After a former energy client sued Greenberg Traurig for malpractice, alleging it could have avoided millions of dollars in legal fees if not for the firm’s negligence, the law firm has shot back, calling the claims purely speculative.
The lawsuit, brought by electrical company NextEra Energy Inc. against the law firm in May, is the latest malpractice suit arising out of bankruptcy actions. Such malpractice claims have been on the rise, according to a report last year by the American Bar Association’s Standing Committee on Lawyers’ Professional Liability, which showed that bankruptcy was the fifth most common practice for malpractice claims.
The lawsuit by NextEra, formerly known as FPL Group, claims it spent millions of dollars in legal fees, including at trial and for successor counsel at Skadden, Arps, Slate, Meagher & Flom, that it could have avoided if Greenberg, its initial counsel, had asserted a specific defense.
Greenberg had defended FPL Group in a 2004 suit filed by a trustee of Adelphia Communications Corp. that was seeking to recover from FPL an allegedly constructive fraudulent transfer from a $149 million stock sale.
NextEra argued Greenberg failed to assert and preserve a specific affirmative defense, §546(e) of the bankruptcy code, which provides a safe harbor for certain transfers involving the purchase or sale of securities. Instead, NextEra claims, Greenberg advised it was a standing or jurisdictional defense that did not need to be included in the answer to the 2004 suit and could be raised at any time during the litigation.
After FPL Group discovered that Greenberg had “profoundly misinterpreted” the rule, the malpractice suit claims, it terminated the firm and hired replacement counsel at Skadden, which then moved to amend the answer to preserve the §546 defense.
However, Southern District Bankruptcy Judge Robert Gerber in July 2011 denied the request, finding that FPL Group had not shown good cause for the delay in amending the answer.
“In substance, FPL Group, by its agent [Greenberg], intentionally thought it could ‘lay low’ and hold back on a defense upon which it presumably later would rely,” wrote Gerber at the time. “That was unfair to FPL Group’s adversary and is offensive to the court.”
Although Gerber ultimately found in favor of FPL Group after trial, NextEra was damaged in the form of legal fees paid to Skadden and trial and appeal fees, “amounting to millions of dollars,” according to NextEra’s malpractice lawyers, Keith Fleischman and June Park of the Fleischman Law Firm.
NextEra said it and Greenberg agreed to toll the statute of limitations for claims arising out of Greenberg’s representation of FPL. Extensions of the tolling agreement expired on May 8 this year, the day NextEra filed its malpractice suit.
Greenberg, represented by Steptoe & Johnson, is arguing NextEra’s claim that it would have avoided trial if the defense had been asserted is “based on several impermissible assumptions.”
It assumes that the judge would have dismissed the action without a trial, Greenberg said. But when successor counsel sought the defense, the judge had said it was “not a likely winner,” Greenberg notes.
“This action is an effort at malpractice-by-hindsight, lacking a legally sufficient basis and impermissibly premised on speculation,” Greenberg said in July 7 dismissal papers. “Short of speculation, there is no way to determine that the judge would have dismissed the bankruptcy action without a trial.”
Also, Greenberg said courts within the Second Circuit and elsewhere previously held that the §546(e) defense did not apply to private transactions such as the one between NextEra and Adelphia. “That was the state of the law at the time when the answer was filed in the bankruptcy action in 2004,” and it remained so until 2011, said Steptoe lawyers Roger Warin, Michael Miller and Justin Chu.
A Greenberg spokesperson declined to comment beyond the briefs, other than to call NextEra’s claims “ill-founded.”
The ABA report last year, which tracked malpractice claim trends from 2012 through 2015, showed back-to-back increases in claims arising out of bankruptcy areas.
Perhaps not surprisingly, given the difficult economic times preceding the period covered by the 2015 study, the report said, claims in the collection and bankruptcy area increased 1.39 percent, after a dramatic increase of 1.93 percent between the 2007 and 2011 studies.