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Legal Malpractice Case May Reach $9 Million

Lawyers in the firm are being asked to shoulder $9 million of the cost to end the case.

Neal Gerber lawyers balk at paying $9 million in settlement

December 12, 2013. By Steven Strahler, chicagobusiness.com

Neal Gerber & Eisenberg LLP is trying to settle a closely watched legal malpractice lawsuit, but some partners of the midsized Chicago law firm are balking at proposed terms, which are said to call for shouldering $9 million of the cost to end the litigation.
Settlement talks were confirmed by a lawyer representing Neal Gerber and two partners who were accused of legal malpractice and breach of fiduciary duty by General Growth Properties Inc. heiress Mary Bucksbaum Scanlan.

The attorney, Stephen Novack, also said the defendants continue to seek dismissal of the lawsuit; a hearing in federal court here is set for Jan. 15 and trial scheduled to begin April 7.
But he would not comment on the reported $9 million figure. A spokeswoman for the firm declined to comment.

“As in all cases, the parties have discussed the possibility of settlement, but no settlement has been reached,” said Mr. Novack, of Novack & Macy LLP in Chicago. “There are no numbers because there is no settlement. What we're discussing is confidential.”

POSSIBLE STRUCTURE OF THE DEAL
According to sources — including former partners who have spoken with insiders at Neal Gerber — partners are being asked to sign personal guarantees and pay the $9 million over a period of three to five years and amounts based on their stakes in the firm. The figure, which averages about $90,000 per partner, represents what won't be covered by insurance, these sources say.

An attorney for Ms. Scanlan, Frederick Sperling of Schiff Hardin LLP in Chicago, declined to comment, other than to say, “There has been no settlement, and the case is set for trial April 7.”

Disenchantment inside Neal Gerber with the shape of the proposed settlement could prompt partner defections, noted Chicago-based legal consultant Kent Zimmermann. That would further shrink a firm that ranked No. 15 last year on Crain's list of the city's largest law offices.
Since the 2012-13 edition of Sullivan's Law Directory, 15 partners are gone, leaving a net 100. Compared with 157 lawyers of all types listed on its website today, Neal Gerber had 204 in 2008.
“A trickle could turn into a stream very quickly,” said Mr. Zimmermann, who has not done work for the firm, while focusing on mergers and other combinations in a consolidating legal industry.
Ms. Scanlan, 44, sued in 2009, not long after General Growth, foundering from expansion-related debt, declared bankruptcy, wiping out more than $300 million of her trust fund holdings, according to the filing.

CONFLICTS OF INTEREST ALLEGED
The Colorado resident and daughter of one of General Growth's co-founders alleged that Neal Gerber and partners Marshall Eisenberg and Earl Melamed operated under multiple conflicts of interest while representing General Growth and owning stock in it, as they loaded up various trusts established for her benefit with the stock.

Share prices in the second-largest shopping mall owner, whose holdings encompass Water Tower Place and Oakbrook Center, plunged from around $49 in 2007 to less than $1 a year later, according to Bloomberg News. General Growth stock, added this week to the S&P 500 index, is trading around $20 per share, off a high of $23.33 this year but up 50 percent since late 2011.

Ms. Scanlan's complaint says that Mr. Eisenberg, in addition to having served as General Growth's corporate secretary from at least 1992 to 2004, is the majority owner of General Trust Co., the sole corporate trustee for all of “Mary's Trusts.” Mr. Melamed is secretary, director and one of three members of General Trust's trust committee, the complaint added.

Mr. Eisenberg did not return a call seeking comment; Mr. Melamed declined to comment.

General Trust, also named as a defendant, would be included in any settlement, but its legal team "hasn't been spearheading the discussion," according to Mr. Novack. Holly Harrison, a Sidley Austin LLP attorney representing General Trust, declined to comment.

Sources say that one of the bones of contention inside Neal Gerber over the proposed settlement stems from the fact that Mr. Eisenberg, but not the firm, got paid for his role with the trusts.

Still, Ms. Scanlan's complaint alleges that Neal Gerber received “millions of dollars in legal fees” for representing her trusts.

General Growth, after an equity infusion from Brookfield Asset Management Inc. of Canada, emerged from bankruptcy in late 2010. Bucksbaum family members are no longer involved. Former CEO John Bucksbaum resigned in 2008. His father, Matthew — Ms. Scanlan's uncle — who previously was CEO, died last month at 87.

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