May 7, 2019 / 8:51 PM / 3 months ago

Michael Avenatti and the weirdest-ever lead counsel fight

(Reuters) - In 2017, before he became a household name, Michael Avenatti won a jury verdict of nearly a half-billion dollars for a class of California medical centers. Avenatti, at the time a name partner of Eagan Avenatti, was the court-appointed lead counsel for the class, which claimed Kimberly-Clark and Halyard Health were fraudulently marketing surgical gowns that failed to block communicable diseases.

The defendants, which have always denied the class allegations, quickly persuaded U.S. District Judge Dolly Gee of Los Angeles to slash the verdict to about $21 million. That judgment is now on appeal, by both the class and the defendants, at the 9th U.S. Circuit Court of Appeals.

But the most interesting action in the case, Bahamas Surgery v. Kimberly-Clark, is back in the trial court, where Avenatti is sparing no viciousness in a battle to prevent some of his former partners from “hijacking” the class action. I write all the time about lead counsel fights. I’ve never seen one quite like this.

First, some background. Avenatti’s former firm, Eagan Avenatti, is no longer in business. In 2018, after the firm was forced into bankruptcy, the personal corporation of onetime Eagan Avenatti partner Jason Frank obtained a $10 million bankruptcy court judgment against the firm. In February 2019, Avenatti acceded to the appointment of a receiver for Eagan Avenatti.

The following month, as you probably recall, Avenatti was charged with fraud and embezzlement in Los Angeles federal court, where he was accused of stealing millions from several former clients. He was also charged in Manhattan federal court with attempting to extort Nike. The lawyer, who is best known for representing adult film actress Stormy Daniels in her challenge to a nondisclosure agreement precluding her from discussing an alleged affair with President Donald Trump, has pleaded not guilty to the criminal charges against him.

On April 1, Avenatti informed Judge Gee that he would relinquish his role as lead counsel in the Bahamas Surgery class action, “out of an abundance of caution and to ensure that my fiduciary duties are met.” He urged the judge to appoint William Hearon and Ahmed Ibrahim in his stead, noting that the two lawyers had been involved in the case for years and that he would continue to be available to them for consultation. The lead plaintiff, the chief nursing officer of Bahamas Surgery, filed a declaration backing the appointment of Hearon and Ibrahim.

There is precedent for the replacement of class counsel facing criminal charges. After Milberg Weiss and three name partners were indicted in 2006 for allegedly paying kickbacks to lead plaintiffs, the firm was booted from some cases in which it had been appointed lead counsel. (Milberg agreed in 2008 to pay $75 million in exchange for prosecutors dropping charges against the firm.)

What’s unprecedented, to the best of my knowledge, is for a bankruptcy receiver to step into a class action to attempt to replace class counsel – with a lawyer who is also a creditor. On the same day that Hearon and Ibrahim moved to replace Avenatti as lead counsel, Eagan Avenatti’s receiver moved for three onetime Avenatti colleagues, now practicing together at Frank Sims Stolper, to take over the class action. Among the receiver’s arguments: Former Eagan Avenatti partner Frank is owed millions as a creditor of the bankrupt firm, so he has an economic motive to maximize recovery for the class to assure big fees for his onetime firm.

The dispute raises novel questions about who can attempt to replace class counsel in the wake of both an indictment and a bankruptcy. Avenatti argues that he, and not Eagan Avenatti, was appointed to represent the class so the receiver has no standing to oust him. No plaintiff in the case has sought to replace Avenatti, who contends that he made the decision that stepping aside would serve the interests of the class. There’s also an interesting jurisdictional question about how Judge Gee can appoint new class counsel when the class action is before the 9th Circuit, not her.

But the case’s legal issues were swamped by nasty accusations in briefs filed last Friday. The bankruptcy receiver, represented by Landau Gottfried & Berger, asserted that Avenatti improperly contacted the lead plaintiff in the class action, in violation of the order placing Eagan Avenatti in receivership, to sway her to cancel a scheduled meeting with the receiver. The brief also contends that Avenatti’s choices, Ibrahim and Hearon, may be conflicted because of their close ties to Avenatti. The defendants, represented by Gibson Dunn & Crutcher, Munger Tolles & Olson and King & Spalding, said they took no position on who should be appointed to replace Avenatti as lead counsel. But their brief informed the judge that Avenatti sent an email to a King & Spalding lawyer in which he threatened to sue the defendants and their lawyers if they backed the receiver’s attempt to “hijack the litigation away from me.”

Avenatti’s vituperative brief opposing the appointment of his former partners at Frank Sims Stolper claims, among other aspersions, that after Frank and the others left Eagan Avenatti, they improperly helped defendants Kimberly-Clark and Halyard attempt to decertify the class and delay trial because of Eagan Avenatti’s bankruptcy.

“Had the receiver done any due diligence of any significance, the receiver would have discovered the myriad of ethical problems ... including but not limited to their assistance of the defendants in this case on the eve of trial,” the Avenatti brief said. “Shockingly, he failed to make any such inquiry despite being advised of those facts months ago.”

Frank did not respond to my email and phone call requesting a response to Avenatti’s assertions, which are not backed by documents in the docket in the Bahamas case. Receiver’s counsel Jack Reitman of Landau Gottfried did not respond to an email.

In a phone interview, Avenatti said he was told of his former partners’ communications with lawyers from King & Spalding in 2017, when defendants brought their unsuccessful motion to decertify the class. “I stand by everything in my filing,” he said. Avenatti gave me the names of two current and one former King & Spalding lawyers who allegedly received help from his former partners.

The two current K&S lawyers did not respond to my email asking about Avenatti’s assertion. The former K&S lawyer did not return a phone call.

Avenatti denied that he improperly influenced the lead plaintiff in the class action, who remains his client because he is still class counsel. He said he was “not interested” in addressing the defendants’ brief or “responding to bullshit allegations by the receiver.”

I don’t envy Judge Gee, who has scheduled a May 24 hearing on the competing motions to replace Avenatti.

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