Sheila Gowan, the Chapter 11 trustee to Dreier LLP, is being sued by her former law firm, Diamond McCarthy, over a $1.4 million fee she received in the Dreier case.
Texas-based Diamond McCarthy said Gowan, a former nonequity partner, is required under the partnership agreement to turn over the fee she was awarded for her work as trustee.
But Gowan, now of counsel at Sadowski Fischer, contends the fee is entirely her own, according to court papers.
“As a result of my association with [Diamond McCarthy, or DM],” she said in bankruptcy court papers in May, “DM demands that it is entitled to receive part of my compensation. I have refused DM’s demand. I have no agreement or understanding, in any form, between myself and DM or with any other person, for the sharing of compensation to be received for my trustee services.”
Diamond McCarthy filed suit against Gowan on July 2 in Texas state court (Harris County district) for breach of the partnership agreement and unjust enrichment, among other claims (See Petition).
“Diamond McCarthy files this instant petition against its former non-equity partner with considerable regret and only after potential avenues of compromise reached an impasse,” the lawsuit said.
Diamond McCarthy, well known for its law firm bankruptcy work, is counsel to the liquidating trustee in Dewey & LeBoeuf and counsel for the Heller Ehrman estate. The firm’s managing partner, Allan Diamond, is Chapter 11 trustee for Howrey LLP.
Diamond McCarthy was also trustee’s counsel in Dreier. Total fees paid to Diamond McCarthy in that case are about $11 million, according to June court records.
Acting on behalf of bankrupt firms, the firm has brought claims against large firms that took on partners of failing law firms and has filed clawback suits against former partners of failed firms.
During most of Gowan’s time at Diamond McCarthy, she was trustee to Dreier LLP, a law firm formerly led by Marc Dreier, who was convicted by the Southern District U.S. Attorney’s office for securities fraud, wire fraud and money laundering. She continued as trustee after leaving Diamond McCarthy in 2013.
Diamond McCarthy hired Gowan in February 2008, and enclosed a copy of its partnership agreement in a letter to her. The firm claims Gowan acknowledged the terms of the partnership agreement by signing the letter.
Under the agreement, each partner pays into the firm all sources of income, including those from serving as a trustee or guardian.
In late 2008, the firm was approached about the possibility of one of its attorneys serving as the trustee for Dreier LLP. Gowan, a former assistant U.S. attorney in the Southern District, was appointed as Chapter 11 trustee through her employment with Diamond McCarthy and upon the recommendation of other partners, the firm claims.
Under the terms of her employment, all fees earned as trustee would be owed to Diamond McCarthy, the firm said.
Shortly after her appointment as trustee, she hired Diamond McCarthy as trustee’s counsel. The firm continued to be her counsel after she left.
While at Diamond McCarthy, Gowan devoted most of her time to serving as trustee, the firm said, hours that the firm hasn’t been compensated for by the estate.
Diamond McCarthy said it provided “substantial” support, paying her $275,000 a year, or a total of about $1.3 million during her time at the firm; annual bonuses totaling $75,000; and thousands of dollars in reimbursed travel expenses.
“Diamond McCarthy made this substantial outlay of resources in reliance of its contract with Gowan that it would be entitled to the Dreier trustee fee,” the firm said.
Although Gowan was based in New York, that office did not have enough litigators, “particularly younger partners and associates,” to properly staff the case, the lawsuit said. At Gowan’s request, she was represented and supported in large part by partners and associates in Texas, the suit said.
“Diamond McCarthy’s Texas attorneys were responsible for nearly all of the litigation work on the Dreier LLP matter as well as much of the bankruptcy work,” the firm said.
In January 2013, Gowan told management she believed she was entitled to keep the entire Dreier trustee fee and she was not bound by the partnership agreement because she had not manually signed it, the lawsuit said.
Firm partners told her they disagreed. She resigned shortly afterward.
Last month, Southern District Judge Stuart Bernstein (See Profile) approved the $1.4 million in fees for Gowan’s work, which included a $300,000 enhancement.
Diamond McCarthy said it expects that Gowan will direct the trustee fee to be paid into her personal bank account, and the firm is filing suit to protect its claim to the fee. Texas Lawyer, an ALM affiliate, also reported on the suit Monday.
In a phone call with the New York Law Journal, Gowan declined to comment.
Diamond McCarthy’s attorney, Kathy Patrick, partner of Gibbs & Bruns, did not return a call seeking comment. Managing partner Allan Diamond also declined comment.
While Diamond McCarthy said it provided enormous support for Gowan, she told Bernstein at a hearing last month that the Dreier case was difficult and it was not possible to account for all the hours she worked.
“When I look back at the time I spent, it’s astonishing to me the amount of hours that I spent dealing with the government,” including the U.S. Trustee’s Office, U.S. Attorney’s Office and the Securities & Exchange Commission, she said, “to try to come up with a way to generate some assets so that I could pay the creditors.”
“It’s not as if I had the—you know, a law firm operating committee, or a general manager who would say, ‘Sheila, you know, here’s the books and records of the law firm … these are the receivables’,” she said, according to the court transcript.
Gowan told the court she had to visit Dreier in prison multiple times. She described him as cooperative and said he “became my bud.”
Hinshaw & Culbertson partner Philip Touitou, an expert in partnership disputes who is not involved in this case, said disputes over fees between ex-partners are not uncommon, especially when it involves a contingency fee or fee awards in class actions.