SAN FRANCISCO — Pillsbury Winthrop Shaw Pittman has reached a $10 million settlement in a malpractice dispute with bankrupt client SonicBlue, a court filing Tuesday shows.
The firm will pay $7.6 million and forgo $2.4 million in outstanding fees to SonicBlue’s estate, according to the filing, which awaits approval by a bankruptcy judge at a hearing slated for March 31.
SonicBlue’s estate had sued Pillsbury for malpractice and breach of fiduciary duty, demanding the firm return $4.2 million in fees and pay $11 million in damages.
“The creditors committee is pleased with the terms of the settlement,” said Ron Oliner, a partner at Duane Morris who represents the creditors committee in the bankruptcy.
Pillsbury General Counsel Ronald Van Buskirk declined to comment beyond pointing at language in the settlement saying the deal had been reached to the parties’ mutual satisfaction.
Pillsbury represented the SonicBlue estate from the filing of its bankruptcy petition in 2003 until 2007 when it came to light that the firm had failed to disclose to the court a 2002 pre-bankruptcy promise to creditors. The firm promised in a letter to three hedge funds, which had invested in a $75 million bond issue, that they would be repaid in full should SonicBlue enter bankruptcy protection.
Pillsbury attorneys later described the letter as a “scrivener’s error.” The hedge funds threatened to sue for repayment in September 2006.
In a 2005 internal e-mail sent by Pillsbury partner William Freeman about the retainer SonicBlue had paid, he told partner Craig Barbarosh that the firm had “major exposure here.”
Citing the potential conflicts, the bankruptcy judge removed Pillsbury from the case in March 2007.
In early 2008, the bankruptcy trustee, Dennis Connolly of Alston & Bird, sued Pillsbury over the undisclosed promise, as well as a failure to disclose that it had received payments from SonicBlue within 90 days of the bankruptcy filing. Any firm that participates in a bankruptcy must disclose such “preference payments” because they can represent a conflict of interest and sometimes must be returned to distribute to other creditors.
The settlement comes as a result of mediation in February between the parties, which was ordered by Judge Marilyn Morgan of the U.S. Bankruptcy Court for the Northern District of California in San Jose. She denied Pillsbury a jury trial in November, and had set a bench trial for this fall in the event mediation failed.
Howard, Rice, Nemerovski, Canady, Falk & Rabkin litigation chairman Bernard Burk, who represents Pillsbury, referred comment to Pillsbury’s Van Buskirk.
Another firm involved in SonicBlue’s bankruptcy, Levene, Neale, Bender, Rankin & Brill, settled for $2.5 million in November, and forfeited $2.2 million in fees it was owed. The firm, which was accused of failing to disclose preference payments, did not have to pay back $1.2 million in fees it had already collected.
The court-appointed trustee, Connolly of Alston & Bird, is out of the office for the week and could not be reached for comment.
The SonicBlue estate paid out about $75 million to creditors last fall after a liquidation plan was approved.
