Investors sue company, law firm over sale of assets in bankruptcy

Charlotte Bankruptcy Lawyer Bryan W. Stone of Arnold & Smith, PLLC answers the question “Does Bankruptcy stop foreclosure?”


At the time, investing in oil-and-gas giant Tri-Valley Corp. seemed like a good idea. Now the same investors who invested in the company are suing Tri-Valley after getting next-to-nothing out of the company’s bankruptcy, and have also sued the law firm that represented the company in its bankruptcy.

Oil drill Charlotte Bankruptcy Attorney North Carolina Debt LawyerTri-Valley Corp. hired law firm K & L Gates in 2012 to represent it and two subsidiaries in a Chapter 11 bankruptcy action. Investors brought suit against the company in 2013 alleging “a number of securities related claims against the former directors,” corporate code violations, breach of fiduciary duty, and negligence, according to The investors also brought legal malpractice claims against K & L Gates.

The investors allege that the bankruptcy of one of Tri-Valley’s subsidiaries was converted into a Chapter 7 bankruptcy, which in effect made the interests of Tri-Valley and its subsidiary “directly adverse.” This conflict of interest became an issue when the assets of the subsidiary were sold. Investors claim “they were shafted in the proceedings both by the former officers and directors of Tri-Valley and their counsel.”

K & L Gates, however, said that it represented the Tri-Valley and its subsidiaries in the bankruptcy actions—not the companies’ investors—and it therefore owed the investors no duty. Since the law firm did not owe the investors any duty, it could not have committed malpractice on the investors’ behalf. On that basis, the firm moved a California federal court in March to dismiss the malpractice claim. That motion is pending.

K & L Gates also alleges that the investors’ claims are barred by the automatic stay imposed by the bankruptcy court. In general, when a debtor—whether an individual or a corporation—declares bankruptcy, the bankruptcy action stays all pending or countenanced litigation. That means any pending lawsuits are put on hold until the bankruptcy court lifts the stay or until the bankruptcy case ends. Law suits that have not been filed against a debtor cannot be filed while a bankruptcy is pending, unless the person or entity filing the lawsuit obtains permission from the bankruptcy court to file the action.

The investors have responded that the bankruptcy stay is inapplicable to the legal malpractice claims against K & L Gates, because the law firm was not the entity protected by the stay. Stays of proceedings in bankruptcy actions protect debtors, not their counsel, the investors have alleged.

K & L Gates also argues that the investors’ action is barred by the doctrine of estoppel. That doctrine provides that once claims are litigated in a court of law, they cannot be raised again in another court.

In the Tri-Valley case, K & L Gates argues, the bankruptcy court reviewed the potential conflicts in K & L Gates’ representation of both Tri-Valley and its subsidiaries, and approved of the arrangement. None of the investors involved in the law suit against K & L Gates and Tri-Valley objected when the sale of the subsidiary’s assets was approved.

That failure to object, the law firm argues, should operate as a bar to any claims brought by the investors in their current action.

If you find yourself needing the services of an experienced Charlotte, North Carolina bankruptcy attorney, please call the skilled lawyers at Arnold & Smith, PLLC find additional resources here. As professionals who are experienced at handling all kinds of bankruptcy matters, our attorneys will provide you with the best advice for your particular situation.



About the Author

Bryan 1Bryan Stone is a Partner with Arnold & Smith, PLLC, where he focuses his practice on all aspects of bankruptcy, including: Chapter 7, Chapter 11, Chapter 13, home loan modifications and landlord-tenant issues.

A native of Macon, Georgia, Mr. Stone attended the University of Georgia, where he earned a BBA in Banking and Finance, and Wake Forest University School of Law, where he obtained his law degree.

Following law school, Mr. Stone relocated to Charlotte, where he currently serves as Chair of “Bravo!” – a young professionals organization associated with Opera Carolina – and founded the University of Georgia Alumni Association of Charlotte.

In his spare time, Mr. Stone enjoys perfecting his barbeque skills for the annual “Q-City BBQ Championship” and playing softball in the Mecklenburg County Bar softball league.






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