Biglaw Sucked in as Defendant in Malpractice Mess

Biglaw Sucked in as Defendant in Malpractice Mess

Source: New York Lawyer
Meredith Hobbs | August 8, 2011

Three unhappy investors suing developer M. Shi Shailendra over what they claim are millions of dollars in losses from failed real estate ventures also are suing his law firms and banks, alleging the lawyers and lenders should have done a better job of protecting their interests. Their suit for malpractice and fraud against Holland & Knight, whose Atlanta office worked on several of the projects, raises a question of urgent interest to other real estate investors who lost cash and face big loan payments for projects that are underwater: Can they hold responsible the lawyers who handled real estate transactions for ventures that did not pan out?

Rahim Sabadia, his wife Nafees El Batool and his brother–in–law Ishtiaq Khan claim they lost $16 million and are on the hook for another $18 million in loan guaranties for real estate deals in Florida and Georgia that Holland & Knight handled from 2002 to 2009. Sabadia, who lives in California, is suing the firm specifically and, with the other two plaintiffs, as the trustees for two Sabadia family trusts that invested in Shailendra’s projects. The suit was filed in May 2010 in Los Angeles County Superior Court.

An amended complaint filed in June claims Holland & Knight formed at least 10 entities to develop Midtown Atlanta high rises, a shopping center in Henry County, Georgia, and a tract of Florida swampland, a former sod farm on a bay seven miles north of the Gulf of Mexico that Shailendra and the plaintiffs envisioned turning into a waterfront vacation home community for baby boomers. The investors claim Holland & Knight partner W. Reeder Glass of Atlanta, who handled the transactions, acted as if he were their lawyer as well as Shailendra’s but was really acting in Shailendra’s interests, which unbeknownst to them were not aligned with their own.

But Holland & Knight contends the firm was not Sabadia’s counsel. Glass is not named in the suit. Glass set up a number of limited liability companies to acquire and hold land for the projects and serve as corporate vehicles for the assets. According to his February deposition, he retired from the firm in mid-2010 after becoming in-house lawyer for the Shailendra family. He did not respond to an email requesting comment.

“Holland & Knight put on a dog and pony show about how wonderful these deals are. They did not tell him to get an independent lawyer,” said Sabadia’s lawyer, David Z. Ribakoff of Enenstein, Ribakoff, LaViña & Pham in Santa Monica, California, who is representing the plaintiffs. Sabadia “was thinking this firm was protecting him and looking out for his interests,” Ribakoff said.

In a June motion for summary judgment on the malpractice claims, Holland & Knight said it did the legal work for several of the real estate transactions but did not personally represent Sabadia, Khan or the Sabadia trusts. Rather, it acted as the lawyer for the Shailendra Group and some of the investment entities. The firm contends the investors cannot show their real estate losses are due to the work it did and have produced no evidence of fraud.

“They made a bunch of investments, did their own due diligence, the economy went south and they are trying to use a legal suit to recoup their investments,” said Holland & Knight’s lawyer, John D. Klinedinst of Klinedinst in San Diego.

According to court documents, Khan began investing with Shailendra in 1992. An orthopedic surgeon, Khan operates a chain of medical facilities that provide companies treatment for their workers’ on-the-job injuries as well as employee drug testing. A decade later Khan encouraged his brother-in-law Sabadia, a defense contractor in Yorba Linda, California, who heads Sabtech Industries, to invest as well.

As the real estate market heated up in 2004, Sabadia and Khan committed to an investment plan with Shailendra in which the goal was for each to increase their net worth by $100 million within a decade, according to Holland & Knight’s motion for summary judgment. That same year, the Shailendra Group hired Glass to start working on real estate projects. Shailendra introduced Glass to Sabadia and Khan at a strategic planning meeting in 2007. Three years later, the plaintiffs called a meeting with Shailendra to confront him over their ailing investments.

In May 2010, Sabadia and the two family trusts sued Holland & Knight for malpractice, breach of fiduciary duty and breach of good faith. In June, they added two fraud claims — fraudulent concealment and constructive fraud — after winning access to the firm’s files in discovery. They allege Holland & Knight knowingly drafted agreements that furthered Shailendra’s interests at their expense.

What’s notable about the new claims is insurance covers claims for malpractice but not fraud. Holland & Knight already asked for summary judgment on the three malpractice claims, but at a July 11 hearing Judge Susan Bryant-Deason tossed the motion. According to the hearing transcript, Bryant–Deason said the firm’s defense lawyers did not include a declaration with the motion authenticating the evidence they submitted for dismissing the case so there was effectively no evidence to back their arguments.

Although the defense lawyers submitted the declarations page before the hearing, the judge refused to consider it. The case was set for a jury trial Aug. 31, but it has been continued to February because of the added fraud claims. Klinedinst said his client requested the continuance so they can file a motion to dismiss the entire complaint, including the fraud charges.

Making A Case
To make their case against Holland & Knight, the plaintiffs must show it was reasonable for them to believe the firm represented them and demonstrate that the firm’s actions caused their losses. The plaintiffs never signed an engagement letter with Holland & Knight, but they contend it was reasonable to believe Glass was acting as their lawyer based on his interactions with them. They also note they were never asked to sign an “I am not your lawyer” letter, Holland & Knight’s term for a non-engagement letter.

For example, according to court documents, Sabadia alleges Glass did not advise him to have his own lawyer present at a two-hour investor meeting in 2007 with Khan, Shailendra and one of his sons. At the meeting, where Glass discussed a complex transaction to restructure the ownership of East Bay Development of Florida, the former sod farm that the group planned to transform into what promotional materials called a “new old Florida” waterfront community. To Sabadia, this meeting shows Glass was acting as his lawyer.

In his deposition, Glass said that he was the lawyer for Shailendra Group and in some cases for the entity itself. In those cases, the entities, including East Bay Development, signed an engagement letter with Holland & Knight. Glass acknowledged in the deposition that he did not advise Sabadia to have his own lawyer present at the 2007 meeting. But he said there was no need because Holland & Knight’s actions were on behalf of the real estate entity and there was no adverse relationship between the investors.

“As far as I was concerned, Dr. Khan, Mr. Sabadia and the Shailendras were all aligned with one another. They had a common interest and a common objective, and they were not in a conflict situation,” Glass testified. “They already had all of their ownership documents in place in the transaction. As far as I could tell they had a common course of conduct and approach to all of their business transactions.”

In general, Glass said in his deposition Shailendra Group engaged him to handle the transactions for the various parties and paid the bills. Shailendra is the manager and sole owner of Shailendra Group, Glass testified, but he did not represent Shailendra personally until becoming his in-house lawyer in mid-2010.

“These people had been doing business together long before I got there,” he added. “And they operated in much the same fashion as I have described where organizational documents were done by lawyers that didn’t represent Mr. Sabadia and [where there was] no attorney-client relationship … and from the common course of conduct, at least in this market, that was not unusual.”

Who Benefited?
But the plaintiffs allege Shailendra benefitted disproportionately from the transactions. For instance, said Sabadia’s lawyer, Ribakoff, his client put in all the cash required to close on a land acquisition by East Bay Development and personally guaranteed the loans, yet received only a 23 percent ownership interest. “All the transactions had that kind of inherent unfairness,” he said. Glass said in the deposition that he assumed Sabadia had his own counsel to guide him in his negotiations with the other investors and assess the soundness of the deals. “I just couldn’t imagine that a sophisticated businessman who was investing money didn’t have professional assistance and guidance in what he was doing,” he said.

Holland & Knight contends Sabadia had his own lawyers in California for guidance. The firm cites communications between Sabadia and Orange County business law firm Shulman Hodges & Bastian, which the court ordered the plaintiffs to produce in March after another discovery battle.