$40 Million Claim Against Troutman Sanders

ATLANTA (CN) - The Troutman Sanders law firm defrauded a company it represented in a $1.3 billion merger by allowing $40 million from an asset sale to go to another client, then covering up its mishandling of the transaction, Mariner Health Care claims in court.

Mariner Health Care sued Troutman Sanders LLP in Fulton County State Court.

Atlanta-based Mariner operated 263 assisted-living facilities and 11 long-term acute-care hospitals before National Senior Care, a home rehabilitation and skilled nursing company, acquired it in 2004.

"This action for fraud arises out of Troutman's fraudulent acts associated with legal services rendered to Mariner in connection with a $1.3 billion corporate merger and acquisition," the complaint states.

"In 2004, the New York office of the law firm of Jenkens & Gilchrist, Parker, Chapin ('Jenkens') represented both Harry Grunstein ('Grunstein') and Rubin Schron

('Schron') in a series of transactions (the "Mariner Merger Transaction") involving the privatization of a publicly-traded healthcare company, Mariner Health Care, Inc. ('Mariner').

"In April of 2005, most if not all of the lawyers in the New York office of Jenkens joined Troutman to establish a New York office for Troutman.

"From April of 2005 through approximately April of 2012, Troutman served as outside general counsel for Mariner, representing Mariner in numerous corporate and litigation matters."

Mariner claims the New York attorneys also had represented National Senior Care (NSC), Mariner's sole shareholder, and its owner Harry Grunstein.

While representing Mariner in the $50 million sale of one of its medical equipment units, Mariner claims, Troutman Sanders allowed one of its longtime clients, Rubin Schron, to wrongfully keep $40 million of the payment.

Schron, an investor who bought some of Mariner's real estate through a company he controlled, was sued by the Department of Justice in 2009 for alleged anti-kickback violations. Schron, Grunstein and another principal of Mariner Health Care and SavaSeniorCare Administrative Services settled by paying $14 million to the federal government and several states, the Department of Justice said in February 2010.

Neither Schron nor Grunstein are parties to Mariner's complaint.

"In 2004, attorneys in the New York office of [nonparty] Jenkens undertook the representation of Schron, one of its long-standing clients, in the Mariner merger transaction valued at $1.3 billion," the complaint states. "At the same time, Jenkens also took on the representation of other parties to the transaction, including Grunstein and NSC.

"In the Mariner merger transaction, NSC, through a wholly owned subsidiary, acquired Mariner and became Mariner's parent company.

"At the time of the Mariner merger transaction in December 2004, Mariner, through subsidiaries, owned and/or operated approximately 250 skilled nursing facilities ('SNFs'), in certain cases owning both the real estate on which the SNFs operated as well as the SNF operations. As part of the Mariner merger transaction, subsidiaries of SMV Property Holdings LLC ('SMV'), a company controlled by Schron, purchased the real estate of approximately 168 of the Mariner-owned SNFs. The remaining approximately 91 Mariner-owned SNFs continued to be operated by subsidiaries of Mariner after the Mariner merger transaction."

Mariner says it sold its medical equipment unit, Mariner Medical Supply, to Omnicare, which provided Mariner with pharmaceutical supplies and drugs, for $50 million.

Mariner received $10 million directly from the sale, while the rest was to be paid through an intermediary controlled by Schron, according to the complaint.

But Mariner claims its attorneys never finalized the documents recording the second step of the deal, allowing Schron to keep the $40 million of the purchase price that Omnicare had deposited into the merger escrow account.

Mariner says that Troutman did not realize that it had never drafted documents reflecting the $40 million due from Schron's company to Mariner until it received a subpoena from the Department of Justice, which was investigating the transaction for possible violations of anti-kickback laws.

During the investigation, Troutman also found out that Mariner had never received the $40 million it was owed, according to the complaint.

"As a result of Troutman's failure to properly document the MMS transaction, and Schron's improper taking of the $40 million without payment to Mariner of the same, Schron risked significant legal jeopardy, including criminal and civil penalties for violating federal anti-kickback laws, and a possible prison sentence," the complaint states.

"If such penalties were imposed, not only could Troutman be liable for potential malpractice to Schron, but it could also be implicated in the violations as well. In addition, Troutman would have undoubtedly received tremendous negative publicity regarding its failure to properly document the MMS transaction and its possible involvement in the theft of $40 million by Schron of monies owed to Mariner.

"To avoid the consequences of its malpractice, in October of 2006, well after receiving the DOJ subpoena in August of 2006, Troutman began the process of 'papering' the MMS transaction and creating the missing documents.

"In creating the alleged closing documents, Troutman created and utilized a scheme to account on paper for the missing $40 million payment from [Schron's company] HSA to Mariner."

According to the complaint, Troutman falsely claimed that Mariner had borrowed $40 million from an entity controlled by Schron, and that the $40 million payment due to Mariner from the asset sale was offset against the alleged debt.

Mariner claims that Troutman backdated the merger documents and induced Grunstein to sign the blank backdated agreements, without telling him they were created almost 2 years after the transaction was completed.

"Prior to signing the documents, Grunstein asked [Troutman attorney Mark] Goldsmith to confirm that Mariner had in fact received the $50 million for the sale of the membership interests of MMS LLC," the complaint states.

"In response, Goldsmith told Grunstein during the first two weeks of November 2006 that he was holding the transfer slips in his hands, with one made at the closing for $40 million directly from Omnicare, and one for $10 million, made six months later.

"No attorney at Troutman ever informed Grunstein that while Omnicare had in fact paid the total $50 million purchase price, Mariner had not received it and neither HSA nor any other entity controlled by Schron had paid Mariner $40 million of that purchase price."

Mariner claims it did not discover it had been defrauded by Troutman until Schron sued the law firm and other parties involved in the merger.

Schron sued Troutman Sanders in 2010 in New York, alleging breach of fiduciary duties.

Mariner says Troutman's own internal investigation concluded that its attorneys had "papered" the $40 million transaction.

It seeks more than $40 million in compensatory and punitive damages for fraud.

Mariner is represented by L. Lin Wood with Wood, Hernacki & Evans.

Troutman Sanders issued a statement calling Mariner's claims "without merit" and said it would fight the lawsuit.

Troutman Sanders employs more than 600 lawyers, specializing in business law, energy and industry regulation, finance, litigation and real estate, and has offices throughout the United States and China.

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