Lawyers Handling the Sale of a Georgia Company Allegedly Blew The Deal and Face $33 Million Legal Malpractice Lawsuit
December 2, 2014 The onetime owners of a Kennesaw-based company are seeking more than $33 million in a legal malpractice suit against Womble Carlyle Sandridge & Rice and four lawyers over what the plaintiffs claim was a mishandled corporate sale. The former owners of American Viatical Services (AVS) sued the Womble firm, three partners–John “Sandy” Smith, Robert Ambler Jr. and James Connelly–and former partner Bernard Coleman Jr., who left the firm in 2012. The plaintiffs claim the law firm and its lawyers botched the sale of AVS and a related entity, AVS Underwriting, by failing to include control of AVS Underwriting as collateral if the deal collapsed. When the buyers defaulted, AVS founders Philip and Sharon Loy were stripped of AVS Underwriting, said their attorney, John Stivarius Jr. Philip Loy is now the salaried president of AVS Underwriting, said Stivarius, “Today, neither Phil nor Sharon has an ownership interest in AVS Underwriting,” said Stivarius, and AVS has been destroyed. He filed the complaint in Fulton County Superior Court Nov. 18 with fellow Elarbee, Thompson, Sapp & Wilson partner Stanford Wilson. The defendants are represented by King & Spalding partner John Brumbaugh, who said via email that Womble does not discuss former or current clients in the media and that the firm and the lawyers will be defended “in the appropriate forum.” According to the complaint, AVS and AVS Underwriting were founded in the mid-1990s, legally separate and distinct but “functionally equivalent [and] dependent upon each other for the ‘business’ associated with each.” A viatical settlement is an arrangement in which someone sells the right to his life insurance policy to a third party for a lump-sum payment that is less than what the insured’s estate would receive upon his death. Issuers of such settlements insure themselves against heavy losses resulting from viatical clients outliving their life expectancies by buying what is called “cost contingency insurance.” According to court filings in an unrelated case, AVS was founded in 1994 to provide life expectancy evaluations for the cost contingency insurance market. Between 1994 and 1998, its primary business involved preparing analyses for AIDS or HIV-positive patients seeking a viatical settlement. Womble attorneys Coleman and Smith had helped in the formation of AVS Underwriting in 2004. In 2009, after fending off suitors offering as much as $31 million for the companies, the Loys retained the pair to help craft a deal selling the companies for $40 million. As detailed in the complaint, the buyer, Portsmith Securities Limited Malaysia, was to pay the Loys $7 million cash at closing and provide a secured promissory note for $12 million, payable over seven years at 8 percent interest. There were other regular payments based on AVS’ working capital, annual earnout payments and post-sale employment agreements for the Loys, which included restrictive covenants and noncompete clauses. The deal also included the creation of a new company, which would ultimately be named Longevity Partners, to purchase the Loys’ equity interests in AVS. The deal was worth $40 million or more over the life of the sale and purchase, the complaint said. The entire collateral for the promissory note was to be the Loys’ stock and ownership interests in the businesses, which they would recover if Portsmith defaulted, the suit said. “The [letter of intent] clearly delineated the entire collateral for the Secured Promissory Note was the Loys’ interests they were selling,” the complaint said. “This was done to provide what was thought to be the ultimate protection of the Loys in the event of default of the promissory note by the purchaser.” But in hashing out the terms of the letter of intent and in subsequent documents, Coleman and Smith failed to delineate AVS and AVS Underwriting as “legally distinct entities,” even though they had helped set up AVS Underwriting years earlier, the complaint said. As the deal neared fruition, Coleman asked Philip Loy about the relationship between AVS and AVS Underwriting, and Loy explained that AVS Underwriting “was part of the business but he thought it of it more as d/b/a [doing business as] than as a separate entity company,” the suit said. In an email, Loy told Coleman “AVS Underwriting does not file a tax return as no money is posted to that company even though most checks are made out to AVS Underwriting.” Despite a substantial exchange of correspondence among the Loys, their lawyers and those representing the buyers, the complaint said, the Womble attorneys “failed to change the security agreement to reflect that [the Loys’] equity interests should include AVS Underwriting and failed to communicate to Philip Loy or Sharon Loy the significance on the entire sale of not including AVS Underwriting as the collateral for the secured promissory note.” The deal went through and the Loys received their initial payment, Stivarius said. Then Longevity defaulted. The Loys entered into a forbearance agreement in 2011, but Longevity defaulted on that as well. In December 2012, the Loys executed their right to have the collateral reassigned to them, “under the belief that the ‘business’ sold to buyer would be completely returned to them,” the complaint said. In arranging the reassignment, “Womble once again chose to remain silent regarding the lack of adequate collateralization of the loan, that the Loys were a risk of losing the value of the bargained transaction and that they had lost effectively all leverage to compel that the deal be cured or have the full return of their business,” the complaint said. Between the time of the sale and the default, Longevity had shifted many of AVS’ operations to AVS Underwriting, the complaint said, and when AVS was returned to the Loys, “it was effectively a shell of the company.” They were told Longevity now owned AVS Underwriting and all of its contracts and accounts receivables and were “banned from the office and unable to participate in the operation of the companies they had founded.” In November 2012, Philip Loy sued Longevity in Fulton County Superior Court, again turning to Womble for counsel: Ambler and Connelly handled that suit, with Connelly advising that, for an estimated $160,000 in fees, “he could get both companies back,” the malpractice suit said. In December 2012, AVS Underwriting and Longevity sued Philip Loy and AVS in Cherokee County Superior Court. Originally posted by Greg Land for the Daily Report Full story here. Ball & Evans and Ball & Evans – Legal Malpractice Lawsuit Trial Lawyers – Los Angeles
