For several months, the U.S. Trustee’s Office has accused Kaye Scholer and Capstone Advisory Group LLC of failing to disclose key facts and potential conflicts of interest when they were hired to work on investment firm GSC Group Inc.’s Chapter 11 bankruptcy case. Kaye Scholer appeared to put its part in the dispute in the past last week by agreeing to give up a total of $1.5 million in fees it had received or expected to receive for its work on the matter and to revamp its procedures for applying for future bankruptcy assignments. But the judge overseeing the case has put the firm back on the spot by ordering two of its lawyers to testify Tuesday about what a key figure in the case said at a critical meeting with Justice Department lawyers.

Manhattan bankruptcy court judge Shelley Chapman ruled during an April 24 hearing [PDF] that she needs to hear live testimony from D. Tyler Nurnberg, the managing partner of Kaye Scholer’s Chicago office, and Matthew Micheli, a counsel based in the same office, as she tries to determine what exactly GSC liquidating trustee Robert Manzo said during the September 2012 meeting with the DOJ attorneys with regard to an issue at the heart of the matter. Chapman said she is having trouble reconciling deposition testimony Nurnberg and Micheli provided in the case with statements Manzo made and needs to hear from the two attorneys in order to "make a judgment about the credibility of the different versions of the story."

The scheduled appearance by the Kaye Scholer lawyers is the latest twist in a saga that began with GSC’s bankruptcy filing in 2010. Upon entering Chapter 11, the company retained Kaye Scholer as its legal adviser and Capstone as its financial adviser. Manzo—whom Capstone identified in court filings as one of its employees—was subsequently hired to oversee the liquidation of GSC’s assets. The trustee’s office—an arm of the Justice Department that monitors bankruptcy cases—intervened in the case in January via a 112-page filing that claimed Kaye Scholer and Capstone had neglected to say Manzo was actually an independent contractor who used a fee-sharing agreement prohibited by the bankruptcy code. The agency also faulted Kaye Scholer for not disclosing that Manzo had known the firm’s managing partner, Michael Solow, personally and professionally for more than two decades.

The trustee’s office ultimately agreed to drop its claims against Kaye Scholer as part of the out-of-court settlement struck last week. As The Am Law Daily reported, the deal’s terms call for the firm to give up $1.5 million in legal fees—roughly a third of its total earnings in the case—and to retain an independent expert to review and revise its approach to seeking bankruptcy work. Kaye Scholer also acknowledged in January that it made a "mistake" in perpetuating the notion that Manzo was a GSC employee. (On February 14, the trustee’s office announced [PDF] it had reached a separate settlement with Capstone under which the financial adviser agreed to give up $3.75 million in fees connected to the case and to adopt procedural reforms similar to those embraced by Kaye Scholer. Court records show that agreement was withdrawn on April 19.)

At issue now are claims filed by GSC creditors against Capstone and Manzo, according to the latter’s lawyer, Willkie Farr & Gallagher business litigation cochair Joseph Baio. And central to the dispute is the question of what, if anything, Manzo said to the Justice Department lawyers in September about whether independent contactors had worked on the bankruptcy. 

As Chapman framed the question during the April 24 hearing, Nurnberg and Micheli’s deposition testimony leaves the impression that Manzo falsely stated at the meeting that no independent contractors were involved the GSC case. Manzo insists he never said that, and Baio says that nowhere in its scathing January filing does the trustee’s office accuse Manzo of lying at the September meeting.

Chapman said she hopes that hearing directly from the Kaye Scholer lawyers can help her sort out discrepancy. "There are starkly different versions of what occurred…And it goes to the issue of credibility. It goes to the issue of knowledge of concerns. It’s an issue…This is an important issue…I can’t look these guys in the eye and figure out how good their recollection is. So we need to bring them in on this limited point," Chapman said, according to a transcript of the hearing. "I’m cognizant of the fact that Kaye Scholer has settled. This in no way…undoes that."

In an added wrinkle, the same transcript shows that Andrea Schwartz, the lead lawyer for the trustee’s office in the case, said during the April 24 hearing that she can’t remember what Manzo said at the September meeting. Baio said that if Nurnberg and Micheli testify, Schwartz must take the stand as well. Chapman acknowledged that possibility, and noted that, if Schwartz does become a witness, one of her colleagues may need to handle the remainder of the proceedings.

This story first appeared in Litigation Daily sibling publication The Am Law Daily.