A Santa Barbara law firm is suing a deceased hedge fund manager’s estate for as much as $12 million in allegedly unpaid contingency fees.

Cappello & Noël filed a lawsuit against the estate of Michael Klein, the fast-rising financial star who died in an airplane crash in Panama in 2007, along with Pacificor, the hedge fund that Klein founded.

The core of the complaint filed in Santa Barbara County Superior Court is an allegation that the law firm secured a court victory for Klein that paved the way for him to reclaim as much as $30 million in bonds stored in a

Panamanian account. Cappello & Noël argues that because its victory freed up the assets, it is owed a 40 percent cut of the “net recovery” — both jury damages awarded and the unlocked bonds themselves — that was governed by the firm’s contract.

Attorneys for Pacificor and the Klein estate called the allegations “linguistic gymnastics.” They argue that the retainer agreement between Klein and Cappello covered only the firm’s initial jury verdict in Santa Barbara and not a different set of proceedings in Los Angeles County that unlocked the Panamanian account.

“[O]ur clients deny the Cappello firm is owed any additional fee, and they will vigorously defend the suit,” Timothy Trager, an attorney for Pacificor and the Klein estate, told the Business Times in a statement.

The dispute began when Klein sued three former employees of his hedge fund and they sued back. The former employees alleged they had not been paid as promised for their work managing Klein’s funds and asked for 55 percent of the $30 million in Class D bonds held by Old Growth, a Panamanian entity owned by Klein.

After a lengthy trial, Klein won. The jury gave one of the former employees $78,000 and the other two $1 each. Klein and his fund were awarded $41 million in damages. The judge cut the verdict down to $4 million and an appeals court upheld it. Cappello doesn’t dispute that the 40 percent contingency was paid on the jury award.

At the same time as the lawsuit, a dispute was unfolding over who owned the $30 million in the Panamanian account, which was maintained by Deutsche Bank. Cappello sued the bank on Klein’s behalf, but the matter went to arbitration in New York. Meanwhile, the former employees had made a claim to the assets in the account.

In Los Angeles County, Deutsche Bank filed what is called an “interpleader action.” When there’s a dispute over the rightful owner of an account’s contents, a bank can hand the matter over to a court to decide.
Cappello claims that Klein and his fund used the court victory against the former employees to prove that the former employees had no claim to the assets in Panama. That meant Klein got a clear title to the bonds, Cappello’s lawsuit alleges. Though the dispute over ownership of the bonds was a separate proceeding, Cappello claims it fell under the language of its agreement because it was “casually related” to the Santa Barbara judgment: “‘Net

Recovery’ shall mean any and all gross sums received and collected by Clients pursuant to judgment or settlement less any and all actually incurred cost and expenses expended in the Litigation … .”

“They basically went into court and said, ‘Hey, this lawsuit trumps anything that’s going on down here,’ ” Barry Cappello told the Business Times. “The results of our litigation were used to obtain the result in that case.”
Trager, the attorney for Pacificor and the Klein estate, argues that the contingency agreement covers only the damages awarded in the lawsuit between Klein and his former employees. He points out the language in Cappello’s contract that says any work on outside matters will be governed under a different contract: “In the event Cappello & Noël performs services for Clients in any related matters that arise out of this relationship but not covered by this Retainer Agreement, then the amount of compensation, if any, Clients will be required to pay for those other services shall be set out in a separate retainer agreement,” the agreement states.

Trager said there was no separate agreement for the Los Angeles dispute. Cappello concedes that it will be up to court to decide the final meaning of the agreement.

“That’s what lawsuits are about — one party reading a contract one way, and another party reading it a different way,” Cappello said. “Our agreement is clear on what ‘net recovery’ is.”

• Contact Stephen Nellis at snellis@pacbiztimes.com.