Judge: Former HDL execs can still sue LeClairRyan

HDL's former downtown headquarters is now occupied by True Health Diagnostics, which bought the bulk of HDL's assets out of bankruptcy.

HDL’s former downtown headquarters is now occupied by True Health Diagnostics, which bought the bulk of HDL’s assets out of bankruptcy.

The blame game isn’t yet over in the saga of Health Diagnostic Laboratory.

A judge’s ruling last week in the former Richmond-based blood testing company’s two-years-and-counting bankruptcy case officially leaves open the door for its former executives to sue downtown law firm LeClairRyan, which was HDL’s legal counsel for years prior to its collapse.

The ruling was made as a result of an appeal filed by HDL founders Russell Warnick and Tonya Mallory, who sought to preserve their ability to pursue legal claims of their own against LeClairRyan related to its past representation of HDL insiders individually.

They were appealing the court’s prior approval of the $20 million settlement LeClairRyan agreed to pay to HDL’s bankruptcy estate, worried that language in the agreement could be interpreted as preventing them from being able to individually deflect blame for the company’s downfall from themselves to the law firm.

Judge John A. Gibney Jr.’s opinion, filed July 14 in Richmond federal court, stated the agreement doesn’t read that way.

The ruling also affirmed the prior approval of that $20 million settlement, which had already been signed off on by HDL and LeClairRyan and the bankruptcy court, but was held up by Mallory and Warnick’s appeal.

The settlement money remains in escrow and will be available to the HDL estate after Aug. 14, which is the deadline for Mallory and/or Warnick to file another appeal.

LeClairRyan’s in-house counsel Lori Thompson said the firm had no comment on the ruling. The firm has said the settlement funds would be covered by its insurance policies.

Cullen Drescher Speckhart, an attorney with Wolcott Rivers Gates representing the HDL trustee, said the estate views the judge’s opinion as a victory, particularly because it affirms the $20 million windfall for HDL creditors.

The judge’s decision last week also made public for the first time the demand letter the HDL trustee sent to LeClairRyan in October 2015. That letter had previously been sealed per a court order.

The letter stated HDL’s case for placing blame on the law firm, claiming the company incurred no less than $250 million in damages as a result of the Department of Justice investigation that ultimately fueled its downfall and arguing that LeClairRyan bore responsibility for a significant portion.

No individual HDL insiders have sued LeClairRyan to date, and it’s unclear what form any such suits might take.

They could be filed as separate cases in federal district court or as offshoots of the sweeping lawsuit the trustee filed last September against more than 100 defendants, including the company’s cofounders, directors and shareholders.

That case, which is still pending and headed for mediation next month, seeks to place blame for the company’s downfall on the shoulders of HDL insiders and sales contractors, and aims to recover more than $600 million in damages.

Various defendants in that larger case have asked to be dismissed from it, including Mallory and Warnick, who are also concurrently in settlement talks with the trustee.

Some former HDL executives have already settled with the trustee. That list most notably includes cofounders Joseph McConnell and Satyanarain Rangarajan, and Dennis Ryan, a former HDL executive vice president and cofounder and namesake of LeClairRyan.

McConnell, Rangarajan and Ryan agreed to pay $15 million, $8.8 million and $5 million, respectively, to the bankruptcy estate. Those totals include some money out of their individual pockets and some from insurance coverage that was in place when they worked at HDL.

Ryan’s settlement agreement includes provisions that leave him open to being sued by individual HDL execs for the work he did for the company during his time at LeClairRyan.

HDL fell into bankruptcy in June 2015, after the DOJ claimed the company was paying kickbacks to doctors. The once fast-rising downtown company couldn’t survive the aftermath and filed Chapter 11, sold off the bulk of its assets to a Texas competitor and left lawyers to go after the rest for creditors.

The trustee and its team of attorneys have since filed about 1,400 adversary proceedings against various doctors, charities and anyone else that did business with HDL and could potentially have to turn over funds.

HDL's former downtown headquarters is now occupied by True Health Diagnostics, which bought the bulk of HDL's assets out of bankruptcy.

HDL’s former downtown headquarters is now occupied by True Health Diagnostics, which bought the bulk of HDL’s assets out of bankruptcy.

The blame game isn’t yet over in the saga of Health Diagnostic Laboratory.

A judge’s ruling last week in the former Richmond-based blood testing company’s two-years-and-counting bankruptcy case officially leaves open the door for its former executives to sue downtown law firm LeClairRyan, which was HDL’s legal counsel for years prior to its collapse.

The ruling was made as a result of an appeal filed by HDL founders Russell Warnick and Tonya Mallory, who sought to preserve their ability to pursue legal claims of their own against LeClairRyan related to its past representation of HDL insiders individually.

They were appealing the court’s prior approval of the $20 million settlement LeClairRyan agreed to pay to HDL’s bankruptcy estate, worried that language in the agreement could be interpreted as preventing them from being able to individually deflect blame for the company’s downfall from themselves to the law firm.

Judge John A. Gibney Jr.’s opinion, filed July 14 in Richmond federal court, stated the agreement doesn’t read that way.

The ruling also affirmed the prior approval of that $20 million settlement, which had already been signed off on by HDL and LeClairRyan and the bankruptcy court, but was held up by Mallory and Warnick’s appeal.

The settlement money remains in escrow and will be available to the HDL estate after Aug. 14, which is the deadline for Mallory and/or Warnick to file another appeal.

LeClairRyan’s in-house counsel Lori Thompson said the firm had no comment on the ruling. The firm has said the settlement funds would be covered by its insurance policies.

Cullen Drescher Speckhart, an attorney with Wolcott Rivers Gates representing the HDL trustee, said the estate views the judge’s opinion as a victory, particularly because it affirms the $20 million windfall for HDL creditors.

The judge’s decision last week also made public for the first time the demand letter the HDL trustee sent to LeClairRyan in October 2015. That letter had previously been sealed per a court order.

The letter stated HDL’s case for placing blame on the law firm, claiming the company incurred no less than $250 million in damages as a result of the Department of Justice investigation that ultimately fueled its downfall and arguing that LeClairRyan bore responsibility for a significant portion.

No individual HDL insiders have sued LeClairRyan to date, and it’s unclear what form any such suits might take.

They could be filed as separate cases in federal district court or as offshoots of the sweeping lawsuit the trustee filed last September against more than 100 defendants, including the company’s cofounders, directors and shareholders.

That case, which is still pending and headed for mediation next month, seeks to place blame for the company’s downfall on the shoulders of HDL insiders and sales contractors, and aims to recover more than $600 million in damages.

Various defendants in that larger case have asked to be dismissed from it, including Mallory and Warnick, who are also concurrently in settlement talks with the trustee.

Some former HDL executives have already settled with the trustee. That list most notably includes cofounders Joseph McConnell and Satyanarain Rangarajan, and Dennis Ryan, a former HDL executive vice president and cofounder and namesake of LeClairRyan.

McConnell, Rangarajan and Ryan agreed to pay $15 million, $8.8 million and $5 million, respectively, to the bankruptcy estate. Those totals include some money out of their individual pockets and some from insurance coverage that was in place when they worked at HDL.

Ryan’s settlement agreement includes provisions that leave him open to being sued by individual HDL execs for the work he did for the company during his time at LeClairRyan.

HDL fell into bankruptcy in June 2015, after the DOJ claimed the company was paying kickbacks to doctors. The once fast-rising downtown company couldn’t survive the aftermath and filed Chapter 11, sold off the bulk of its assets to a Texas competitor and left lawyers to go after the rest for creditors.

The trustee and its team of attorneys have since filed about 1,400 adversary proceedings against various doctors, charities and anyone else that did business with HDL and could potentially have to turn over funds.

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