Originally Published May 28, 2013

When the principals of Harrisburg-based firm Schutjer Bogar spoke to The Legal in February, the mood was somber and the future of the firm was bleak.

The client that once made up a third of the firm’s total billables, Kentucky-based long-term care center operator Kindred Nursing Centers East, was gone, following an acrimonious split in which the firm accused the company of failing to pay its bills.

Schutjer Bogar’s principals, having spent more than $1 million to grow the firm in order to meet Kindred’s needs, were staring down the prospect of collapse.

“There is a strong chance that if our creditors can’t continue to work with us we’ll have to dissolve the firm,” firm founder Chadwick O. Bogar told The Legal at the time.

But a lot can change in three months.

Speaking to The Legal on May 20, Bogar sounded rejuvenated as he talked about the future of the firm, now called SB2, short for Schutjer Bogar & Bartel.

The firm filed for Chapter 11 bankruptcy in March — a move Bogar said has been the “best thing” the firm could have done — and hired outside accountants and consultants to help oversee its finances.

The firm is now in the process of paying back its creditors and Bogar said he’s confident they will all be reimbursed in full.

Part of this confidence stems from the fact that, despite the turmoil it went through over the past year-and-a-half, the firm is continuing to grow, according to Bogar.

“April was our best month in a year-and-a-half,” Bogar said, noting that the firm took on 31 new cases and two new clients.

In fact, the firm, which had laid off two people in January and was anticipating more layoffs when Bogar spoke with The Legal in February, has actually hired two more lawyers since filing for bankruptcy, Bogar said.

In addition, according to Bogar, the firm had only one attorney defection in the wake of the bankruptcy filing.

There was, however, one major casualty of the firm’s recent struggle.

Schutjer Bogar co-founder Brad Schutjer, burned out by the stress of the ordeal, retired from the firm and has stopped practicing law altogether, according to Bogar.

“I think it took a toll on all of us,” Bogar said. “You realize what you really want to do with yourself and your life.”

Bogar said he has agreed to buy out Schutjer and become the firm’s sole equity shareholder. Meanwhile, Schutjer, who Bogar described as his best friend, will “always be connected with the firm” as an emeritus co-founder.

The upside to Schutjer’s departure, Bogar said, is that the firm’s management is much more streamlined now.

“I know everything that’s going on every day,” Bogar said, explaining that he wasn’t always so hands-on.

“When you’re young and you start making a ton of money, you start goofing off,” Bogar said, but added that the incident with Kindred “really sobered us up.”

A ‘Strange call’

According to Bogar, his firm began negotiations with Kindred in 2010.

The firm had been doing some work for the company for a few months, but now the plan was for Schutjer Bogar to handle Kindred’s Medicaid eligibility and reimbursement claims across the country, Bogar said.

According to Bogar, however, the company was initially concerned about whether a firm of Schutjer Bogar’s size would be able to handle the work.

As young firm leaders determined to land a big client, Bogar said he and Schutjer put up about $1.5 million and took out lines of credit in order to open and staff new offices across the country.

“We got a little starry-eyed there,” Bogar admitted to The Legal in February, but said that, at the time, there were no obvious red flags.

And for about a year, Bogar said, it seemed like Schutjer Bogar and Kindred might make great business partners.

The firm began leasing Regus office space across the country and hiring attorneys to handle the influx of work it was receiving from Kindred, according to Bogar.

“They became a third of our billables — 25 to 35 percent,” Bogar said.

Bogar estimated that the firm had about 14 attorneys when it brought on Kindred as a client and grew to about 23 attorneys after that, opening offices in South Carolina, Boston and Georgia, among other locations.

In February 2012, however, the firm received what Bogar called a “strange call” from Kindred complaining about legal bills.

According to the amended complaint the firm filed in its suit against Kindred in the U.S. District Court for the Middle District of Pennsylvania in September 2012, Kindred did not raise these billing issues until after it had been confronted by the firm about its alleged habitual lateness in making payments.

In its answer to the amended complaint, Kindred rejected this notion, maintaining instead that “the excessive billing practices of plaintiff were a cause of alarm to Kindred and were brought to the attention of plaintiff.”

But in a separate suit filed in early February in the Middle District, Schutjer Bogar alleged that Kindred’s decision to cease working with the firm was precipitated by the September 2011 departure of attorney Kelly Kjersgaard Hayes.

According to the complaint in that suit, Hayes “abruptly” left Schutjer Bogar to work for a South Carolina firm in September 2011. The complaint alleged that prior to leaving Schutjer Bogar, Hayes had arranged with Kindred to terminate its relationship with the firm and to continue working with her.

The complaint further alleged that Hayes arranged to continue training Kindred employees using methods developed by Schutjer Bogar.

But Hayes, in a brief in support of her motion to dismiss Schutjer Bogar’s suit for failure to state a claim, called these allegations “baseless.”

Within a few months of Hayes’ departure, the billing disputes between Kindred and Schutjer Bogar arose, according to court documents.

On April 25, 2012, Schutjer Bogar and Kindred entered into a settlement agreement under which Kindred was required to pay the firm $201,000 in order to satisfy its February and March obligations, according to Schutjer Bogar’s amended complaint against Kindred.

The settlement agreement also provided that Kindred would pay the firm 80 percent of its total legal fees for April, according to the amended complaint.

That arrangement was to continue thereafter until either the firm closed all of its Kindred matters or the two parties agreed on another fee arrangement, the amended complaint said.

remaining afloat

According to the amended complaint, Kindred initially complied with the settlement terms and paid 80 percent of its May invoices as well but, on June 29, 2012, the company sent a letter to the firm stating that it wished to terminate its relationship with Schutjer Bogar within four days.

Kindred’s counsel sent a letter to the firm in July 2012 indicating that the company intended to pay only 34 percent of its total legal invoices for the previous month, Schutjer Bogar said in its amended complaint.

Kindred said in its answer to the amended complaint that Schutjer Bogar’s “services were terminated due to continued problems with excessive billing.”

Bogar said that, in hindsight, it was at this point that the firm should have filed for bankruptcy.

Instead, as Bogar told The Legal in February, both he and Schutjer borrowed $100,000 from their parents and $200,000 from their friends to try to keep the firm afloat.

Bogar explained that the real damage to the firm was caused not by Kindred going elsewhere, but by the company failing to give the firm enough lead time to prepare for the loss.

Had Kindred told Schutjer Bogar in September 2011 that it wanted to terminate the relationship, the firm could have restructured and moved on, rather than continuing to grow and do work for the company for months until the situation came to a head, Bogar said.

Likewise, had Kindred adhered to the settlement terms and allowed Schutjer Bogar to wrap up the remaining cases it had been working on for the company, the firm could have remained solvent, Bogar said.

Kindred, however, maintained in its answer to the amended complaint that it did not violate the settlement agreement.

Schutjer Bogar’s litigation against Kindred and Hayes has been stayed since the firm filed for bankruptcy.

In February, Kindred’s counsel, Jeffrey S. Adler of Burns White in West Conshohocken, Pa., forwarded a statement from the company to The Legal.

“Kindred does not comment on pending litigation as a matter of policy,” the statement said. “Kindred’s legal position is well articulated in its pleadings filed with the court. Kindred is, and will continue to, arduously defend against the unmeritorious allegations brought by Schutjer Bogar.”

Reached May 20, Adler said the company stands by that statement.

Reached May 21, counsel for Hayes, David A. Fitzsimons of Martson Law Offices in Carlisle, Pa., said the “circumstances alleged in [Schutjer Bogar's] claim against [Hayes] relating to Kindred Care simply didn’t happen that way.”

“If the opportunity comes to proceed with the case, we will,” Fitzsimons said.

But Bogar told The Legal he’s looking to put the firm’s litigation with Kindred and Hayes in the past and close that chapter for good.

“It’s a distraction we don’t need,” Bogar said.

The firm will now attempt to settle with Kindred “for something, anything at all,” according to Bogar.

Bogar said his firm’s ability to survive the experience is largely attributable to the support of the rest of its clients, all of which stuck with the firm during its struggles, even as competing firms took Schutjer Bogar’s bankruptcy as a cue to try to poach business.

But Bogar also gave credit to Kindred for forcing the firm to become more efficient.

For example, since cutting ties with Kindred, according to Bogar, the firm is now saving about $100,000 a month in “needless brick-and-mortar expenses.”

Rather than paying a monthly rent to lease rarely-used office space across the country, the firm now spends a fraction of that cost renting office space on an as-needed basis, Bogar said.

Bogar said the firm now relies heavily on technology, including daily video conferences, to keep its attorneys connected with one another while they work remotely.

Meanwhile, Bogar said, the firm’s new financial consultants are helping it to better manage its money so that it won’t get caught flat-footed again.

“Kindred taught us a lot,” Bogar said of the experience. “I wish it hadn’t happened but we learned a lot.”

Zack Needles can be contacted at 215-557-2493 or zneedles@alm.com. Follow him on Twitter @ZNeedlesTLI.