4-19-22 As seen on Law.com - 'Things Have Changed.' Bankruptcy Judge Approves Girardi Keese Trustee's Lender Probe.

Posted on April 20, 2022

U.S. Bankruptcy Judge Barry Russell, who previously rejected a similar request back in November, shut down the objections of litigation funders Stillwell Madison, California Attorney Lending II and Virage SPV 1 LLC, all of whom are potential targets of the trustee's investigation.

April 19, 2022 at 04:34 PM

Amanda Bronstad -Staff reporter

What You Need to Know

  • The trustee sought to expand the role of special counsel Larry Gabriel, who is investigating $25 million in fraudulent transfers to Tom Girardi’s estranged wife, Erika Girardi.
  • U.S. Bankruptcy Judge Barry Russell rejected the trustee's request last fall but on Tuesday said: "The bottom line is, I think there’s additional evidence."
  • One lender's lawyer attempted to discredit a proposed lawsuit against his client that alleges Girardi Keese was a "criminal enterprise."

Citing “additional evidence,” a bankruptcy judge has approved the Girardi Keese trustee’s request to spend more money investigating whether the firm’s former litigation funders knew about Tom Girardi’s fraud.

U.S. Bankruptcy Judge Barry Russell of the Central District of California, who previously rejected a similar request back in November, shut down the objections of litigation funders Stillwell Madison, California Attorney Lending II and Virage SPV 1 LLC during a brief hearing on Tuesday.

“Things have changed since the last time I thought it was pretty speculative and very expensive,” the judge said of the trustee’s request. “There’s enough in the motion to show me that there are things I didn’t know going on before.”

Key among those changes, he said, was that none of the three lenders had objected to the trustee’s request last time but now, as potential targets of the investigation, have raised concerns.

“The fact we’re potential targets doesn’t mean everything we say is wrong,” countered DLA Piper partner Eric Goldberg, in Los Angeles, for Stillwell Madison.

“I have to take into account that none of you objected the first time around. That doesn’t mean your arguments aren’t good,” Russell responded. “But still, it’s important.”

The trustee, Elissa Miller, had filed a motion to expand the role of special counsel Larry Gabriel, of Los Angeles-based Jenkins Mulligan & Gabriel, brought in on Dec. 17 to probe $25 million in fraudulent transfers to Girardi’s estranged wife, Erika Girardi, who stars on “The Real Housewives of Beverly Hills.” Miller, of SulmeyerKupetz in Los Angeles, asked that Gabriel also be paid to investigate lenders, former accountants and “outside legal counsel.”

But the lenders raised a host of arguments against the motion, insisting the trustee’s nearly $500 million in estimated claims were inflated and that the estate could end up solvent with legal fees tied to last year’s $1.8 billion settlement, in which Girardi Keese represented 23% of the residents and businesses impacted by a 2015 gas leak in the Porter Ranch neighborhood of Los Angeles.

Russell said there’s too much uncertainty about the estate’s assets and liabilities to moot the trustee’s request based on potential solvency.

The lenders, who gave Girardi Keese millions of dollars in loans secured by legal fees, are among the largest secured creditors in the Chapter 7 case. California Attorney Lending II has a $6.7 million judgment, Stillwell Madison has a $7.4 million claim, and Virage wants $11.3 million.

On Oct. 13, Miller sought to hire San Francisco’s Girard Sharp to investigate the lenders, some of which had access to Girardi Keese bank statements, tax returns and other financial application. But former clients Joseph, Jamie and Kathleen Ruigomez, who have an $11.7 million judgment against Girardi Keese, had objected, fearing such an investigation would cost the estate more than $100,000. Russell agreed, adding that the trustee didn’t appear to have a “smoking gun” against the lenders.

On Tuesday, the objecting lenders insisted Miller still had no evidence that the lenders knew Girardi was taking money from clients.

William F. Savino, of Woods Oviatt Gilman in Buffalo, New York, attempted on Tuesday to discredit a proposed lawsuit alleging Girardi Keese was a “criminal enterprise” and naming his client, California Attorney Lending II, as a defendant. Edelson PC attached the draft complaint to an agreement, filed this month in the Northern District of Illinois, that would pay clients of the Lion Air crash, also represented by Girardi Keese, their $2 million in stolen settlement money that sparked Girardi’s downfall.

“It’s fascinating reading, whether they are going to win or not, but the fact of the matter is that’s not before me,” Russell said of Edelson’s suit. “The bottom line is, I think there’s additional evidence as far as the necessity.”

The lenders also focused on Miller’s continuing expenditures. But, this time, Miller proposed lower hourly rates that would convert to contingency fees should she bring a claim against a lender, or obtain a cash settlement with one of them.

“In this particular case, the cost to the estate is substantially less. That was a big concern I had before,” Russell said. “If it’s an unnecessary fishing expedition, and things are done unnecessarily, I have no problem disallowing fees. But I have a pretty good idea of when things are reasonable.”

William F. Savino