Bankruptcy Trustee Files $1.2B Suit Against McDermott

Legal Ethics

Bankruptcy Trustee Files $1.2B Suit Against McDermott

Posted Apr 17, 2008, 06:48 am CDT
By Debra Cassens Weiss

McDermott, Will & Emery is facing a $1.2 billion malpractice suit by the bankruptcy trustee by Saint Vincent's Catholic Medical Centers of New York.

The suit filed in a New York state court claims the law firm delayed a bankruptcy filing and failed to disclose a possible conflict between two financial advisers, the New York Law Journal reports. The suit names the law firm and partners William Smith, Stephen Selbst and David Cleary, the story says.

The suit claims the hospital lost more money and had to pay more professional fees while the bankruptcy was delayed. The suit seeks $1.2 billion in damages and disgorgement of $4.5 million in fees.

Financial advisory firm Huron Consulting Inc. and turnaround boutique Speltz & Weis were both doing work for the hospital when Huron offered to acquire Speltz & Weis for $17 million and a share of Speltz’& Weis' future revenue, the suit alleges. Much of the turnaround’s future revenue was tied to the hospital work, but court policy would have barred one of the firms from continued consulting work once the offer was known, the story says.

The suit accuses McDermott of helping the deal along by failing to quickly disclose the buyout offer and delaying the bankruptcy. Even after the filing, McDermott tried to allow both financial firms to stay on the case, the suit says. McDermott was fired in September 2005 and replaced by Weil, Gotshal & Manges.

The suit is the latest of several against law firms by bankruptcy trustees. Law firms are at a greater risk than in shareholder suits based on aiding and abetting claims, which are often dismissed under U.S. Supreme Court precedent. Trustees often allege malpractice and have litigation trusts to fund their aggressive litigation.

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