LeClairRyan gave joint venture 'unprecedented control' and priority payments, bankruptcy trustee says
Photo illustration by Brenan Sharp/ABA Journal.
The joint venture between LeClairRyan and alternative services provider UnitedLex was intended to help keep the law firm afloat, but the combination “only served to plunge LeClairRyan further into insolvency,” according to the Chapter 7 trustee for the bankrupt law firm.
An Oct. 26 complaint by trustee Lynn Tavenner alleges the joint venture, ULX Partners, was given “unprecedented control” over a wide range of law firm operations that the alternative services provider used to benefit itself over other creditors.
Tavenner alleges that ULX Partners and certain LeClairRyan officers and directors “prioritized their own desires for financial gain and prolonged the debtor’s lifespan” instead of winding down the law firm. That allowed UnitedLex, ULX Partners and others to “improperly and unfairly extract millions of dollars from the estate, to the detriment of LeClairRyan’s creditors.”
UnitedLex owned 99% of ULX Partners, which was created in April 2018. LeClairRyan transferred more than 300 nonlawyer employees to the company, which then contracted to provide services to LeClairRyan.
After the deal was reached, LeClairRyan “was no longer able to function on its own without the support of the ULX entities,” the lawsuit says. The deal called for ULX Partners to be compensated based on net law firm profits—a provision that violated ethics rules on fee sharing in Virginia, where the law firm was based, Tavenner says.
Tavenner alleges that ULX Partners pressured LeClairRyan to make payments ahead of vendors that were also owed money. From November 2018 until the law firm sought bankruptcy protection in September 2019, payables owed to ULX Partners decreased by 30.7%, while payables owed to other creditors increased by 181%, the complaint says.
The complaint says more than $19 million in transfers from LeClairRyan to ULX Partners from August 2018 to the date of the bankruptcy filing are avoidable transfers. Of that amount, at least $17 million are preferential transfers that occurred within one year of the filing, Tavenner says.
Tavenner also targets an $8 million promissory note in which LeClairRyan agreed to repay prior advances by ULX entities to the law firm. The note, backdated by more than three months, gave the debt priority over other debts.
The suit alleges that UnitedLex and ULX partners conspired to breach the fiduciary duties owed by LeClairRyan officers and directors, in part by entering into a joint venture that gave control of the law firm to nonlawyers.
The defendants also conspired to breach firm leaders’ duties by “terminating the firm’s deferred compensation and supplemental retirement plans, misappropriating funds tendered to the debtor by its clients for specific expenses, facilitating fraudulent and preferential transfers, and/or making misleading or false statements to professional consultants,” the suit says.
The alleged false statements were made to Hinshaw & Culbertson, which advised in an opinion letter that UnitedLex should not have an ownership interest in LeClairRyan or exercise any management control over the law firm.
UnitedLex gave this statement to Bloomberg Law and Law360: “We believe the allegations being raised through the bankruptcy of LeClairRyan have no merit. As a major creditor of LeClairRyan, we fully expect the bankruptcy process to fairly resolve this matter. We eagerly await the resolution process and the opportunity to highlight our client commitment.”
ABAJournal.com: “Too big too soon: How LeClairRyan went under”