ATLANTA (CN) - Owners of the Atlanta Hawks and the Thrashers claim the King & Spalding law office committed malpractice by negotiating a "fatally flawed contract" that left them unable to buy out a co-owner. The contract, which was "declared void and unenforceable" by a court, also led to the joint owners being sued in Maryland, according to the complaint in Fulton County Superior Court.
The joint owners claim the result has been 5 years of litigation and more than $130 million lost in "operating the Thrashers after the franchise would have been sold but for the cloud on the franchise's title." The Thrashers are a National Hockey League team.
The plaintiffs - joint owners SSG Group LLC and LPF Atlanta LLC - say they hired King & Spalding in August 2005 to negotiate and draft a contract to buy out co-owner SB Belkin LLC.
The joint owners, which had come together to form co-plaintiff HPTA Holding Company LLC and subsequently gained 97 percent ownership interest in the teams, disagreed about the operation of the franchises.
Specifically, the joint owners say they disagreed about the trade of Joe Johnson, "a promising NBA player and eventual All-Star."
A majority of the ownership wanted to trade Johnson, but Belkin did not. As the Hawks' NBA governor, Belkin did not authorize the trade, ignoring the majority's wishes, according to the complaint.
The other owners responded by scheduling a board meeting to remove Belkin as NBA governor, but Belkin obtained an injunction in Massachusetts state court, preventing the removal. As a result, SSG and LPF sought King & Spalding's services to help facilitate a buyout of Belkin.
King & Spalding were to negotiate the terms of a purchase and sale agreement (PSA). But the parties could not agree on a price to be paid for Belkin's interest, so an appraisal process was included in the contract.
Still, SSG and LPF say, they were concerned the appraisal process would be in Belkin's favor; they wanted the right to select a first or second appraiser and the right to object to any appraisal even if the appraiser was selected by the joint owners.
The agreement drafted by the law firm did not "meet the needs of plaintiffs," the complaint states. "The PSA did not contain an appraisal process that would result in a fair and reasonable valuation of Belkin's interest, did not protect SSG and LPF's economic interests in HPTA, did not guarantee plaintiffs the right to select one of the first two appraisers, and did not provide an expeditious appraisal."
Also, the plaintiffs say, the "fair market value" definition under the PSA was "fatally flawed" and allowed appraisers to value "Belkin's interest at its highest possible value rather than the value that would result from an arm's-length transaction between a willing buyer and seller."
As a result of the flawed definition, the appraisal process broke down, resulting in "chaos" and triggering "intense litigation," the complaint states.
Belkin sued the plaintiffs in November 2005 in Maryland, contending that Belkin "was entitled to choose the second appraiser and that plaintiffs had breached the PSA, by among other things, objecting to the Citigroup appraisal and selecting Morgan Stanley to conduct the second appraisal," according to the complaint.
The plaintiffs in the new lawsuit claim that unbeknownst to them, King & Spalding, realizing it could be sued for malpractice in the PSA, had an "actual and apparent conflict of interest" in representing the present plaintiffs in Maryland.
"King & Spalding was aware of its conflict of interest, but rather than tell the plaintiffs, continued to undertake the representation and took the lead role in selecting local counsel and dictating legal strategy," the complaint states.
Ralph Levy, who was chairman of the board of directors of Attorneys' Liability Assurance Society, the firm's malpractice insurance carrier, was chosen as lead litigator in the Maryland dispute. "As attorney for plaintiffs, he owed them a duty to zealously represent their interests, even if those interests compelled the assertion of arguments that might expose ALAS to financial loss," the complaint states.
The plaintiffs say that King & Spalding did not reveal Levy's position as ALAS board chairman, nor the conflict of interest.
More litigation ensued, culminating in a 3-week trial in August 2009 that resulted in the Maryland trial court declaring the PSA "void and unenforceable because there was no agreement on a method for selecting the second appraiser when both parties objected to the first appraisal," according to the complaint.
The plaintiffs also claim that the definition of fair market value in the PSA had the "effect of casting [the appraisers] in the role of broker trying to assess the highest possible market price as opposed to a FMV that would be developed by the banker as neutral."
Therefore, the three parties remained joint owners of the teams, as they were in 2005 before King & Spalding was hired to "negotiate an agreement to expeditiously buy out Belkin's interest." Belkin appealed, but a settlement of the litigation and their ownership interest was reached in December 2010.
The plaintiffs claim they suffered more than $194.5 million in losses. They seek compensatory, consequential and punitive damages. They are represented by Robert E. Shields and Everette L. Doffermyre with Doffermyre Shields Canfield & Knowles.
Steven M. Collins , a partner with Alston & Bird, representing King & Spalding, said in a brief interview: "We've seen the complaint and we are familiar with the allegations. King & Spalding acted appropriately and the lawsuit is without merit. We look forward to presenting a substantial defense in court at the appropriate time."
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