Former clients of Porzio, Bromberg & Newman are suing the Morristown firm, claiming an ill-advised attempt to use an involuntary bankruptcy petition to collect a debt cost them millions.

The petition was dismissed when the bankruptcy court concluded the debtor company was having no trouble paying its bills.

In Morales v. Porzio, Bromberg & Newman, BER-L-6881-12, the clients are seeking to recoup the $4.5 million they claim the whole episode cost them.

The plaintiffs, Ariel Morales, William Colgan and Michael Nudo, were principals of Armanti Financial Services, a provider of billing, coding, collecting and claims administration services for doctors and hospitals.

In July 2008, they sold the business for $16 million to Apollo Health Street Inc. of Bloomfield. The agreement called for Apollo to pay by installments.

The sellers, through a pair of real estate holding companies, leased from Apollo two buildings in Bloomfield to conduct their business. The sellers were also principals of Med-Link, a developer and owner of billing and collection software, which contracted with Apollo to use its products and services.

In 2009, the sellers began to suspect Apollo was insolvent, as it was cutting its workforce and other expenses, and its equity investors wrote their interests in the company down to zero.

Apollo then allegedly breached agreements with the sellers, Med-Link and its landlords. In July 2009, Apollo was supposed to pay the sellers $4.6 million but it only paid $2.3 million. Apollo also owed Med-Link $814,938 and owed its landlords $282,081.

When Med-Link threatened to discontinue services to Apollo for nonpayment of bills, Apollo sued in Superior Court in Essex County, seeking to enjoin Med-Link from terminating its licensing agreement. The sellers and Med-Link counterclaimed that Apollo failed to pay its obligations. Beginning in June 2011, the sellers, Med-Link and the two real estate holding companies filed four separate suits against Apollo.

In April 2011, Morales, Colgan and Nudo contacted Warren Martin Jr., co-chairman of Porzio’s bankruptcy practice, to determine what recourse it had for Apollo’s various breaches.

On April 26, 2011, Martin filed an involuntary Chapter 7 petition on behalf of Morales, Colgan, Nudo, Med-Link, the two real estate holding companies and five other creditors.

Apollo moved to dismiss the petition and argued the petitioners would have learned it was financially sound had they done their due diligence. Martin did little more than review a Dun & Bradstreet report, Apollo said.

On May 18, 2011, U.S. Bankruptcy Judge Novalyn Winfield dismissed the petition, finding Apollo was generally paying its debts as they became due and, where the company did not pay its debts, it had valid reasons.

Apollo then sought a ruling that the petition was filed in bad faith and that the company was entitled to attorney’s fees and costs, as well as compensatory and punitive damages. Apollo asserted that the involuntary bankruptcy caused significant disruption to its business.

Before Winfield could rule, the petitioners settled their Essex County suits and potential bad-faith claims with Apollo in April 2012. Morales, Colgan and Nudo, along with Med-Link and the two real estate holding companies, agreed to pay Apollo $400,000. They also agreed to waive their rights to further payments, including the $2.3 million installment payment on the purchase of their company, the $814,938 owed to Med-Link and the $282,081 owed to the real estate holding companies.

The agreement further called for Apollo’s purchase of the company from Morales, Colgan and Nudo and for it to pay for any attorney’s fees they incurred in litigation with Apollo, but that right was waived under the settlement, costing the sellers $625,000.

In total, the plaintiffs incurred costs of $4.45 million as a result of the failed malpractice case, according to their complaint, filed by David Mazie and David Freeman of Mazie, Slater, Katz & Freeman in Roseland.

The plaintiffs claim in their suit that Martin had an obligation to tell the plaintiffs that if the petition were dismissed, there was a good chance the bankruptcy court would find the petition was filed in bad faith, making them liable for substantial compensatory and punitive damages, as well as attorney’s fees and costs, the suit claims.

If Martin had done the proper research of Apollo’s financial condition, he would have found there were no grounds to file the bankruptcy petition, they claim.

The suit charges that Martin breached his duty of care to his clients and that he and his firm were unjustly enriched by receiving legal fees for services that were negligently performed.

“You can’t just put someone in voluntary bankruptcy because they’re not paying you,” Mazie says. “The prudent thing to do is to sue and take discovery.”

Martin was out of the country and could not be reached. D. Jeffrey Campbell, managing partner of the firm, said the firm had not been served with the complaint. He said he believed that “what really happened is not what [the plaintiffs are] describing.”

Campbell added that, “unfortunately, in this day and age, often when you have clients who have a result they don’t like and owe their lawyers significant legal fees, this is what happens.”

He described the plaintiffs’ bill as in “the significant six figures.”

Charles Toutant is a reporter for the New Jersey Law Journal, a Legal affiliate. •