By Hilary Russ
Law360, New York (July 28, 2011) — K&L Gates LLP argued Thursday that a bankruptcy judge in New York shouldn’t block the firm from seeking confidential documents pertaining to a settlement between bankrupt Teligent Inc. and its former CEO, which the firm says are key to defending against malpractice allegations.
The document dispute touches on related proceedings in other courts, creating a jurisdictional quandary that U.S. Bankruptcy Judge Stuart M. Bernstein will have to address, said the firm at Thursday’s hearing.
The feud stems from the 2001 bankruptcy of telecommunications company Teligent when former CEO Alex Mandl left the company just before it went bankrupt.
At the time, he still owed Teligent $12 million on a $15 million loan he took out under his employment agreement. Mandl said that under the terms of the agreement, he did not have to repay the money.
But after the company’s reorganization plan was confirmed, Savage & Associates PC, the representative for a trust for unsecured creditors, launched hundreds of avoidance actions in bankruptcy court — including one against Mandl — to recover the funds. Mandl, who was represented by K&L, lost at trial.
Mandl got new lawyers from Greenberg Traurig LLP, filed post-judgment motions and resumed court-mandated mediation with Savage. The parties reached a deal calling for Mandl to hand over $6 million to the trust. The deal also directed Mandl to sue K&L in Washington superior court for malpractice and to give Savage half of any proceeds.
Since then, K&L has been trying in Washington court to get access to confidential information from the mediation discussions between Mandl and Savage. K&L says the documents could show some kind of collusion or fraud between the parties.
The discovery issue previously made it all the way up to the Second Circuit, which ruled in early May that K&L had not shown exactly why it needed the secret information.
However, the Second Circuit did find that the firm merely failed to show a compelling need for all mediation documents. Since that ruling, K&L has asked the Washington court for precise categories of documents, said K&L’s attorney, Luba Shur of Williams & Connolly LLP, at the bankruptcy court hearing.
Representing her firm, Denise Savage said that with her motion to block discovery in state court, she was merely asking the bankruptcy court to enforce its own confidentiality order and that it should not be left up to the state court to interpret a federal court’s ruling.
“I don’t think it’s appropriate for a state court to do that,” she told Judge Bernstein.
Jurisdictional issues were also raised by Savage’s other request that Judge Bernstein enforce the portion of the bankruptcy court-ordered settlement agreement that pertains to the proceeds of the malpractice suit.
Savage said the deal was done, consummated and was valid, and that she wanted the bankruptcy court to protect it against K&L’s attempt to dismantle it in the Washington case.
“We would like a ruling regarding our rights with the D.C. proceeds,” she told Judge Bernstein.
But Shur argued that there was “absolutely no precedent” for a federal bankruptcy court to become entangled in a common law tort case in such a manner.
“What Ms. Savage is asking is truly radical,” Shur said, claiming that Savage essentially wanted a bankruptcy judge to adjudicate a portion of a Washington case to which Savage was not even a party.
Shur also said one of several arguments K&L intended to make going forward in the malpractice suit was that the entire case should be thrown out because of improper proceedings.
“I’m not before the D.C. court. I’m before this court,” Savage shot back.
While Savage was not part of the malpractice suit, she said she should be able to appear there in order to protect her rights. And while K&L was not actually a party to the adversary case between Savage and Mandl in bankruptcy court, the firm was a major player at Thursday’s hearing.
This is the final case to be resolved in wrapping up the decade-old Teligent bankruptcy. At least $20 million has already been gathered to distribute to the creditors, but the outcome of the malpractice case could contribute to that amount significantly, attorneys involved in the case have previously said.
Bernstein said he would issue a ruling in the future.
“Next time write shorter briefs,” he told the attorneys.
Denise L. Savage of Savage & Associates PC represents her firm.
Luba Shur, Michael S. Sundermeyer and Mark S. Levinstein of Williams & Connolly LLP represent K&L Gates LLP.
Adam J. Lamb represents Mandl.
The adversary case is Savage & Associates PC et al. v. Alex Mandl, case number 1:03-ap-02523, in the U.S. Bankruptcy Court for the Southern District of New York.
The bankruptcy is In re. Teligent Inc. et al., case number 1:01-bk-12974, in the same court.
–Additional reporting by Christie Smythe and Ian Thoms. Editing by Eydie Cubarrubia.