A short-lived client relationship in Texas has K&L Gates facing conflict claims, though the litigators involved, including one who is now a clerk for U.S. Supreme Court Justice Neil Gorsuch, have already left the firm.
Quantum Materials Corp. of San Marcos filed a lawsuit against the firm in Hays County district court on Tuesday, alleging that it engaged in a conflict of interest—representing both the business and its lenders in a dispute over a loan—that caused Quantum to be sued in three states.
Quantum Materials, a company that manufactures tetrapod quantum dots for use in lighting applications, alleges in its petition that it engaged K&L Gates as counsel in 2016 to do corporate work, including drafting documents for a prospective lender. The company later shifted that legal work in-house, but maintains in the petition that K&L Gates never formally resigned from the representation and still remains legal counsel to Quantum.
The company is seeking monetary damages of just $100,000, but argued that punitive damages 1,000 times that amount should be awarded. Lawyers for Quantum argued that such hefty damages would deter other large firms from engaging in the type of conduct the suit alleges.
“Predatory lenders prey on financial difficulties. A predatory law firm can prey on the concept of justice itself,” the complaint says.
According to the complaint, Quantum retained K&L Gates as legal counsel in late 2016. As part of the arrangement, the filing said, K&L Gates attended board meetings and reviewed “highly confidential corporate secrets.” The law firm charged about $100,000 a month for the work, the filing said.
Some time later Quantum replaced its entire board and transferred all legal work back to its own corporate counsel. But K&L Gates, “to this date, has never formally resigned from representing Quantum, and has remained legal counsel to Quantum,” the company claimed.
In 2017, Quantum borrowed money and issued promissory notes to lenders SBI Investments and L2 Capital. A dispute between the company and the lenders later arose, prompting Quantum to file a lawsuit requesting temporary injunctive relief. The lenders in turn claimed damages against Quantum and opposed its request for temporary injunctive relief.
The petition on SBI’s and L2′s behalf was signed by lawyers Gregory Sapire and Jeffrey Quilici, the complaint said. At the time, Sapire was a partner at K&L Gates, and Quilici was an associate. Sapire since made a move to Cleveland Terrazas, a small local firm, and Quilici now is a judicial law clerk to Gorsuch in Washington.
Sapire and Quilici are not named as defendants in Tuesday’s suit.
At an October 2017 hearing, Quantum raised the issue of a conflict, and Sapire and Quilici denied that Quantum had ever been a client of their firm, the filing said. ”K&L Gates refused to voluntarily step down and demanded depositions and a hearing to argue their right to continue suing their own client,” Quantum alleges.
Quantum filed a motion to disqualify K&L Gates from the litigation, but the firm withdrew from the lawsuit a day before the trial court was to set to hear the motion, according to the petition.
According to the complaint, it was under K&L Gates’ guidance that SBI and L2 seized $500,000 worth of shares from Quantum, “alleging frivolous ‘defaults.’” The defaults included prepayment penalties for submitting a payment a day early, late payment penalties for submitting on Monday a payment due Sunday, and a penalty for the company’s accountant quitting, the complaint alleged.
“It appears that at least some of the alleged ‘defaults’ may have actually been started by K&L Gates when they did legal work for Quantum,” the complaint said. “In other words, K&L Gates was suing their client, Quantum, ostensibly arguing absurd technical ‘defaults’ that were in part created by presumably legal malpractice or fiduciary violations possibly done by K&L Gates.”
The petition alleges that K&L Gates is demanding $300,000 from Quantum in payment for legal fees.
The lawsuit asserts legal malpractice, breach of fiduciary duty and deceptive trade practices as causes of action.
The matters with SBI and L2 resulted in litigation in Texas and Florida, which resolved in Quantum’s favor, and in Texas, which is still ongoing, the complaint said.
“My client hired K&L Gates with the logical expectation that the firm would work in Quantum’s best interests. Instead, the actions of the law firm have created financial harm to this company and its shareholders,” said Michael Minns, a Houston attorney who represents Quantum.
Mike Rick, associate director for PR and communications for K&L Gates, said the firm does not comment on pending litigation.
Sapire and Quilici did not respond to calls seeking comment Wednesday.