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Steven Perles and Thomas Fortune Fay made their reputation representing victims of terror attacks in lawsuits against countries that sponsor terrorism. But the two Washington, D.C. lawyers are now embroiled in a legal battle over the multimillion-dollar fees their successful litigation brought about, with Perles fending off charges he misused money in a trust account that belonged to both of them. In a suit filed June 20, Fay accuses Perles of improperly using $1 million of his terror-case proceeds as a bond in another suit filed against Perles by a former employee, Anne-Marie Kagy, who is seeking her own share of the proceeds. In the Kagy case, U.S. Magistrate Judge Alan Kay concluded that Perles owes the former employee almost $1.5 million. Fay and Perles worked as co-counsel in high-profile terrorism cases, including two against the government of Iran that yielded judgments of almost $600 million, of which $54 million has been collected. And, in fact, their lobbying efforts had made such suits possible: They persuaded Congress in 1996 to pass a law permitting terrorism victims to collect a portion of their judgments from the frozen assets of states that sponsor terrorism. Both Fay and Perles declined to comment about the substantive issues in the lawsuit, since the litigation is still pending and Perles has yet to file a response to Fay’s complaint. But both say they hope that Fay’s suit will not affect three other terrorism cases against Libya, Sudan and Iran in which they are currently collaborating. “It is just a lawsuit right now, and I hope it stays that way,” Fay says. “It is unfortunate.” LITIGATING FLATOW Anne-Marie Kagy was a law student when she went to work at the Perles Law Firm. Through her attorney, she also declined to comment for this article, but according to court documents, she continued to work for Perles after graduation and, in 1996, approached him about a full-time position. Perles told Kagy that he could not pay her a base salary, but offered to let her work on some of his cases on a contingency basis, meaning she would get paid only if and when he did. One of those cases involved a wrongful death claim on behalf of the family of Alisa Flatow. In April 1995, the young American student was killed by a suicide bomber who blew up a bus on the Gaza Strip. Flatow’s father, Stephen, filed a lawsuit against the Islamic Republic of Iran charging that the terrorist who killed Flatow was acting as an agent of Iran and its Ministry of Information. At the time, the lawsuit was unprecedented and the chances of recovering any money from the case were considered remote, at best. In addition to her work on the Flatow case, Kagy also worked on a group of cases involving claims by Jewish American citizens who were forced into slave labor in Nazi concentration camps during World War II. About half of those cases ended with a judgment, and Perles paid Kagy a third of his net proceeds. Perles’ fee in those cases was capped, so the money recovered was nowhere near the multimillion-dollar judgment the attorneys sought in the Flatow case. All told, court documents say, Kagy received about $20,000 over the course of three years for her work on the Holocaust cases. In addition, she was paid $50 an hour for her work on some of Perles’ other noncontingency cases. Specific arrangements for Kagy’s compensation in the Flatow matter were never agreed upon. Kagy worked on the Flatow case for three years. At first, she assisted Perles and his co-counsel, Thomas Fay, a D.C. solo practitioner, in drafting the complaint and overseeing the effecting of service on Iran. After the Iranian government refused to defend itself against the suit, the documents say, Kagy took on the responsibility of researching and writing a comprehensive memorandum analyzing and refuting every conceivable defense Iran might have raised if it had chosen to defend the claim. In the court documents, both Perles and Kagy acknowledge she contributed valuable services to the Flatow litigation. Both also agree that Kagy was entitled to some compensation for her work, in the event money was ever collected. In March 1998, U.S. District Judge Royce Lamberth entered a judgment in favor of Flatow for $22.5 million in compensatory damages and $225 million in punitive damages, based in part on Kagy’s memo. As her work on the Flatow case wound down, Kagy began working on a similar case involving two other American students, Matthew Eisenfeld and Sara Duker, who were also killed by suicide bombers on an Israeli bus. Again, the families sued Iran, claiming the country provided financial support for the terrorists. The number of hours Kagy spent on the Eisenfeld and Duker cases was a matter of dispute, but Kagy left the firm in 1999. In July 2000, Lamberth awarded the Duker and Eisenfeld families $327 million, including $27 million in compensatory damages. The following October, Congress authorized payment of compensatory damages to victims of terrorism in suits against Iran. The money came from Iranian credits with the Department of Defense representing overpayments for military equipment and the proceeds on rental property that the Iranians owned in the United States. Both judgments were ultimately paid out in January 2001. KAGY MAKES A CLAIM In December 2000, Kagy notified Perles that since judgments on the cases had finally come through, she was entitled to $3 million — a third of Perles’ share and what she considered her part of the contingency payments in the Flatow and Eisenfeld and Duker cases. The following month, Perles filed suit in the U.S. District Court for the District of Columbia seeking a declaratory judgment and saying that he and Kagy had an oral agreement that she would receive an “unspecified multiple of her normal hourly rate.” At the time, Perles’ attorney, Steven Schneebaum, now a partner at Greenberg Traurig, told Legal Times that Perles would be happy to pay Kagy $75,000 for her work on Flatow, an amount he says reflected her agreed-upon hourly rate. Schneebaum said that Kagy had no basis to seek more. In response, Kagy filed a counterclaim, and a $2 million attorney’s lien was placed against the net proceeds of the judgments in an account managed by Perles’ attorney. Since Perles and Fay were equal partners in both the Flatow and the Eisenfeld and Duker litigation, half of the money taken for the lien belonged to Fay. The litigation wound its way through the courts, with Perles arguing that while Kagy should be compensated for her work in the Flatow case, she was not entitled to any of the proceeds in the Eisenfeld and Duker cases because of her “very limited participation.” “Her name is on the pleadings. She did the work,” says Mark Cummings of Sher, Cummings and Ellis, who represents Kagy. “But to this day she has not been paid a dime on either Flatow or Eisenfeld and Duker.” On April 20, more than four years after the initial suits were filed, the court entered a final judgment finding Kagy was entitled to about $1.4 million — or a third of Perles’ fee — in the Flatow case and about $47,000, based upon an hourly rate, for her work on the Eisenfeld and Duker case. Neither side was happy with the outcome, and both immediately filed appeals, which are still pending. FAY JOINS THE FIGHT Despite his partnership with Perles, Fay was never named as a party in the dispute between Perles and Kagy. But with a final judgment of more than $1 million in Kagy’s favor, Fay became worried about his half of the money that was subject to the lien. Over the next few weeks, in a series of letters and face-to-face meetings with Perles and his attorney, Schneebaum, Fay requested that his portion of the money be returned from the trust account, where it was held since 2001. In a May 19 letter to Perles and Schneebaum, Fay wrote, “Let me note that the lien asserted by Ms. Kagy was upon the proceeds from the Flatow and Eisenfeld cases, not upon the Perles share. On that basis I agreed to deduct $2 million from the Fay and Perles joint net proceeds to cover the amount of the asserted lien. Obviously a number of issues remain open including the question of whether the entire amount being held is subject to enforcement upon any judgment entered against Steve Perles, but not against me.” As the weeks passed, Fay grew increasingly concerned when he learned that the balance in the lien account had dropped to $1.6 million and that about $425,000 was transferred from the account to pay for Perles’ legal fees, something that Fay says in court documents occurred without his permission. In addition, he learned Perles planned to use the remainder of the money to secure the judgment while he appealed his case. In another letter, on May 27, Fay wrote, “I repeat my request for return of one half of the original escrow deposit amount. I did not agree to pay half of Anne-Marie Kagy’s compensation or half of any judgment entered on her behalf. “ In the interim, according to court documents, Perles filed his motion asking that the money from the original lien placed be used as a bond to secure the judgment during the appeal process. In his motion, Perles asserted that the amount in the account was $1,339,675, slightly less than the amount of the judgment. He said he would commit to keeping $1.5 million in the account to satisfy both the judgment and any interest. “There was $2 million that was supposed to be put aside in a trust and not touched,” says Kagy’s lawyer, Cummings. “We have a pretty serious problem with that.” Without a satisfactory response from Perles about the return of his money, and with the balance in the account declining, Fay filed a lawsuit June 20, accusing Perles and Greenberg Traurig, which handled the trust, of unauthorized use of funds, unjust enrichment, and conversion. In his suit, Fay asked not only for his money back plus interest but damages as well. “The total money wasn’t there, and I guess that is what upset me,” Fay says. Based on some of the documents submitted in Fay’s suit, Kagy filed her own motion June 29, opposing Perles’ request to use the lien as bond for the appeal and accusing Perles of committing fraud on the court. If it is determined that Perles misappropriated money from the joint trust account, he could face an investigation by the D.C. Bar. Bar Counsel Wallace “Gene” Shipp Jr. declined to comment specifically on the lawsuit between Fay and Perles, but said the conduct that is alleged is the type that could trigger a bar ethics probe.

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