Law Firms

More Bankruptcy Trustees Target Law Firms

  • Print.

More law firms are facing lawsuits by bankruptcy trustees who claim lawyers helped companies hide financial problems.

Such suits “have largely replaced shareholder class actions in the nightmares of law firm managing partners,” the New York Law Journal reports. “These suits are often better funded, better lawyered and, with the U.S. Supreme Court likely to further limit third-party liability in securities fraud cases, they may soon have a distinct legal edge as well.”

Among the law firms currently facing trustee suits are Mayer, Brown, Rowe & Maw, sued by the bankruptcy trustee of failed commodities brokerage Refco Inc., and Clifford Chance, sued by the trustee for failed hospital finance company DVI Inc.

In another case, Enron law firm Vinson & Elkins agreed to pay $30 million to the company’s bankruptcy trustee, even though a formal suit had not been filed against the law firm, the legal newspaper says.

A common defense to such suits is that the bankruptcy trustee, who stands in the shoes of the company, cannot sue because the company is in pari delicto—or also at fault—with regard to its financial troubles. Trustees argue in pari delicto does not apply when company executives commit fraud to benefit themselves rather than the company.

Denis Cronin represented Vinson & Elkins in the Enron settlement and is now a partner there. He said bankruptcy trustees are getting more aggressive in pursuing claims against law firms because of pressure from distressed-debt hedge funds that buy bankruptcy claims as an investment. Often the trustees are represented by big-name law firms.

“If there ever was a gentlemen’s agreement among firms not to sue each other, it’s over now,” he said.

Give us feedback, share a story tip or update, or report an error.