Wednesday, March 7, 2018
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Ninth Circuit Revives $20 Million Suit Against Estate of Heller Ehrman
By a MetNews Staff Writer
The Ninth U.S. Circuit Court of Appeals has ordered reinstatement of a $20 million malpractice claim against the bankruptcy estate of Heller Ehrman LLP, an erstwhile global law firm.
Reversing a summary judgment granted by the District Court for the Northern District of California, a three-judge panel held that the action is not time-barred under California’s one-year statute of limitation because triable issues of fact exist as to when the plaintiff was notified that Heller was no longer representing it. The opinion notes that no matter when the alleged harm from malpractice occurs, the statute does not start running until “continuous representation” ends.
Reversal of the district court came on Monday, the same day the California Supreme Court rendered advice to the Ninth Circuit, in response to a certified question, regarding Heller. The state high court advised that the administrator of the estate has no claim to a slice of attorney fees garnered by its former partners in non-contingency cases that they trekked with them when they landed at other firms.
Heller was dissolved on Nov. 28, 2008, and filed for bankruptcy 30 days later.
Malpractice Action
The malpractice action was brought in bankruptcy court by Paravue Corporation, a software company founded in 2002 by Lauren Barghout. It alleged that Heller was careless in advising that a loan agreement be signed under which Acuity Ventures II, LLC could, at its pleasure, convert any part of the outstanding principal into preferred stock, at a specified rate.
Acuity sought to exercise that right; Barghout refused to recognize the right; Acuity sued Paravue and Barghout in Santa Clara Superior Court on May 7, 2007 to gain an order compelling conversion of sums owed by Paravue into preferred stock.
Right at that time, Heller was mulling whether it had a conflict of interest based on its own ownership of stock in Paravue, received in lieu of attorney fees. It subsequently determined that it was required to withdraw; Barghout would not consent unless the law firm returned some fees, which it would not; and the Santa Clara Superior Court on July 17, 2007 granted the firm leave to withdraw.
After Acuity purchased assets of Paravue at a public sale, Paravue and Heller entered into an agreement on July 14, 2008 under which the statute of limitation on a malpractice action would be tolled until the date of the agreement.
Commencement of Statute
Paravue brought its action on April 27, 2009 and, contending the statute began to run on July 14, 2008, took the position that the one-year deadline was met. However, Heller insisted that as of that date in 2008, the action was already time-barred.
The bankruptcy court agreed with Heller and District Judge Charles R. Breyer affirmed. In an Oct. 7, 2015 decision, Breyer noted that by July 2007, two lawyers who were not members of the Heller firm—Jack Russo and Michael Ackerman—were representing Paravue’s interests.
The judge wrote:
“Russo argued Paravue’s position at multiple hearings where Heller Ehrman attorneys remained silent. At a July 10 hearing, Ackerman appeared specially on Barghout’s behalf and stated that he would step in to represent Paravue in the Acuity litigation if Heller Ehrman withdrew….Heller Ehrman immediately communicated [by email] to Paravue, both on July 10 and on July 11, that it agreed to Ackerman’s request and that it intended to withdraw as counsel….Paravue delayed agreeing to substitution because it wanted a refund of attorneys’ fees from Heller Ehrman ‘as a condition of withdrawal.’…Russo communicated this message to Heller Ehrman, and the only reasonable inference to be drawn from his communication is that he was acting on Paravue’s behalf.”
Continuous representation, Breyer declared ended “at latest by July 11, 2007—more than one year before July 14, 2008.”
Ninth Circuit’s View
Breyer was reversed in a memorandum opinion by a panel comprised of Circuit Judges Ronald M. Gould and Paul J. Watford, along with District Judge Louis Sands of the Middle District of Georgia, sitting by designation.
The opinion notes that a director, who was chief executive officer of Paravue, resigned on July 9, 2007, and Barghout declared herself to be CEO. On July 13, it recites, on advice of Heller, she appointed a director and the board confirmed her status as CEO.
“The Parties dispute when Dr. Barghout’s role as CEO became effective and what authority she had prior to being confirmed by the Board,” the opinion says.
While Breyer centered his attention on the emails of July 10 and 11, when Barghout was the sole director, the Ninth Circuit opinion alludes to an email string, mentioned by the bankruptcy court, from July 3-7. The opinion points out:
“Heller sent the emails to Dr. Barghout and her personal attorney, Russo. Dr. Barghout was then only the Chief Science Officer and one of two directors for Paravue, and there is no evidence that her personal attorney was counsel for Paravue or authorized to act for the corporation.”
The opinion declares that “the bankruptcy court incorrectly concluded that there was no genuine issue of material fact as to whether these emails provided sufficient notice to Paravue, a corporation, that Heller was terminating the attorney-client relationship.”
It also says:
“Paravue argues that the bankruptcy court conflated Dr. Barghout with Paravue, the corporation. We agree. It appears the bankruptcy court viewed the facts from the perspective of Heller, the attorney, and as though Dr. Barghout was the client, not Paravue. The evidence does not show that Paravue, the client, ‘actually and reasonably believed’ that Heller would provide no further legal services.”
The case is Paravue Corp. v. Heller Ehrman LLP, No. 16-15385.
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