UnitedLex Corp. committed fraud and got paid before creditors when a joint venture with law firm LeClairRyan unraveled, a trustee for the defunct law firm says.
The Chapter 7 trustee’s complaint filed on Monday in the Eastern District of Virginia targets UnitedLex, as well as ULX Partners, a joint venture that began in 2018 and was intended to help the struggling Richmond, Va-based firm stay afloat. According to the new complaint filed by Foley & Lardner lawyers on behalf of trustee Lynn Tavenner, the venture “only served to plunge LeClairRyan further into insolvency.”
After 31 years in business LeClairRyan filed for bankruptcy in 2019. Founded as a regional corporate firm, LeClairRyan over the years rapidly expanded across the U.S. But this rapid expansion led to increased overhead expenses, and coupled with financial mismanagement that included over-compensation of certain attorneys, contributed to years of declining revenue.
ULX Partners was designed to provide nonlegal operations for law firms and was touted as “law firm 2.0.” More than 300 administrative and legal support professionals from LeClairRyan were rebadged to ULX for a stake in the venture.
But, according to the complaint, UnitedLex and ULX Partners, along with LeClairRyan officers and directors, “prioritized their own desires for financial gain and prolonged the Debtor’s lifespan, enabling the Defendants and others to improperly and unfairly extract millions of dollars from the Estate, to the detriment of LeClairRyan’s creditors.”
The trustee claims that ULX Partners has insider status in the bankruptcy proceedings due to its heavy ownership share in the joint venture, amounting to 99%, as well as the joint venture’s control over many essential functions at LeClairRyan, including marketing, accounting, conflict management, and business development.
Insider status has created voidable liens and recoverable preferential transfers of no less than around $17.4 million, the complaint says. Even irrespective of insider status, it said, the ULX entities are liable for more than $19 million in damages for fraudulent transfers.
The alleged conspiracy between the ULX entities and the LeClairRyan officers and directors caused damages of no less than around $42.8 million, including damages arising out of keeping the firm operating instead of winding it down, the complaint said. It also cited as other parts of the calculation the liquidation of the firm’s retirement plan, as well as LeClairRyan’s conversion from a professional corporation to a professional limited liability corporation to engage in the joint venture with UnitedLex, and an increase in trade payables and account receivable.
“We believe the allegations being raised through the bankruptcy of LeClairRyan have no merit. As a major creditor of LeClairRyan, we fully expect the bankruptcy process to fairly resolve this matter. We eagerly await the resolution process and the opportunity to highlight our client commitment,” said Stacey Yonkus, director of communications at UnitedLex, in a statement to Bloomberg Law on Tuesday afternoon.
The complaint also alleges that ULX’s actions also caused damages in excess of $1 million through “their misappropriation of funds tendered by clients for specific expenses, which were used by the ULX Entities for improper purposes.”
Last September as LeClairRyan filed for bankruptcy, Bloomberg Law reported the firm had entered into an outstanding deferred loan promissory note by which it agreed to pay ULX Partners $8 million for outstanding fees owed under the joint venture agreement. As of the firm’s bankruptcy filing, that loan had not been paid back.
However, according to the complaint, ULX Entities sought to elevate ULX Partners’ priority over other unsecured creditors through the promissory note, which they claim was “an equity infusion.”
The complaint filed also alleges that ULX Partners was sharing in fees from LeClairRyan’s legal practice, which is prohibited by the Virginia State Bar Rules of Professional Conduct. Under the master services agreement governing the joint venture, the complaint said, fees to ULXP were to be calculated using a combination of factors, including invoice fees related to operations services and production services.
Production services fees were based on “a calculation that is based on member distributable income and accrued revenue,” which are fees from the LeClairRyan’s legal services, the complaint stated.
The case is: Tavenner as Chapter 7 Trustee v. ULX Partners LLC, Bankr. E.D. Va., 320-ap-0314.
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