Real Litigation Of Beverly Hills: Ethics Lessons From The Thomas Girardi Bankruptcy Case – Insolvency/Bankruptcy/Re-structuring – United States -…

05 August 2021

Frankfurt Kurnit Klein & Selz

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Contested conservatorships, feuds over NFL feepayouts, Twitter battles making their way into court documents, and allegations of hundreds ofthousands of dollars in lottery ticket earnings being siphoned to a"Real Housewives" star's coffers: this summer hasbrought a cascade of lessons for ethics practitioners in thebankruptcy action facing plaintiffs' firm Girardi Keese,formerly headed by Thomas Girardi.

Both the firm and Mr. Girardi are currently embroiled ininvoluntary chapter 7 bankruptcy proceedings in U.S. BankruptcyCourt in the Central District of California, after Mr. Girardi wasfound last year to have failed to distribute$2 million in settlement monies to the families of plane crashvictims he was representing. Since then, a deluge of former clients have come forwardto accuse the firm of similarly misappropriating settlement funds.Thomas Girardi, famed for spearheading major class actionsand for appearing alongside ex-wife Erika Girardi on the reality TVshow "Real Housewives of Beverly Hills," was placed intoa conservatorship earlier this year after beingdiagnosed with Alzheimer's disease and dementia. TheState Bar of California also deactivated Mr. Girardi's law license.

Despite the firm's size and renown after decades inpractice, however, Girardi Keese did not carry professionalliability insurance. The bankruptcy proceedings must nowattempt to disburse recoupments to lenders, shareholders, andindividual creditors in turn. In sum, the creditors'claims against the firm total $130 million, according to documentsfiled in the action. In the absence of insurance, Ms. Girardihas recently attempted to convince the court to keep certain feearrangements in place on current firm clients, given the value ofthose legal fee arrangements as a source of potential income thatcould be redirected to creditors.

Last month, Ms. Girardi objected to the transition ofoutstanding cases on the firm's docket to other law firms.She argued that given the value of Girardi Keese'sremaining cases, she believed that the firm may be able to pay offits liabilities to outstanding debtors from attorney's feesrecouped in those pending actions. In her pleadings, Ms.Girardi made her interest in the proceedings clear: although shefiled for divorce from Mr. Girardi in November 2020, "therewas no pre-nuptial agreement" and under California laws, sheargued that she has an interest in any distributions due to Mr.Girardi after accounting for the firm's creditors.

Girardi objected specifically to the transference of two majorcases held by Girardi Keese. In one, Girardi Keeserepresented plaintiffs in 100 cases associated with the now-settledNFL concussion litigation, In re National Football LeaguePlayers' Concussion Injury Litigation No. 2:12-md-02323(E.D. Pa.), pursuant to a joint client agreement with the law firmGoldberg Persky White P.C. In that matter, Ms. Girardiasserts that Girardi Keese could receive a windfall of up to $20million in contingent fees should the structure under the originaljoint client agreement remain in place.

In a second objection filed with the court, Ms. Girardicontested the transference of Girardi Keese's portfolio of 52cases in connection with a class action against Johnson &Johnson and Boston Scientific Corporation, whose plaintiffs allegepersonal injury from the use of pelvic mesh products. Underthe proposed transfer, Girardi Keese's cases would betransferred to two law firms currently representing otherplaintiffs in the mesh litigation. These matters arescheduled for a hearing on August 10, 2021.

Though it may not be salacious enough for network syndication,these developments have significant lessons for ethicspractitioners. The law firm's predicament is an extremeexample of the consequences that can follow from a law firm notcarrying adequate professional liability insurance. Althoughthere is certainly an open question of whether a malpracticecarrier would agree to cover any of the losses here (given theallegations of intentional misconduct), it would have at leastprovided the injured clients with a possible avenue of recovery.This predicament also adds to the debate over whetherjurisdictions impose rules requiring lawyers to carry legalmalpractice insurance.

In the absence of liability insurance or sufficient assets tomake the firm's creditors whole, this action will largelycenter on the firm's present and future legal fees, and onparsing how those are divided. The court's relativereceptiveness to Ms. Girardi's arguments will provide insightsinto how courts view legal fees as a potential commodity to be usedin satisfying creditors.

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