Last Friday, Michael Minns was questioning a witness during the last day of a virtual trial before a Kansas court when his office manager slipped him a piece of paper with a message from the Supreme Court of Texas.
It was the best news Minns could hope for: Texas’ highest civil court had just declined to review an appeal brought by K&L Gates regarding a malpractice lawsuit that Minns brought against the global law firm two years ago.
The timing was perfect yet ironic on Minns’ end.
It just so happened that the witness Minns was questioning at the very moment he received the news was his client, Steve Squires, who is the founder of K&L Gates’ courtroom opponent: San Marcos-based Quantum Materials Corp.
Minns alleges that intentional and grossly negligent actions by K&L Gates embroiled his client in litigation with its lenders in three states — the Kansas trial included.
And now, as the K&L Gates malpractice suit winds its way back down to a Hays County trial court, Minns says he will enter the discovery process with evidence of what he knew was likely true all along: K&L Gates had been simultaneously representing both Quantum and its lenders — a direct conflict of interest.
He said that information came out in the Kansas trial during the testimony of Adam Long, the managing partner of L2 Capital, one of Quantum’s lenders.
“It’s worse than anything we guessed,” Minns told The Texas Lawbook. “K&L Gates appears to have been simultaneously and secretly working for both sides.”
A spokesperson with K&L Gates declined to comment on the litigation. K&L Gates’ lead lawyer, George Kryder of Vinson & Elkins, did not respond to a request for comment.
Founded in 2007, Quantum manufactures nanosized semiconductors called quantum dots for use in electronics, display, lighting and photovoltaic industries. The company is headquartered on Texas State University’s campus and employs around 50 people. Its quantum dots are finding a new use these days in COVID-19 tests, which Minns said were administered to the Quantum legal team so they could be in the same room (albeit at a social distance) during the Kansas trial.
The Quantum-lender-K&L Gates legal saga dates back to 2016, when Quantum retained K&L Gates for transactional work. This included K&L Gates lawyers attending multiple Quantum board meetings that involved confidential discussions about the quantum dots. It also included negotiations with the principals of SBI Investments, the other of Quantum’s two lenders, court documents say. Minns said Long’s testimony revealed that both he and the owner of SBI retained K&L Gates for transactional work before Quantum ever had.
In March 2017, Quantum, L2 and SBI worked out lending arrangements under terms that allowed the conversion of debt into company stock if Quantum defaulted on the loans.
The trouble came in the fall of 2017, when a dispute arose between Quantum and the two lenders, which alleged Quantum defaulted on its loans, entitling them to convert their promissory notes into Quantum stock, per the agreements.
Quantum, which denied any default had taken place, sought and obtained a temporary restraining order barring the transfer agent from making any transfer of stock.
But in an October 2017 hearing on the matter, SBI and L2 attempted to intervene. When they came to court, they were represented by two lawyers from the Austin office of K&L Gates.
Quantum’s lawsuit identifies the two litigators as Gregory Sapire and Jeffrey Quilici. Neither are still with the firm. Sapire practiced at K&L Gates for 17 years before leaving the firm in 2018 to join Austin litigation boutique Cleveland Terrazas. He now is a name partner at a new Austin boutique, Soltero Sapire Murrell.
Quilici, who graduated from the University of Texas School of Law in 2012 and clerked for U.S. Supreme Court Justice Neil Gorsuch, is currently a senior associate at Orrick Herrington & Sutcliffe.
When Quantum’s lawyers, noting the potential conflict, offered to let the lawyers “leave the case and forgive the offense,” the lawsuit says, they “doubled down” instead.
Sapire and Quilici did not respond to requests for comment.
SBI and L2’s intervening attempts in the Hays County court have since failed. The transfer agent, Empire Stock Transfer, never appeared in the injunction proceedings, so Quantum obtained the relief it was looking for. The lenders appealed the matter to Austin’s Third Court of Appeals, but lost again after the court issued a ruling in March 2018 affirming the lower court’s decision.
Quantum sued K&L Gates in October 2018 for malpractice and violation of the Deceptive Trade Practices Act. K&L Gates moved to dismiss the suit under the Texas Citizens Participation Act, and Hays County District Judge Bruce Boyer denied that motion in February 2019. K&L Gates appealed the dismissal unsuccessfully to the Third Court of Appeals, and on Oct. 16 the Texas Supreme Court denied review of the firm’s appeal.
In its petition for review, K&L Gates contends that it only provided legal services to Quantum between December 2016 and January 2017, when it “sent a final invoice which terminated the representation.” K&L Gates argues Quantum only filed suit after a firm representative asked Quantum to pay its outstanding invoices, which it says Quantum is yet to do.
K&L Gates also points out that it declared in the trial court that its prior representation of Quantum had no relationship with the lenders’ intervening lawsuit and that there was no risk of any of Quantum’s confidential information being compromised. Moreover, the firm’s representation of the lenders only lasted 10 days; the firm voluntarily withdrew “to spare the lenders protracted disqualification proceedings and substituted new counsel,” the petition for review says.
Minns disputes K&L’s characterization of the events. He said the bill K&L Gates sent — by then, ballooning to $300,000 — did not clarify it was final. Moreover, Minns said, a clause in K&L’s engagement letter said they would bring new counsel up to speed if they ever withdrew.
“This is quite funny because under their contract, if they were quitting (which they never did), I was the new counsel,” Minns said. “They had a duty to sit down with me and hand the files over.”
Although K&L Gates eventually handed the Quantum files over, he said he is yet to receive an original copy. He also disputes that K&L Gates withdrew as the lenders’ counsel out of courtesy.
“They put us through a whole bunch of work,” he said. “We had to brief, respond, and we showed up in the courthouse for the hearing, and then they quit before the hearing.”
Now that he has learned from the Kansas trial that K&L Gates was representing SBI “at the same time [Quantum] hired them,” he is speculating with more earnest on the juxtaposition of K&L Gates’ access to Quantum’s confidential information and the lenders’ insistence that they have Quantum company stock as collateral in their loan agreements.
“Here’s a question: Say you’re a lender, and you don’t know about any [potential] deals — all you know is you’re getting 28% interest on notes,” Minns said. “There’s been no positive publicity [about Quantum] and you don’t know about three deals being negotiated [by Quantum].
“Would you ask for stock instead of cash?”
Typically, Minns’ bread and butter at his Houston law firm, Minns & Arnett, is criminal tax defense work. But he also works on accounting and legal malpractice cases due to the overlap that occurs between the two. He said the malpractice work has been heavier than usual this year since the pandemic halted criminal indictments for months.
“Almost every client we have that gets charged [in a tax fraud case] has been a victim of accounting and legal malpractice,” Minns said. “That background makes us uniquely positioned in accepting malpractice plaintiffs’ work and legal malpractice.”
Minns said there will still be much to learn from discovery in the Hays County case. But given the tri-state fight with the lenders (in Texas, Kansas and Florida) over loan agreements that has weighed Quantum down in litigation, K&L Gates’ refusal to sit down with Minns and mediate in the malpractice case and the hoops they’ve had to jump through in both categories of litigation, he thinks there will be many takeaways.
“I guess there will be lessons [from all of this],” Minns said. “One will be what happens if somebody is trying to money whip somebody into submission and they don’t submit? The answer to that is very possibly a jury trial.”
Quantum’s legal team also includes Minns’ law partner, Ashley Arnett, Houston criminal trial and appellate specialist Seth Kretzer and San Antonio trial lawyer Mark Murphy of Davis & Santos. Kansas attorney William Modrcin played a significant role in the Kansas case for Quantum.
In addition to Kryder, K&L Gates’ legal team includes partner Matthew Moran and associates Jeremy Reichman and Emalee LaFuze.