Dragonetti Case Against Reed Smith, Partner Settles

May 11, 2011

This article originally appeared in the Legal Intelligencer on May 11, 2011.

After two-and-a-half years of discovery battles, motions and the appointment of a discovery master and expert e-discovery master, a Dragonetti Act lawsuit against Reed Smith partner Alan K. Cotler and two of his former clients settled the week after a jury was selected.

Attorneys for the parties in Leeds v. Cotler were huddled in a corner of Philadelphia Common Pleas Court Judge Mark I. Bernstein’s courtroom Tuesday hashing out what appeared to be final details of a written settlement agreement. A jury had been selected in the case Friday and was waiting to enter the courtroom when the lawyers went back into Bernstein’s chamber to inform him of the settlement.

The case was brought against Reed Smith, Cotler and his clients Peter C. Morse and R. Bruce Dalglish, principal owners of MP III Holdings, the parent company of a nationwide truck driving school known as MTA Training Centers and MTA Schools. There were initially 13 plaintiffs, including private equity company members Jeffrey Leeds and former Massachusetts Gov. William Weld, of Leeds Weld & Co.

Shortly before depositions were set to take place last year, a number of the plaintiffs voluntarily withdrew from the suit, leaving only Leeds and Leeds Equity Partners IV LP as plaintiffs.

The group filed their suit in the Eastern District of Pennsylvania in November 2008, alleging Morse and Dalglish’s tortious interference action against them in an underlying suit wasn’t supported by any evidence, was done for “harassment” and caused at least one investor not to invest in the private equity company, according to court documents. Reed Smith and Cotler represented Morse and Dalglish in that tortious interference action.

The Dragonetti action was dismissed for lack of jurisdiction and was refiled in Philadelphia Common Pleas Court in 2009. Clifford E. Haines initially represented the plaintiffs but withdrew and has since sued them in a separate action for failure to pay his fees.

The plaintiffs were represented since mid-2009 by Robert N. Hunn of Kolsby Gordon Robin Shore & Bezar. The four defendants were represented by Richard Bazelon of Bazelon Less & Feldman. Marc J. Sonnenfeld of Morgan Lewis & Bockius was brought in to represent Morse about two weeks before trial. He declined to comment about the settlement, as did Bazelon. Hunn didn’t immediately return a call for comment.

Alan Kessler of Duane Morris served as discovery master and Leonard Deutchman of LDiscovery was appointed special expert in digital forensics and electronic discovery.

The underlying lawsuit, Pennsylvania Business Bank v. Franklin Career Services, was filed in Philadelphia Common Pleas Court in May 2002. Morse and Dalglish intervened as plaintiffs and initially raised a breach of contract claim and then after discovery filed a tortious interference claim against a number of intervening defendants, according to court documents.

Morse and Dalglish, as principal owners of MP III Holdings, entered a merger agreement with their biggest competitor and market leader, Franklin Career Services. The owners of Franklin made this agreement without informing Leeds Weld Equity Partners III, which invested about $30 million in Franklin in exchange for 10 percent stock ownership and the power to appoint two members of the four-member board, according to court papers.

William Weld testified that when Jeffrey Leeds found out about the transaction there was, “smoke coming out of both ears,” according to the court filings. Leeds was opposed to the merger and the owners who initially agreed to it kept delaying the closing date, according to court papers.

Eventually, Kirkland & Ellis sent Morse and Dalglish a letter on behalf of Franklin saying the merger was off.

“This decision left MTA in shambles as its most profitable schools had been closed by Franklin,” according to court filings.

The tortious interference case against a number of Leeds entities, which were brought into the underlying suit as intervening defendants by intervening plaintiffs Morse and Dalglish, was eventually nonsuited by the judge in favor of the intervening defendants.

In the ensuing Dragonetti case, there was a lot of back and forth regarding discovery, the production of Reed Smith bills from the underlying action and whether the defendants had to produce statements of their net worth.

Bernstein ruled Reed Smith, Cotler, Morse and Dalglish did have to provide statements of their net worth after Bernstein denied their summary judgment motions.

They filed three summary judgment motions. One dealt with liability issues, a second argued Morse and Dalglish were simply relying on the advice of counsel and a third argued the plaintiffs had no damages.

They argued they were entitled to summery judgment in terms of liability because Leeds incurred his alleged damages while acting as a shareholder and couldn’t bring claims on the corporation’s behalf. The defendants also argued they had probable cause to include both of the remaining plaintiffs as defendants in the underlying action.

Summary judgment as to liability was also appropriate, they argued, because the plaintiffs couldn’t demonstrate an injury and had no evidence to suggest the defendants abused the process for an unallowable purpose such as blackmail or extortion, according to the motion for summary judgment.

As to the damages issue, Reed Smith, Cotler, Morse and Dalglish argued again that Leeds couldn’t claim damages on behalf of a company. They also argued that Leeds Equity Partners IV LP was not going to benefit from an investor who allegedly pulled out of the investment because of the underlying lawsuit. The defendants argued that investor was going to invest in other Leeds entities that were no longer a party to the Dragonetti case, according to the court filings.

On the day of the jury selection in the Dragonetti action, Bernstein declined to trifurcate the trial as requested by the defendants and instead bifurcated it. The first phase of the trial would have addressed the defendants’ liability and any compensatory damages and the second phase would have dealt with punitive damages if the jury had found the defendants’ conduct to be “outrageous,” according to the docket.