Bankruptcy Trustees Sue Law Firms

Two large law firms, Bryan Cave and Holland & Knight have been sued by different bankruptcy trustees over their prior representation of companies which later filed bankruptcy proceedings.  Both firms strongly deny the claims made against them.  “Bankruptcy trustees for mortgage loan broker Estate Financial Inc. (EFI) and affiliate Estate Financial Mortgage Fund (EFMF) filed malpractice complaints against Bryan Cave in U.S. bankruptcy court in Santa Barbara, Calif., on April 28.

The trustees, who are seeking to recover assets for EFI and EFMF investors, claim that Bryan Cave and restructuring counsel Katherine Windler in Los Angeles looked the other way while their client, the now-defunct lenders EFI and EFMF, fraudulently sold mortgage-backed securities to investors, according to Cal Coast News. Bryan Cave maintains that the suits, which seek $100 million in damages, have no merit.

EFI and EFMF filed for bankruptcy in June 2008, and EFI principals Karen Guth and Joshua Yaguda pleaded guilty in October 2009 to 26 felony counts that included charges of fraudulently selling mortgage-backed securities to investors. Guth was given a 12-year prison sentence in December 2009, while Yaguda was sentenced to eight years in prison, according to local news reports.

…Bryan Cave wasn’t the only Am Law 100 firm to become ensnared in bankruptcy litigation this week. Holland & Knight was slapped with a 20-page civil complaint filed by bankrupt Industrial Enterprises of America (IEAM) on April 30.

As previously reported by The Am Law Daily, former IEAM chief executive John Mazzuto and outside lawyer James Margulies, a founding partner of Cleveland firmMargulies & Levinson, were indicted by state prosecutors in New York last year for running a $60 million stock scheme that contributed to the collapse of Pittsburgh-based IEAM, which sold antifreeze and other automotive chemicals before filing for Chapter 11 in May 2009.

Both Mazzuto and Margulies are contesting the criminal charges, which claim that the two used a pump-and-dump scheme to drive up the price of IEAM’s stock. But rather than reward company employees, the stock scheme contributed to IEAM’s collapse when Mazzuto and Margulies used that money for personal expenses and to pay their lawyers, according to the criminal charges.

Holland & Knight, which had been litigation and securities counsel to IEAM, is accused of participating in a “large-scale scheme to loot IEAM” through “willful participation, gross negligence, conflicts of interest, and fraud” that allowed the stock scheme to proceed and to deprive IEAM of its working capital. ”

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