O'Melveny Is Accused Of Aiding Deceptive Deals

By Anna Scott and Kari Hamanaka
Daily Journal Staff Writers
May, 2010
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The trustee of a bankrupt real estate development company has accused O'Melveny & Myers and one of its top partners of helping the company engage in deceptive financial transactions that ultimately led to $35 million in losses for its creditors, according to a new federal lawsuit.

The transactions were designed to help the chairman and chief executive of the company, Empire Land, remove a clause from a loan agreement with now-defunct lender IndyMac Bank in which he personally guaranteed half of an $89 million loan, the lawsuit said. The O'Melveny partner was on the company's board of directors.

The complaint, filed April 23 in U.S. Bankruptcy Court in Riverside, called the acts by the firm and the partner, Peter T. Healy, "malicious" and "outrageous." It was filed by lawyers for Richard K. Diamond, the Chapter 7 bankruptcy trustee for Empire Land and seven of its affiliated companies. In addition to O'Melveny and Healy, the complaint named as defendants Empire Land's chairman and CEO, James P. Previti, along with three other former Empire officials and the developer's management company, Empire Partners Inc.

The complaint, filed by the Century City-based Landau Gottfried & Berger, seeks $80 million in economic damages plus punitive damages from O'Melveny for claims including professional negligence and breach of fiduciary duty to the debtors.

Healy, who is based in San Francisco, is co-chair of O'Melveny's corporate finance and capital markets practice and leads the office's transactions practice. The lawsuit said he joined the firm in 1989; his firm biography said he specializes in capital market transactions, ranging from public offerings to private placements, and has advised boards on mergers and acquisitions.

In a statement, an O'Melveny spokeswoman said the allegations in the lawsuit are "baseless and without merit" but declined to comment on them specifically or in detail. Healy did not respond to several requests for an interview.

Previti could not be reached for comment. Larry R. Day, former in-house counsel for Empire Land and a defendant, declined comment.

The complaint targets Healy for his role in the financial transfers as an Empire Partners director. It also charges that, because he was acting as an agent of O'Melveny for Empire at the time, the firm is liable for his conduct and guilty of professional negligence.

Lawyers say trustee-filed lawsuits are not unusual in large bankruptcy cases. Trustees often analyze the behavior of the bankrupt entity's principals prior to their filing and look for any culpability as part of the normal due diligence process.

"The trustee certainly took very seriously filing action against O'Melveny as a firm and understands it's a large institution," said Michael Gottfried, a partner at Landau Gottfried. "It was considered very, very seriously."

Previti, a veteran homebuilder, founded the Ontario-based Empire Land in the early part of the decade. The company made its mark building master-planned communities in California, mostly in the Inland Empire, and Arizona. Empire Land listed assets of about $106 million and liabilities of about $500 million when it filed for bankruptcy, according to published reports.

Healy, the O'Melveny partner, had a business relationship with Empire that pre-dated his joining the law firm, and he brought the company in as a client, according to the lawsuit. Healy served as a director of Empire Land Inc. from 2002 until 2008 and as the general partner for four of its real estate projects, according to Diamond's complaint. Meanwhile, O'Melveny served as Empire Land's outside corporate counsel on various matters during the same time period.

The lawsuit stems from dealings involving a Palmdale master-planned residential development, Anaverde, for which Healy provided legal services. The IndyMac loan on the project was coming due in August 2007, and the company did not have the funds to repay it, the complaint said.

Rather than going into default, the executives sought to extend the loan term. To do so, Empire Land had to prove it had $10 million in ready cash. So Previti and the other defendants allegedly infused Empire Land with money from several of its 100 affiliated companies to temporarily give the appearance of liquidity, the complaint said. The money was later transferred back.

"It was essentially a matter of... putting the money into the entity and transferring it out shortly after," said Gottfried. "It was giving the impression that the money was part of the Empire Land assets."

Because of the extension, Previti was able to refinance the IndyMac loan with a new lender and remove the personal guaranty clause.

Empire Land and seven of its affiliates eventually filed bankruptcy in April 2008. The companies would have sought bankruptcy protection nearly a year earlier, however, had Previti defaulted on the IndyMac loan, according to the complaint. By the time the companies did file, Diamond alleges, they wasted tens of millions of dollars continuing to operate as active businesses.

The Empire-related bankruptcy cases were consolidated and converted from Chapter 11 to Chapter 7 in December 2008.