Ex-Heller Employees Sue Former Partners

Former employees of Heller Ehrman sued at least 179 former partners in April, demanding they fork over $32 million for the largest group of creditors in the defunct firm's bankruptcy.

The suit, an adversary proceeding filed in the Bankruptcy Court for the Northern District of California, targets all partners who were at the firm on Aug. 11, 2008, when 60 days' notice should have been given to the first employees laid off on Oct. 10, said Craig Collins, of Los Angeles litigation boutique Blum Collins.

Background

Heller's former shareholders prefer not to be called partners. They were technically shareholder employees of the professional corporations that composed the limited liability partnership, which could make proving liability for the LLP's employee wages a little more complicated.

The suit could have duplication or jurisdictional issues, since a similar complaint has been filed in the District Court for the Northern District of California against the professional corporations. Blum said his firm is going to ask to dismiss the district court case, which it took over, because most of the important decisions in Heller are being made in the bankruptcy court.

The Suit

It is not clear whether the partners can be sued in bankruptcy court, since they are not bankrupt. The professional corporations that made up Heller LLP are also named in the suit, but are also not bankrupt. Collins argues that the suit is allowed under bankruptcy rules because the outcome will have an economic impact on the Heller estate and its rights and liabilities.

Heller's 800-plus former employees say they are owed accrued vacation and severance as guaranteed by the firm's policies, the 60-day notice required by federal and California WARN Acts, and penalties for failure to give that notice. The suit also alleges violations of New York, Washington State and Washington, DC, labor laws.

The suit, which proposes a plaintiffs' class of the former employees, also attempts to create a defendant class. It names Chairman Matthew Larrabee and members of the executive, policy and compensation and dissolution committees “individually and on behalf of those similarly situated.”

At least 179 partners were at the firm on Sept. 26, the day Heller said it would dissolve. The firm lost about 50 partners earlier last year, but defections slowed in the two months leading up to the dissolution as merger talks increased.

Larrabee and his predecessor as chairman, Barry Levin, did not return calls seeking comment. Former partner and dissolution committee member Jonathan Hayden declined to comment on the record. John Fox, a partner at Manatt, Phelps & Phillips who represents Heller's professional corporations in the district court case, declined to comment publicly.

The action against the partners came a day after Heller's creditors sued Bank of America, saying its “clerical error” in an August 2007 Uniform Commercial Code filing would have misled other “hypothetical” secured creditors. They want the bank to return $58 million paid to it since the firm dissolved. Bank of America was Heller's only secured creditor, or so everyone thought. Its last UCC filing before Heller's September dissolution vote actually terminated its security interest in Heller.

About a week after Heller dissolved in late September, the bank attempted to correct the statement, calling the 2007 filing a “clerical error.” The creditors say these actions fall within a 90-day “preference” period during which any actions that affect a debtor's financial status can be thrown out by the bankruptcy court.

Conclusion

If the creditors win, the $58 million goes into the pot for everyone else, but the banks stand a good chance of getting a lot of it back because they will line up as unsecured creditors, with equal claim on the money.

Amanda Royal is a reporter for The Recorder, an Incisive Media sister publication of this newsletter, in which this article first appeared.

Former employees of Heller Ehrman sued at least 179 former partners in April, demanding they fork over $32 million for the largest group of creditors in the defunct firm's bankruptcy.

The suit, an adversary proceeding filed in the Bankruptcy Court for the Northern District of California, targets all partners who were at the firm on Aug. 11, 2008, when 60 days' notice should have been given to the first employees laid off on Oct. 10, said Craig Collins, of Los Angeles litigation boutique Blum Collins.

Background

Heller's former shareholders prefer not to be called partners. They were technically shareholder employees of the professional corporations that composed the limited liability partnership, which could make proving liability for the LLP's employee wages a little more complicated.

The suit could have duplication or jurisdictional issues, since a similar complaint has been filed in the District Court for the Northern District of California against the professional corporations. Blum said his firm is going to ask to dismiss the district court case, which it took over, because most of the important decisions in Heller are being made in the bankruptcy court.

The Suit

It is not clear whether the partners can be sued in bankruptcy court, since they are not bankrupt. The professional corporations that made up Heller LLP are also named in the suit, but are also not bankrupt. Collins argues that the suit is allowed under bankruptcy rules because the outcome will have an economic impact on the Heller estate and its rights and liabilities.

Heller's 800-plus former employees say they are owed accrued vacation and severance as guaranteed by the firm's policies, the 60-day notice required by federal and California WARN Acts, and penalties for failure to give that notice. The suit also alleges violations of New York, Washington State and Washington, DC, labor laws.

The suit, which proposes a plaintiffs' class of the former employees, also attempts to create a defendant class. It names Chairman Matthew Larrabee and members of the executive, policy and compensation and dissolution committees “individually and on behalf of those similarly situated.”

At least 179 partners were at the firm on Sept. 26, the day Heller said it would dissolve. The firm lost about 50 partners earlier last year, but defections slowed in the two months leading up to the dissolution as merger talks increased.

Larrabee and his predecessor as chairman, Barry Levin, did not return calls seeking comment. Former partner and dissolution committee member Jonathan Hayden declined to comment on the record. John Fox, a partner at Manatt, Phelps & Phillips who represents Heller's professional corporations in the district court case, declined to comment publicly.

The action against the partners came a day after Heller's creditors sued Bank of America, saying its “clerical error” in an August 2007 Uniform Commercial Code filing would have misled other “hypothetical” secured creditors. They want the bank to return $58 million paid to it since the firm dissolved. Bank of America was Heller's only secured creditor, or so everyone thought. Its last UCC filing before Heller's September dissolution vote actually terminated its security interest in Heller.

About a week after Heller dissolved in late September, the bank attempted to correct the statement, calling the 2007 filing a “clerical error.” The creditors say these actions fall within a 90-day “preference” period during which any actions that affect a debtor's financial status can be thrown out by the bankruptcy court.

Conclusion

If the creditors win, the $58 million goes into the pot for everyone else, but the banks stand a good chance of getting a lot of it back because they will line up as unsecured creditors, with equal claim on the money.

Amanda Royal is a reporter for The Recorder, an Incisive Media sister publication of this newsletter, in which this article first appeared.