The Partner from Hell

Submitted by patentadmin on Mon, 11/08/2010 - 12:43

A couple of weeks ago, we wrote of a law firm accused of simultaneously representing multiple parties with adverse interests (known to us in the law biz as a “conflict of interest”). Well, now we have a case where a law firm has been found guilty of, among other things, what amounts to a conflict of interest. (S. Lavon Evans, Jr. et al. v. Baker & McKenzie, LLP et al.)

Evans is the owner of a company that drills oil and gas wells. In early 2006, he entered into an agreement with one Reed Cagle to form a joint venture to build a large drilling rig. Under this agreement, Evans would contribute equipment and components, valued at $5.6 million, and Cagle would contribute cash in an equal amount. Evans would own 51% of the joint venture. It was further agreed that the equipment and the drilling rig would not be subject to any lien or mortgage.

The parties then went to the law firm of Baker & McKenzie (3,600 lawyers in 70 offices worldwide, with annual gross revenues of over $2 billion) which had previously represented Cagle. A partner at this firm, Joel Held (now one of the “et al.” in “Baker & McKenzie LLP et al.”), who had previously represented Cagle in several business ventures, created a limited liability company, Laredo Energy Holdings LLC, as the joint venture entity.

Evans duly contributed the agreed $5.6 million worth of equipment and components to Laredo. However, Cagle, as it was subsequently discovered, was broke. In order to overcome this little problem, he arranged to mortgage Laredo’s assets. He then used part of the proceeds of the loan as his contribution to Laredo. (The astute reader will understand that Cagle had thus gotten his interest in Laredo for less than nothing – he got a membership interest and cash, while Laredo got $7 million into debt.)

As previously noted, the agreement between Evans and Cagle expressly prohibited any lien or mortgage on the Laredo equipment or drilling rig. In order to overcome this little problem, Attorney Held represented to the lenders that Cagle had authority to borrow funds on behalf of Laredo and to “grant a security interest” (lawyerspeak for “mortgage”) in the Laredo drilling rig. Evans, who despite his considerable wealth appears to be not the sharpest tack in the box, was unaware of all of this.

Throughout 2006, work progressed on the drilling rig. However, Cagle, whose responsibility it was to oversee payment, was not paying all the vendors and subcontractors. As a result, they went to Evans, who paid them and sought reimbursement from Cagle. Cagle then convinced Evans (as we said, not the sharpest tack) that Laredo should borrow $5 million to complete the project. Laredo borrowed the five mil from Draw Works LLC, a limited liability company owned by two friends of – you guessed it – Cagle. Attorney Held negotiated the terms of this loan, which – the jury apparently found – were “highly favorable” to Draw Works.

When this loan proved insufficient to complete the drilling rig, Held and Cagle persuaded Evans to organize two subsidiaries of Laredo which would raise additional capital. Upon being organized, these subsidiaries, not the sharpest tacks in the box, raised capital by borrowing it from another company owned by Evans. Cagle then diverted the funds to his own use.

In February 2007, the idea finally began to dawn on Evans that something was amiss. He hired a consultant to review the books and records of the various businesses jointly owned with Cagle. The consultant reported that Cagle was insolvent and owed somewhere between 9 and 14 million dollars, mostly to Evans. As a result, Evans became “dissatisfied with his business relationship with Cagle” – we’re quoting Evans’ Complaint here – and sought “dissolution.”

Cagle, who had nothing to lose and everything to gain, launched a legal blitz against Evans. He retained FOUR law firms, including Baker & McKenzie, to sue Evans and his other business enterprises, with the alleged goal of intimidating Evans into abandoning the claimed indebtedness and surrendering his share of Laredo. We thus see Baker & McKenzie suing one of its clients on behalf of another of its clients. The whole sordid affair came to an end when a federal judge noted the obvious conflict of interest and Baker & McKenzie was forced to withdraw from the case.

A state court jury ultimately found Baker & McKenzie et al. guilty of malpractice, breach of fiduciary duty, negligence, conspiracy, tortious interference with current and prospective business relations and breach of the duty of good faith and fair dealing. They found the damages to be $103 million.

Baker & McKenzie released a statement saying that they “strongly disagreed with the verdict” – no surprise there – and that they had acted “in a manner that was entirely consistent with … professional obligations.”

Baker & McKenzie is a well-respected firm once retained by the author to represent a former employer (they won). How such a firm got into this mess is impossible to explain.

THE LESSONS TO BE LEARNED: If you’re a lawyer, avoid conflicts of interest – and sleazy clients; if you’re a businessperson, read documents carefully before you sign them; and check out people before becoming their partners.

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