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One of the largest nonprofit organizations to have ever sought Chapter 11 bankruptcy protection has sued its former law firm, Weil, Gotshal & Manges, for $40 million, claiming the firm’s representation produced “disastrous results.” The National Benevolent Association, the social services arm of the Christian Church (Disciples of Christ), filed suit against the New York firm Sept. 14 in U.S. Bankruptcy Court for the Western District of Texas in San Antonio, charging negligence and breach of fiduciary duty. The St. Louis, Mo.-based nonprofit, which operates housing facilities for at-risk children and the elderly, filed its Chapter 11 petition last year. It emerged from bankruptcy in April but was forced to sell most of its facilities to pay $230 million to its unsecured creditors. The sum constituted a full recovery with interest for the creditors, a highly unusual result in a bankruptcy. According to the complaint, those creditors, mostly large banks, were amenable to an agreement that would have obviated the need for a bankruptcy filing in the first place. But the benevolent association says Weil Gotshal, whose team was led by partner Deryk Palmer, “took unreasonable negotiating positions and made unreasonable demands on the lenders,” thereby scuttling any chance for a pre-petition agreement. The association claims Palmer pushed for an unnecessary filing to generate fees for his firm and other professionals engaged in the bankruptcy. The professionals, including accountants, bankers and creditors’ counsel, are seeking a combined $34 million in fees. Weil Gotshal has applied for about $10 million, only $1 million of which remains pending. Weil Gotshal, which has 1,200 lawyers worldwide, is generally acknowledged to have one of the nation’s top bankruptcy practices. The firm was debtors’ counsel in the Chapter 11 bankruptcies of both Enron Corp. and WorldCom, Inc. The benevolent association has had new management since coming out of bankruptcy. In a statement, Weil Gotshal said it had worked closely with the organization’s board of directors at the time and regretted that the new board “has chosen to file these meritless claims.” “Bankruptcy was not something anyone wanted,” the firm said. “It became necessary because many months of difficult negotiations with creditors failed to produce an agreement acceptable to the NBA board, and the creditors had commenced litigation and were poised to try to seize NBA’s assets through a receivership which would have technically meant the end of NBA and its important mission.” Founded in 1887 as part of the Christian Church, a mainline Protestant denomination, the benevolent association expanded rapidly in the 1990s. Just prior to its bankruptcy filing, it owned 18 residential facilities and managed 70 low-income housing projects financed by the U.S. Department of Housing and Urban Development. With 2,500 employees in 20 states, the group had revenues from operation and contributions of up to $145 million per year before the bankruptcy. After selling most of its properties, the group now has five facilities and 365 employees and is barred from participating in HUD contracts or from operating at all in Texas. It maintains a $70 million endowment. The group claims its “ability to carry out its mission has been all but destroyed” as a result of the bankruptcy. In its complaint, the association says the creditor banks were willing to work with the group to install professional management to reverse financial losses at its senior care facilities. Paul Ricotta, a partner at Boston’s Mintz Levin Cohn Ferris Glovsky and Popeo, the firm representing most of the creditors, said such an agreement had been possible and would not have required the organization to sell its properties. “We were willing to propose something less draconian,” said Ricotta. He said the association instead insisted on a 40 percent discount on the principal of the debt and filed bankruptcy after the banks ruled out such a discount. Ricotta said the hard line in negotiations was delivered by Weil Gotshal, which he said was clearly the lead counsel. In its statement, Weil Gotshal noted that the board had a restructuring committee that had separate counsel. The committee was represented by Dow, Lohnes & Albertson of Washington, D.C. In an interview yesterday, Susan Pamerleau, the vice chair of the group’s board in the period before and during the bankruptcy, said the hard line was dictated by the board and not Weil Gotshal. She said the professional management issue was a major obstacle for the board at the time. Though the board interviewed some of the management groups recommended by the creditors, she said board members felt strongly that they themselves possessed enough business experience to turn the senior care facilities around. Referring to the ultimate sale of the facilities, Pamerleau said, “It’s unfortunate what happened but there were a lot of good people doing what they thought was right.” All parties agree that the disputes at the time were acrimonious. “I’ve been involved with the Christian Church my entire life,” said Pamerleau. “I’ve never seen more ugliness and dissension and a failure to understand basic business principles than I’ve seen in this whole affair.” But she said her board made their own decisions and she felt the suit by the current board was groundless. “We believe we had good counsel, who were seasoned and experienced professionals,” she said. The benevolent association claims Palmer advised that the group could get an $80 million debt reduction. They charge he also said the group could secure from the bankruptcy court $50 million in debtor-in-possession financing to fund continuing operations, even though the group had $60 million in available cash and securities. The court denied the request for DIP financing on the grounds that the association had adequate funds. The group claims the failure to obtain DIP financing meant the group was out of options just four months after its February 2004 filing. It reached an agreement to sell 11 of its facilities for $210 million in June 2004. POSSIBLE OUTCOME Weil Gotshal partner Richard Davis, who acts as general counsel for the firm, said the DIP financing was sought only to enable the association to continue seeking charitable contributions not subject bankruptcy claims. He said obtaining the financing would not have changed the outcome for the association. That outcome, though, could have been much worse, he said. Analysts had valued the facilities at only slightly more than half of the debt owed by the association, said Davis, and the group, which was losing millions every year, was fortunate that a buyer was willing to pay enough to satisfy creditors. The alternative, he said, would have been a disorderly dismemberment in which the assets were valued at far less. “Given everything that happened and the position of the creditors, this outcome was better than the alternative,” said Davis. He also said a 100-percent recovery with interest for creditors should not be regarded as a negative for the debtor. He said debtors’ counsel had a fiduciary duty to both sides to maximize the value of the estate. Davis said the firm was in the process of retaining counsel. The benevolent association is represented by Daniel Sheehan of Dallas.

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