UnitedLex fights back against claims in LeClairRyan bankruptcy litigation

LeClairRyan’s padlocked former Richmond office. (BizSense file)

The battle over potentially millions of dollars for the bankruptcy estate of collapsed Richmond law firm LeClairRyan continues to play out.

Legal services giant UnitedLex, which formed a controversial joint venture with LeClairRyan leading up to its dissolution, wants the bulk of the claims filed against it last fall by the law firm’s bankruptcy trustee to be dismissed, or at the very least transferred to a different court where it could have a chance to argue its case in front of a jury.

UnitedLex, as well as the ULX Partners joint venture entity, was accused last fall by trustee Lynn Tavenner of keeping the law firm alive longer than it should have in order to “improperly and unfairly extract millions of dollars from the estate, to the detriment of LeClairRyan’s creditors.”

But in filings submitted to the bankruptcy court earlier this month, UnitedLex and ULX argue that Tavenner’s case presents “a misguided narrative” as it relates to the relationship between LCR and ULX, the nature of the joint venture and how much control the two wielded over a weakened LCR.

“Although a court must accept well pled factual allegations as true when considering a motion to dismiss, the court is not required to engage in the willing suspension of disbelief when doing so,” the defendants argued in their Jan. 11 pleadings. “Yet the story pushed by the trustee in the complaint asks that one uncritically accept the premise that prolonging the life of a struggling business is wrong and inherently harmful to creditors.”

Instead, they claim the ULX venture was what it was billed to be at the time of its creation: an attempt to create a new business model for law firms by farming out their back office — and thereby hopefully helping LCR stay afloat and potentially profit from its share of the business.

UnitedLex and ULX are asking bankruptcy Judge Kevin Huennekens to dismiss 10 of the 14 claims against them and to allow the others to be heard in a district court, rather than in bankruptcy court.

Tavenner claims ULX and UnitedLex pocketed $19 million worth of avoidable, fraudulent transfers, the bulk of which came in the final year of LCR’s operations.

She’s seeking to recoup that money, plus $42 million from the defendants for allegedly aiding and abetting a breach of fiduciary duty. State law allows for those damages to be tripled, to the tune of $128 million.

The suit also seeks to cancel out the $8 million debt ULX claims it is owed by re-characterizing it as equity. That figure makes ULX the firm’s largest creditor, according to filings made early on in the bankruptcy case.

The 14 counts included various types of fraud and conspiracy, as well as unjust enrichment and alter ego liability.

The defendants, in addition to trying to poke holes in Tavenner’s narrative and arguing for dismissal of the bulk of the claims, argue that any remaining claims relate more to state law than federal bankruptcy law, and would be best litigated in front of a jury.

“The defendants have a constitutional right to a jury trial for many of these claims, and the bankruptcy court cannot conduct a jury trial on such claims without the defendants’ consent. The defendants have not given, and at this time do not intend to give, such consent.”

ULX and UnitedLex are represented by attorneys David Barger, Thomas McKee and Gregory Milmo of Greenberg Traurig.

Tavenner has enlisted special counsel from Foley & Lardner, a major law firm based in Milwaukee, to investigate potential litigation related to LCR’s downfall.

Tavenner and her team also continue to pursue funds for the estate from some former LCR shareholders and executives. Demand letters have gone out to some, which could lead to further litigation.

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