K&L Gates has finally said something publicly about the malpractice lawsuit between the Philadelphia-based global law firm and a onetime client. It is “meritless,” they claim.
The lawsuit alleges K&L Gates took an adversary position against San Marcos-based Quantum Materials Corp. on behalf of its lenders after representing Quantum months before in transactional work and that the conflict of interest compromised valuable proprietary information, depressed market interest in Quantum and embroiled the company in costly litigation across three states.
“Not only is the plaintiff’s lawsuit a meritless tactical effort to avoid paying our firm the outstanding fees that it owes, but the preposterous relief sought by plaintiff lacks any basis in reality whatsoever,” K&L Gates said in a statement provided to The Texas Lawbook. “We will continue to vigorously defend against plaintiff’s baseless claims and pursue judgment on our counterclaim for fees, and are confident that we will prevail.”
The statement, provided Monday to The Lawbook by a K&L Gates spokesperson, came the same day that Quantum filed an amended petition in a lawsuit brought in Hays County, Texas, two years ago.
Quantum’s amended petition still stands by its original claims, but now Quantum and its lawyers point to more ammo on their side. The proverbial ammo is new evidence that the lawyers say is even deadlier than what they believed to be already-fatal allegations for K&L’s defense — even as discovery is just getting started.
“It is now known that K&L Gates was secretly and simultaneously representing both sides during the 2017 [loan] transaction negotiations,” the amended petition says. “K&L Gates completely concealed this unethical conduct, to the detriment of Quantum.”
As a result, Quantum has bumped up its requested damages to $300 million in the amended complaint — a $200 million increase from what it originally sought.
“Everything we speculated on turned out to be true,” Houston attorney Michael Minns, Quantum’s lead lawyer, said of the new evidence. “It is worse than our wildest speculations.”
Quantum’s legal team supports its claims with evidence revealed in two underlying cases in Florida and Kansas between Quantum and the lenders central to the dispute, L2 Capital and SBI Investments.
Litigation began between the parties in Kansas, Florida and Texas after L2 and SBI claimed Quantum had defaulted on its loan and the lenders attempted to seize Quantum company stock as collateral. Quantum first learned about K&L Gates’ alleged conflict of interest in 2017 when K&L Gates intervened in a separate Texas lawsuit on behalf of L2 and SBI during an injunction proceeding between Quantum and the transfer agent trying to seize Quantum’s stock on behalf of the lenders.
The most important evidence the Florida and Kansas litigation revealed, Minns said, was that K&L Gates had been retained by L2 and SBI’s founders, Adam Long and Jonathan Juchno, before Quantum ever hired K&L Gates, meaning that the law firm was representing both sides during their 2017 loan negotiations. In Juchno’s case, he had been using K&L Gates for “for years,” the amended complaint says.
“We originally thought that Juchno and Long hired [K&L Gates] after [Quantum] did for nefarious reasons,” Minns said. “We learned we were wrong. We learned they hired them before we did and no one revealed that … that’s egregious.”
Moreover, the lawsuit alleges that K&L Gates purposely concealed from Quantum material information about the lenders that would have allowed Quantum to make a more informed decision — which likely would have resulted in Quantum declining to do business with the lenders.
Among the withheld material information is the fact that Long had “earned a reputation for vicious, protracted and expensive litigation,” which is exactly what Quantum has become roped into with its lenders, the company says. Quantum alleges in the amended complaint that K&L Gates willingly “accepted a case from an adversary (the lenders) who could be depended on to generate substantial legal fees.”
The other facts, described by Minns as “egregious,” that the amended complaint lays out include:
- The Securities & Exchange Commission charged Long’s business partner, Edward Liceaga, with violating federal securities laws;
- A judgment was rendered against Long for cheating an investor out of approximately $500,000; and
- Long hired a Florida attorney, Chad Friend, who drafted the forms that the lenders and K&L Gates used during negotiations with Quantum, only to later sue Friend in Florida claiming the forms were “ambiguous.” But during testimony in the other cases, Long said the contract is easy to understand.
The new petition also cites two other malpractice lawsuits against K&L Gates — one in Dallas and one in California — in which “K&L Gates has switched sides and harmed its own client,” which would mean the global law firm should be held liable for violations of the Deceptive Trade Practices Act in the Quantum lawsuit.
“K&L Gates’ failure to disclose its pattern of suing its own clients is deceptive as that term is recognized under the [DTPA],” the lawsuit says.
Asked whether it was possible that K&L Gates didn’t know these facts about L2 and SBI before taking them on, Minns replied that it felt like an unlikely possibility.
“You can’t do a conflicts check without knowing anything about your client’s litigation history,” he said. “We’re a two-lawyer firm, and we run more conflicts checks than that. This is an international law firm with offices all over the world; they have full-time conflicts checkers.”
Minns, however, did not rule out the possibility that K&L Gates will use ignorance as a defense.
“If they knew nothing about their client, that’s their defense and you just raised it,” he said. “I’m not sure a jury will buy it.”
Quantum’s legal team also includes Minns’ law partner, Ashley Arnett of Minns & Arnett and Houston attorney Seth Kretzer.
K&L Gates is represented by George Kryder, Matthew Moran, Jeremy Reichman and Emalee LaFuze of Vinson & Elkins.