The trustee overseeing Howrey’s Chapter 11 case moved forcefully Thursday to squelch a proposed class action filed earlier this month in California that targets former partners of the defunct firm.
In a series of filings, counsel for trustee Allan Diamond challenge the validity of the suit, which claims 302 former Howrey partners owe an unspecified amount of money to the firm’s unsecured creditors based on a bankruptcy code provision that would make those attorneys so-called Howrey “alter egos,” meaning they are equally responsible for the firm’s debts. According to the suit, the partners in question diverted assets from Debtor to themselves to the detriment” of creditors at a time when Howrey was already insolvent and therefore not in a position to pay those partners. The plaintiff in the case is Howrey Claims LLC, a company incorporated in Georgia that on October 31 bought the $994.25 unsecured claim of court reporting agency Jan Brown & Associates.
Diamond’s team argues that the claims asserted in the proposed class action are in reality claims owned by the estate and that furthermore, the filing of the suit violates an automatic stay implemented by the bankruptcy court. Diamond asks the court to enforce the automatic stay and to hold the plaintiff and its counsel in contempt if they don’t drop the case. “By the Complaint, [Howrey Claims] seeks to hijack these bankruptcy proceedings and subsume the most significant parts of the bankruptcy within its class action,” the filing says.
The suit was filed by San Francisco attorney William McGrane, the same lawyer who pushed Howrey into an involuntary Chapter 7 bankruptcy in April 2011 on behalf of three unsecured creditors owed a total of roughly $36,600 (Jan Brown & Associates was among the three creditors in the initial filing). Washington, D.C.based Howrey, which focused almost exclusively on litigation, voted to dissolve in March 2011 after shedding scores of partners and falling deeply into debt.
McGrane, who has a solo practice, has previously tried to assert that Howrey neglected to file as a limited liability partnership in California, making the partners in that state personally liable for the firm’s debts. He later backed off that claim based on the discovery of documents Howrey filed with the California Secretary of State that McGrane thought didn’t exist, according to a court declaration.
McGrane also worked on a team of lawyers representing an official committee of unsecured Howrey creditors but left that position in late September because of differences over the direction the case was taking, filings show. The same filings indicate that the unsecured creditors committee, whose lead lawyer is Bradford Englander of Whiteford Taylor & Preston, do not agree with McGrane’s strategy in the filing of the class action. Englander could not be reached for comment Thursday. (McGrane is seeking court approval to be awarded $79,557.50 in fees and expenses for his work for the committee from December 15, 2011, through late September).
McGrane, who declined to comment when contacted Thursday by The Am Law Daily, states in a court declaration that he came up with the idea on which he based the putative class action while doing research for an article on “the continuing and to me unjust use by lawyers of the limited liability partnership form of organization to limit their legal obligations to pay creditors in full” in law firm bankruptcies.
In seeking to block the suit, Diamond argues in Thursday’s filings that it would interfere with his own extensive work pursuing claims against former partners as well as the firms where those partners landed amid and in the wake of Howrey’s collapse. Diamond is pursuing money due from work the partners took with them to their new firms, or so-called unfinished business claims, and the return of payments made to partners when Howrey was insolvent. Negotiations are well under way to recover those funds, Diamond’s lawyers say in one of Thursday’s filings, and settlements should be announced “in the next few months, if not weeks.” Diamond is prepared to sue those who don’t cooperate, the filing also states. The trustee further argues that the plaintiff in the proposed class action doesn’t articulate a valid claim against Howrey and therefore can’t bring alter ego claims against Howrey’s former owners.
Howrey’s bankruptcy, initially a Chapter 7 proceeding, was converted to a Chapter 11 case and moved into the hands of a trustee last October at the order of the court. Thousands of creditors have filed claims seeking more than $1 million in unpaid rent, invoices, salary, and other claims, according to court filings, which also show Howrey had $16.8 million in assets as of the end of August.
