In re: Teligent, Incorporated, Debtor v. K&L Gates LLP, 10-2257-bk (L);U.S. Court of Appeals, Second Circuit Bankruptcy is an odd case. It combines elements of bad faith litigation, Mary Carter agreements, bankruptcy dealing and huge sums.  A"’Mary Carter" agreement can give the "settling" defendant a financial interest in the remainder of the plaintiff’s case and more importantly in the amount recovered against any non-settling defendant(s)." 

Here, "When Teligent, Inc. ("Teligent") hired Alex Mandl as its CEO in 1996, the company extended Mandl a $15 million loan. The loan was to be due and payable immediately if Mandl resigned his employment without "good reason," but would be automatically forgiven if Teligent terminated Mandl’s employment other than for "cause."

Mandl retained the law firm K&L Gates LLP around April 2001 in connection with his potential departure from Teligent. At that time, $12 million was outstanding on the loan. K&L Gates drafted a severance agreement for Mandl that, according to the law firm, "reflect[ed] that Teligent had terminated Mandl other than for Cause effective as of April 27, 2001, thus triggering automatic loan forgiveness."

Less than a month after the parties ratified the severance agreement, Teligent filed for bankruptcy under Chapter 11. Cross-Appellee Savage & Associates, P.C. ("Savage & Associates") was appointed by the bankruptcy court to be the Unsecured Claims Estate Representative. In discharging its duties pursuant to this role, Savage & Associates filed approximately 1,000 adversary proceedings. These adversary proceedings included an action against Mandl, brought under Sections 548 and 550 of Chapter 11 of the Bankruptcy Code, 11 U.S.C. §§548, 550, to recover the balance of the loan. Mandl again retained K&L Gates to represent him in connection with this matter.

The bankruptcy court held a one-day trial after which it concluded that Mandl had resigned before Teligent terminated his employment, and therefore, Mandl was liable for the balance of the loan. See In re Teligent, Inc., 380 B.R. 324, 333-36 (Bankr. S.D.N.Y. 2008). That finding was not appealed.

Shortly after the bankruptcy court issued its decision relating to the loan, Mandl retained Greenberg Traurig, LLP ("Greenberg Traurig") as new counsel. Greenberg Traurig then filed a number of motions, including a motion for relief from the judgment based in part on a claim of newly discovered evidence. Around the same time, Savage and Associates commenced a new lawsuit in the Eastern District of Virginia against Mandl, naming as defendants Mandl’s wife, Susan Mandl, and ASM Investments LLC ("ASM"), an entity associated with Mandl, and alleging that Mandl had fraudulently transferred certain property through ASM to his wife in order to shelter his assets from creditors.

All parties to the action in Virginia participated in a voluntary mediation in attempt to resolve both the motions before the bankruptcy court as well as the Virginia Action. Greenberg Traurig invited K&L Gates to participate in the mediation, to address Mandl’s claim that K&L Gates committed malpractice in the course of representing him during his termination from Teligent and in the resulting adversary proceeding. K&L Gates declined to participate.

In setting up a framework for the mediation, the parties agreed to be bound by the terms of the protective orders routinely employed by the Bankruptcy Court in the Southern District of New York in the context of court-ordered mediation (the "Protective Orders"). The Protective Orders imposed limitations, inter alia, on the disclosure of information relating to the mediation. However, the Protective Orders provided no guidance on when, or if, a party might be entitled to release confidential information connected to the mediation.

Although formal mediation did not result in a settlement, the parties thereafter reached an agreement. In exchange for dismissal of the action in Virginia, Mandl agreed to pay the estate $6.005 million and to commence a malpractice suit against K&L Gates. The terms of the agreement also required Mandl to remit to the estate 50 percent of the net value of any malpractice recovery. The bankruptcy court approved the settlement pursuant to a motion under Federal

ule of Bankruptcy Procedure 9019