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Category: Legal Malpractice

Wachtell Billing Practices Come Under New Scrutiny in CVR Case

September 5, 2018

A recent New York Law Journal story by Christine Simmons, “Wachtell Billing Practices Come Under New Scrutiny in CVR Case,” reports that on raising the stakes in its long-running legal malpractice suit against Wachtell, Lipton, Rosen & Katz, CVR Energy is now alleging the elite law firm engaged in unethical billing practices by basing its legal fees on the amount charged by investment banks.  “This Kafkaesque method of billing was never disclosed to CVR and Wachtell has gone to great lengths to avoid scrutiny, by clients, the bar and the public of its billing practice,” CVR alleged in a proposed amended complaint that would seek punitive damages against the law firm.

CVR, a refining and fertilizer business controlled by Carl Icahn, is suing Wachtell for legal malpractice in the Southern District of New York.  In the 2013 suit, which Wachtell has strongly contested, CVR alleges the firm failed to advise that CVR would face claims by Deutsche Bank AG and The Goldman Sachs Group Inc. for $36 million under the terms of engagement letters with the banks.  CVR hired the banks as financial advisers in an unsuccessful attempt to fend off a 2012 acquisition by Icahn.  CVR’s counsel, Herbert Beigel, wrote to U.S. District Judge Richard Sullivan, seeking permission to add claims for breach of contract and breach of the covenant of good faith and fair dealing and to seek punitive damages.  He said the additions stem from information “we learned late in discovery.”

As American Lawyer previously reported, Wachtell has a unique billing structure.  Instead of charging by the hour, the firm charges fees for deals that range from 1 percent to 0.1 percent of the transaction amount, according to the 2012 fee agreement at issue in the malpractice case brought by CVR against Wachtell.  A “Billing and Retention Policies” document sent to CVR—and cited in CVR’s proposed new complaint—states that Wachtell provides a “distinctive service,” marked by extraordinary expertise and sophistication that doesn’t lend itself to hourly fees.

“We must base our fees not on time but on the intensity of the firm’s efforts, the responsibility assumed, the complexity of the matter and the result achieved,” the firm asserts.  The document adds: “While our fees are not based on the amount involved in a matter, experience indicates that merger and acquisition and takeover fees have typically ranged [from] 1 percent or more on matters under $250 million and 0.1 of 1 percent or less on matters over $25 billion.”

But CVR, in its new court papers, said contrary to the terms of its engagement letter, Wachtell billed CVR $6 million based on the amount of the success fees invoiced by Goldman and Deutsche in connection with the company’s response to Icahn’s 2012 tender offer, “resulting in a much larger fee than the law firm promised to charge or it was otherwise entitled to—and the firm did so without informing CVR.”  Under CVR’s argument, a $6 million fee would represent 16 percent of the banks’ $36 million fees to CVR.  However, this formula does not appear in CVR’s publicly filed court papers.  CVR’s amended complaint and Beigel’s letter to the court are redacted.

CVR’s court papers do say that Wachtell’s fees, like the fees of Goldman and Deutsche, were higher for failing than succeeding.  “Even though Wachtell is hired by its client to, among other things, get the best deal for its client when engaging investment bankers … for takeover ‘defense’ assignments, Wachtell is perversely incentivized to negotiate engagement letters that benefit the investment bankers, not its client, which is exactly what happened with CVR,” Beigel alleges.

CVR argues that the basis for Wachtell’s fee was unethical and in violation of the attorney ethics rules in that it was excessive and not aligned with CVR’s interests.  The more fees Goldman and Deutsche would receive, the higher Wachtell would bill for its services, “thus creating a material conflict of interest on the part of Wachtell,” the company claims.  CVR also claims Wachtell’s fee was not based on “the amount involved” in the Icahn tender offer, and contrary to the terms of its engagement letter, the fee was not based on “the result achieved” or the “responsibility assumed.”

The company said it’s entitled to the return of fees paid to Wachtell and to recover from Wachtell punitive damages, as its conduct “constituted gross, wanton or willful fraud.”

Wachtell has fought the malpractice allegations since the 2013 suit was first filed and even brought a state court suit against CVR and Icahn for abuse of process and breach of protective order.  In federal court last month, Wachtell’s counsel, Shuster, said the firm believes Icahn brought the case out of animosity.  “He does not like Wachtell.  It was brought as payback.”

NJ Supreme Court: Pledge of Expected Attorney Fees is an Account Receivable

November 16, 2017

A recent New Jersey Law Journal story by Michael Booth, “Lawyer’s Pledge of Expected Fee is an Account Receivable, Court Says,” reports that an attorney’s pledge of anticipated counsel fees to pay off a debt can be considered an account receivable under the Uniform Commercial Code, the New Jersey Supreme Court ruled.  The court’s unanimous, per curiam ruling affirmed an Appellate Division panel reaching the same conclusion in upending a $1.6 million award in a legal malpractice case involving a corporate whistleblower and his former law firm, and an unrelated malpractice case against his second attorney.

The court agreed with Appellate Division Judges Michael Guadagno, Joseph Yannotti and Jerome St. John that a creditor, OKS Realty, should be placed first in line of a series of creditors to a New Jersey attorney since it filed a financing statement under Article 9 of the Uniform Commercial Code with the U.S. Treasury Department.  The court said OKS should be prioritized before other creditors, a law firm and an accounting firm, because of the pledge by the now-retired attorney, Woodland Park solo Diane Acciavatti, to use an anticipated fee to pay off a loan.

“An attorney’s pledge of anticipated counsel fees can be considered an account receivable,” Guadagno previously wrote for the Appellate Division panel, in August 2016.  The ruling means that a company that loaned $125,000 to Acciavatti moves ahead of two other creditors since it was the only one to file a financing statement with the Treasury Department.

“OKS met the requirements … for its security interests to attach to Acciavatti’s counsel fees,” Guadagno said.  “Whether an attorney’s pledge of anticipated counsel fees can be considered a security interest under Article 9 of the Uniform Commercial Code … is an issue of first impression in New Jersey.  We hold that it can.”

OKS’s attorney, Robyne LaGrotta, said she will now move to claim funds that already have been paid to two other creditors—Springfield’s Gourvitz & Gourvitz, and an accounting firm, now called RotenbergMeril. Gourvitz has been paid $83,284 and RotenbergMeril has been paid $133,652.

The multipronged litigation stretches back to 2007 when a plaintiff, John Granata, retained Acciavatti to represent him in legal malpractice lawsuit against his former lawyer, Edward Broderick Jr., and his firm, Broderick Newmark & Grather in Morristown.

Broderick had represented Granata in a whistleblower action against his former employer, Prudential Insurance Co. of America.  Granata, a salesman, claimed he was fired in 2006 because he had complained to superiors that the company was improperly discriminating against agents like himself who served inner-city areas with large minority populations, through such practices as “redlining.”  The company said it fired Granata for allegedly signing a client’s name to a form authorizing a transfer of the client’s funds from a money market account to mutual bonds.

Granata had been seeking $3 million in damages from Prudential, which forced the lawsuit into arbitration.  An panel of arbitrators award Granata $28,000, but assessed him $12,530 in fees and costs.

NJ Appeal Panel: Prior Fee Suit Bars Malpractice Claims

October 20, 2017

A recent Law 360 story by Jeannie O’Sullivan, “Prior Fee Suit Bars Malpractice Claims, NJ Panel Says,” reports that Borrus Goldin Foley Vignuolo Hyman & Stahl dodged a legal malpractice complaint over its representation of a client suing a business partner over allegedly diverted funds, as a New Jersey appeals court affirmed the claims should have been lodged in a prior fee-collection dispute.

The two-judge Appellate Division panel’s decision dealt a blow to Evangelos and Matilde Dimitrakopoulos, agreeing with a trial court’s determination that the couple’s claims against the North Brunswick, New Jersey-based firm over alleged discovery, expert witness and billing gaffes were barred by the entire controversy doctrine.  The doctrine aims to prevent claims arising from the same set of facts from being relitigated.

The panel acknowledged that legal malpractice claims are exempt from the preclusive effect of the entire controversy doctrine, in that they needn’t be asserted in the underlying action that gives rise to the claim.  But the Dimitrakopouloses mistakenly applied the doctrine to the collection action, when the underlying action was actually the couple’s dispute with a former business partner, according to the appeals judges.

By the time the collection action was filed, the couple knew or should have known that their alleged damages were attributable to Borrus Goldin’s alleged professional negligence and could have filed their malpractice claims then, the opinion said.

“Instead, plaintiffs delayed three more years before filing their malpractice complaint.  Our consideration of the facts and equitable factors leads us to conclude that the motion judge correctly determined that the entire controversy doctrine applied here and barred plaintiffs' malpractice complaint,” the opinion said.

The Dimitrakopouloses retained Borrus Goldin in 2009 to assert claims that their business partner in a construction enterprise improperly diverted funds, according to the opinion.  The dispute went to arbitration in December 2010, and Borrus Goldin withdrew as counsel.  The issue was settled in September 2011 after the couple had retained new representation.

Meanwhile, Borrus Goldin had filed a collection action against the Dimitrakopouloses in March 2011 to collect its unpaid legal fees for services rendered in the underlying business dispute, the opinion said.  The court awarded a $121,947.99 judgment in favor of the firm.

The couple filed their malpractice action in September 2015, alleging the firm failed to properly plead claims and obtain consent before agreeing to arbitration, didn’t properly perform discovery and secure expert rebuttal reports, and billed for excessive amounts, the opinion said.  A Middlesex County Superior Court judge dismissed the claims, agreeing with the firm’s argument that the claims were barred by the entire controversy doctrine.

The case is Evangelos Dimitrakopoulos and Matilde Dimitrakopoulos v. Borrus Goldin Foley Vignuolo Hyman & Stahl PC et. al., case no. A-0880-16T3, in the Superior Court of New Jersey, Appellate Division.