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TransPerfect ‘Spin-Off’ Lawsuit Against Ex-Lawyers Is Tossed (1)

March 17, 2022, 7:06 PMUpdated: March 18, 2022, 2:31 PM

Another chapter has closed on the sprawling legal saga spawned by the forced sale of TransPerfect Global Inc. following the breakup of its founding couple, after a Delaware judge on Thursday threw out a “spin-off novella” involving malpractice claims the company filed against its former attorneys.

Chancellor Kathaleen St. Jude McCormick dismissed the case from Delaware’s Chancery Court, where it landed after TransPerfect sued Ross Aronstam & Moritz LLP in New York. The firm argued that the company had violated an order requiring disputes stemming from its sale to be litigated in Delaware.

McCormick noted that the case presented “a twist of Shyamalan-ian proportions": TransPerfect, seeking to avoid a ruling on the merits that could harm its chances in the New York case, had sought “to dismiss its own complaint” without prejudice on jurisdictional grounds. She denied that motion.

Although the case asserts only legal claims seeking money damages, not the sort of equitable remedy that normally creates a basis for Chancery Court jurisdiction, “TransPerfect’s claim falls within the court’s inherent authority to enforce its own orders,” the judge wrote.

Phil Shawe, the company’s principal owner, assailed the ruling early Friday in a statement to Bloomberg Law, suggesting it reflected a push by the legal “establishment” to “circle the wagons” after years of excessive billing—"$1 million to $2 million a month"—by TransPerfect’s former court-appointed custodian.

“We didn’t really expect anything different, and we’re hoping to get some justice in the appellate court,” Shawe said. “These attorneys took the position in court that it wasn’t in TransPerfect’s best interest to see its own bills, so we didn’t have an opportunity to challenge them.”

Martin Russo, a legal strategist for the company, sounded a similar theme, saying it was improper overreach for the judge previously assigned to the case, retired former Chancellor Andre G. Bouchard, to appoint a custodian with carte blanche to run TransPerfect in the first place.

The original order retaining Delaware jurisdiction over the case “put into these documents that only the Chancey Court can rule on it,” and “we all know it’s a very tight circle down there,” he said.

Both men also expressed their concern that the ruling would prevent the company from having its day in court in front of a New York jury.

The case stems from the first-of-its-kind court-ordered sale and custodianship of TransPerfect, a profitable business at the time, over irreconcilable deadlocks between Shawe and its other half-owner, Liz Elting, his former romantic partner. Generally only failing companies are put into custodianship.

After a modified auction run by the custodian—a retired Skadden, Arps, Slate, Meagher & Flom LLP partner—Shawe bought out Elting’s stake. He and his mother, a 1% owner, subsequently spent several years challenging aspects of the custodianship, especially the fees, in court.

The malpractice cases against Ross Aronstam involve allegations that the law firm should have sensed a conflict of interest and conferred directly with the Shawes when responding on the company’s behalf to litigation over the fees.

Those cases culminated in April in a $3.2 million fee award—Bouchard’s final court opinion—for the ex-custodian, a few weeks after he was discharged. TransPerfect has appealed.

In her ruling Thursday, McCormick rejected the company’s argument that Bouchard had effectively given his blessing to the parallel New York lawsuit by “declining to find TransPerfect in contempt or impose sanctions” for having filed it.

That was an “act of merciful restraint” rather than approval by Bouchard, who found TransPerfect had made a good faith attempt to sort out the jurisdictional issues by, among other things, dropping equitable claims that would normally be heard in Delaware, McCormick said.

“To hold otherwise would disincentivize the court from exercising restraint in sanctions matters when clemency would otherwise be appropriate,” the judge wrote.

But she dismissed the case on the merits, saying the law firm honored its professional obligations by following the custodian’s instructions about how to handle the “aggressive campaign of collateral litigation.”

The order retaining Delaware jurisdiction made clear that the custodian had sole discretion to act on the company’s behalf in legal matters, regardless of the path “any corporate constituency may favor or disfavor,” the judge said.

“Defendants had one client: TransPerfect,” she wrote. “Defendants thus acted appropriately in following the instructions of the custodian.”

The law firm represented itself. The company is represented by Offit Kurman PA and Capuder Fazio Giacoia LLP.

The case is TransPerfect Global Inc. v. Ross Aronstam & Moritz LLP, Del. Ch., No. 2021-0065, 3/17/22.

(Updates March 17 story with comments from TransPerfect and additional reporting throughout.)

To contact the reporter on this story: Mike Leonard in Washington at mleonard@bloomberglaw.com

To contact the editors responsible for this story: Rob Tricchinelli at rtricchinelli@bloomberglaw.com; Patrick L. Gregory at pgregory@bloomberglaw.com; Steven Patrick at spatrick@bloomberglaw.com