By Brian Cardile
LOS ANGELES - A mainstay of southern California legal practice faces claims of professional negligence and fraud over its handling of a 2007 transaction and subsequent litigation it spawned involving private equity behemoth Oaktree Capital Management.
The plaintiff, energy sector investment group OCM/GFI Power Opportunities Fund II, L.P., alleged in a complaint filed Monday that Irell & Manella LLP's elementary drafting mistake in an acquisition contract banned the investor in later dealings, as did the law firm's prolonged insistence on the soundness of its allegedly faulty work. The investor, part of Oaktree's corporate private equity division and referred to as "Power Fund II" in the complaint, seeks more than $11 million in damages, plus a potential punitive award.
"Irell had a duty and breached its duty of care to Power Fund II by its acts, errors, and/or omissions that were negligent, reckless, and below the standard of care required of attorneys practicing under similar circumstances," reads the complaint filed by Howarth & Smith. "These breaches of duty caused Power Fund II substantial harm and damages."
The law firm, which since being founded in 1941, has inhabited Los Angeles' upper legal echelon, represented Power Fund II in 2007 when the investor acquired the energy services company GoodCents Holdings Inc for just under $40 million.
When Power Fund II sought to sell GoodCents via merger in 2015, the company expected to rely on contractual language in the 2007 agreement it believed would ensure a preferential stock position after any sale. But Power Fund II, a Delaware partnership headquartered in Los Angeles, claims that a drafting mistake excluded such preferential consideration in which a sale occurred as part of a merger.
Irell & Manella, the complaint further alleges, continued to advise Power Fund II that the 2007 contract was sufficient, notwithstanding Delaware authority that clearly suggested otherwise.
"Irell either recklessly never did any research at any time as to how to properly document a preferential return under well-established Delaware case law ... or it did such research and deliberately misled Power Fund II as to the legal sufficiency of the language that it drafted in order to continue representing Power Fund II ... and thereby earn substantial attorneys' fees, and to cover up its earlier malpractice," the complaint alleges.
The firm's alleged mistake, the complaint claims, caused Power Fund II millions in avoidable legal costs and a settlement with other shareholders over the merger. OCM/GFI Power Opportunities Fund II, L.P. v. Irell & Manella, 19STCV23477 (L.A. Super. Ct., filed July 8, 2019).
Don Howarth, a partner with Howarth & Smith whose plaintiff-side team includes fellow partner Suzelle M. Smith and Padraic J. Glaspy, described in an interview Monday a situation that evolved from careless to deceitful. "It's a sad case for the profession," Howarth said. "It's one that started with a screwup, but became what now looks like a coverup."
Howarth expressed hope the matter would reach a mutually-acceptable settlement.
"We're hoping they'll come to the table," he said, noting the firm had yet to make a "significant" offer.
Irell & Manella's press office declined to comment, citing the pending nature of the matter.