MANHATTAN (CN) – An investor says his family’s companies were exploited by their longtime attorney with Troutman Sanders in deals that cost them “hundreds of millions of dollars.” In a 99-page complaint in New York County Court, Rubin Schron claims, “Although [Leonard] Grunstein achieved considerable professional success and material wealth by serving as Schron’s attorney, that was not enough for him.”
Schron says that Grunstein, a partner with Troutman Sanders who headed the firm’s real estate practice since 2005, consistently gave himself a piece of the action at his clients’ expense.
“Beginning at least in 2002, Grunstein decided to leverage his position as an attorney and a trusted fiduciary of Schron and his family into material equity interests for himself and his co-conspirators in deals that he brought to Schron’s attention. The Grunstein conspirators then expanded their appetite from fractional equity in Schron entities to outright ownership and control of a series of operating companies that were tenants or other counterparties of the Schron entities – entities with interests clearly adverse to those of Grunstein’s clients.”
Schron says that in the past 7 years, Grunstein and his investment banker, co-defendant Murray Forman, have quietly taken ownership interests in a nursing home empire while urging Schron to become involved with their companies.
“Much of Grunstein’s and Forman’s recent ‘success’ as a health-care operator is the result of a broad scheme, described herein, to take improper advantage of Schron in connection with the acquisition and operation of complex real estate and health care businesses worth more than $2 billion,” according to the complaint.
Grunstein and Forman often received valuable ownership interests in companies Schron was financing, though they contributed no cash and accepted no risk, according to the complaint.
“Not content with such outsized and risk-free ownership interests, the Grunstein conspirators orchestrated the transactions and operated the businesses so as to deny Schron and the Schron entities major benefits of the economic bargain they struck, stealing for themselves tens of millions of dollars of value, properties and rights that actually belong to Schron and the Schron entities,” according to the complaint.
Schron claims he paid tens of millions of dollars to Grunstein and Troutman Sanders, and that the firm billed him for work that was not performed or that was performed on behalf of Grunstein, with interests adverse to Schron.
“Not only did Grunstein and his firms fail to obtain effective waivers and decline to act in non-waivable conflict situations, they shamelessly charged the Schron entities for ‘advice’ that completely and disingenuously favored themselves at their clients’ expense,” according to the complaint.
Grunstein tried to conceal his wrongdoing by withholding or destroying legal and financial documents, and Troutman Sanders claimed an “attorneys’ lien” over critical documents – though Schron severed his relationship with the firm in the fall of 2009, according to the complaint.
In one of Grunstein’s conspiracies, he advised Schron to buy out Mariner Health Care, but the Grunstein conspirators took all of the equity in the operating company that would lease and operate Mariner’s facilities, the complaint states. Schron says this forced him to guarantee the debt of the operating company, accept reduced rental payments and forego his right to acquire the operating company.
One of the transactions that Grunstein prepared for Mariner exposed Schron to an investigation with the Justice Department, according to the complaint. Schron says he suffered damage to his reputation and $14 million in damages because of illegal kickbacks involved in the deal that Grunstein negligently prepared.
In another scheme, Grunstein told a nursing home operator, THI of Baltimore, that it had defaulted on a facilities lease with Schron’s SWC Property Holdings, but that it could “sidestep the default by selling THI to an entity (Fundamental) owned by Grunstein and Forman,” according to the complaint. “In other words, Grunstein, as SWC’s lawyer and fiduciary, threatened to exercise his client’s (SWCs) legal rights against THI, not to benefit SWC, but to seize THI’s assets for himself and Forman at a below-market price.” (Parentheses in original.)
Grunstein and Levin also gave self-serving legal advice to dissuade Schron from invoking his legal right as manager of SMV Property Holdings to raise the rent under SMV’s lease of facilities to Sava, according to the complaint.
Grunstein, who had acquired ownership interests in Sava, persuaded Schron that he did not have a legal right to raise the rent, Schron claims.
“Although Schron believed he was receiving his lawyer’s candid legal advice, in fact, these memoranda represented shameless advocacy pieces from his conflicted lawyer-tenant,” according to the complaint.
Grunstein advised SMV to pursue an interest-rate swap with Citibank instead of raising the rent, and Schron says the deal caused more than $50 million in losses.
Schron claims he paid Troutman Sanders attorneys $350,000 for their services in the Citibank swap, but the firm lied in a lawsuit that the deal was related to the Schrons’ private investments.
Schron also claims his Cammeby’s Equity Holdings tried to buy SVCARE, a Grunstein- and Forman-owned company that owns Sava, but Grunstein said, falsely, that the contractual option agreement that he prepared was worthless “toilet paper”
After SVCARE took $120 million in loans from Schron, Grunstein created a ruse that suggests the loans do not need to be repaid or do not exist, according to the complaint.
Schron says he finally fired Grunstein and Troutman Sanders when he uncovered terms buried in a complex contract prepared by Grunstein that “would have given Grunstein a foothold from which he could attempt to take control of other Schron family assets.”
Schron and 12 of his companies, including Cam-Elm, SMV, SWC Property Holdings and Cammeby’s, seek hundreds of millions of dollars in damages, alleging breach of fiduciary duty, breach of contract, conversion, legal malpractice and fraud. They sued Grunstein and his brother Harry Grunstein; Troutman Sanders; Lawrence Levinson, a partner with Troutman Sanders; Forman; and 10 companies owned by the defendants. Schron is represented by Andrew Levander with Dechert LLP.