Risk Update

Law Firm Conflicts Charges — Jones Day Talc Trials, Morgan Lewis Deal Declarations

Posted Dan Bressler

“Jones Day Bid to Represent Bankrupt J&J Talc Unit Under Fire” —

  • “Jones Day LLP’s help creating Johnson & Johnson’s talc liability spinoff should disqualify the firm from serving as the unit’s lead bankruptcy counsel, the Justice Department and thousands of talc injury claimants said.”
  • “Jones Day “appears to be the architect” of J&J’s October corporate restructuring, the U.S. Trustee’s office—the DOJ’s bankruptcy watchdog—said in a court filing Wednesday. The move, known colloquially as the Texas Two-Step, allowed the manufacturing giant to isolate its exposure to more than 35,000 baby powder injury lawsuits and address those claims in Chapter 11.”
  • “By assisting J&J through the divisional merger and bankruptcy filing, Jones Day appears to lack the independence to be a fiduciary for the debtor, the U.S. Trustee told the U.S. Bankruptcy Court for the District of New Jersey.”
  • “‘The prepetition machinations orchestrated by Jones Day are ripe for investigation and challenge in this bankruptcy case,’ Aylstock, Witkin, Kreis & Overholtz PLLC said. “These circumstances make it impossible for Jones Day to meet its burden to show that it is a ‘disinterested person’ and does not ‘hold or represent an interest adverse to the estate.'”

“Morgan Lewis Sued as Ex-Client Alleges Conflict in Deal Work Led to Bankruptcy” —

  • “Global megafirm Morgan Lewis & Bockius is facing a lawsuit that alleges the firm and one of its partners betrayed their fiduciary duties to clients by providing legal counsel to both the purchasing and selling parties in an employee stock ownership transaction.”
  • “The dispute arises out of Morgan Lewis’ alleged dual representation of bankrupt marketing agency Roni Hicks & Associates and the company’s retiring owners in a sale of their equity shares to employees via an employee stock ownership plan (ESOP).”
  • “Stadtmueller said the company’s financial woes came about because of the sellers’ ‘grossly overstated’ business projections, allegedly at the guidance of Morgan Lewis and Chicago-based employment partner Brian D. Hector.”
  • “But, the suit alleges, Hector wasn’t only in the sellers’ corner throughout the deal-making process. Court documents show Hector and Morgan Lewis represented Roni Hicks & Associates at the same time as they represented the company’s divesting owners.”
  • “The complaint finds fault in Morgan Lewis and Hector’s alleged failure to alert the parties of the conflict of interest that emerged out of their two-sided representation. It further alleges the firm and Hector advised sellers to seek the most lucrative price for their stock and failed to alert the marketing company that the loan necessary to finalize the purchase would likely be too much to pay back.”
  • “San Diego-based lawyer William Fennell, who represented Roni Hicks & Associates in claims that arose out of the stock purchase agreements, said the attorneys’ fees paid to Morgan Lewis ‘benefitted the sellers far more than the company.'”
  • “The complaint was filed more than one year after the stock sellers filed suit against Morgan Lewis and Hector on similar grounds that they failed to inform parties about the alleged conflict of interest resulting from the representation of both seller and buyer. In addition, seller-plaintiffs claimed Hector drafted into the stock purchase agreement an indemnity provision that was ‘adverse’ to sellers’ interests.”