OCTOBER 17, 2018 NATALIE POSGATE

A lawsuit filed Tuesday in Hays County accuses K&L Gates of legal malpractice for representing both a company and its lenders in a repayment dispute.

The lawsuit, filed by San Marcos-based nanotechnology manufacturer Quantum Materials Corp., alleges that the Pittsburgh-based law firm’s conflict-of-interest compromised valuable proprietary information, depressed market interest in the publicly-traded company and drove up legal costs for the firm.

Officials at K&L gates did not immediately respond to requests seeking comment.

According to the 12-page lawsuit, San Marcos-based Quantum retained K&L Gates in late 2016. In that capacity, lawyers from K&L Gates regularly attended confidential board meetings during which the company discussed its highly-sensitive high-volume manufacturing process for nanosized semiconductors called Tetrapod Quantum Dots.

As part of their legal work, K&L Gates lawyers were also involved in the drafting of documents for prospective lenders. And in March 2017, Quantum borrowed from two funds, SBI Investments and L2 Capital, under terms that allowed the conversion of the debt into equity if Quantum defaulted on the notes.

The trouble came in the fall of 2017, when a dispute arose between the two lenders, who alleged Quantum defaulted on its loans, which, per the agreements they signed, entitled them to convert their promissory notes into Quantum stock.

Quantum, which denied any default had taken place, sought and obtained a temporary restraining order barring the transfer agent from making any transfer of stock.

But in an October hearing on the matter, SBI and L2 Capital attempted to intervene in the matter, and they were represented by two lawyers from the Austin office of K&L Gates. “K&L Gates was thus in court, in some capacity, representing both sides of a dispute (in which) they had rendered previous (potentially negligent) legal work,” the lawsuit alleges.

The complaint identifies the two litigators as Gregory Sapire and Jeffrey Quilici. Neither are still with the firm. Sapire practiced at K&L Gates for 17 years before leaving the firm earlier this year to join Austin litigation boutique Cleveland Terrazas. Quilici, who graduated from the University of Texas School of Law in 2012, is currently clerking for U.S. Supreme Court Justice Neil Gorsuch.

“At first, the lawyers denied that Quantum had ever been or was currently a client of theirs,” the lawsuit says. “Next, the lawyers claimed K&L Gates had an infallible conflicts check system.”

But when Quantum’s lawyers, noting the potential conflict, offered to let the lawyers “leave the case and forgive the offense,” says the lawsuit, they “doubled down.”

Despite Quantum’s claim of full payment, the lenders demanded through their K&L Gates lawyers that Quantum stock be seized and distributed to them. That demand caused 250 million shares of Quantum stock to be seized by the transfer agent.

A footnote in the lawsuit says that the lenders’ adamant effort to take control of the Quantum stock suggests that insider information could have been divulged through the conflicted representation by K&L Gates.

“It appears that at least some of the alleged ‘defaults’ may have actually been started by K&L Gates when they did legal work for Quantum,” the lawsuit says. “In other words, K&L Gates was suing their client, Quantum, ostensibly arguing absurd technical ‘defaults’ that were in part created by presumably legal malpractice or fiduciary violations possibly done by K&L Gates.”

Quantum said in the suit that K&L Gates eventually withdrew, but only after courtroom challenges that required Quantum to spend thousands in legal bills. Moreover, K&L Gates later presented Quantum with a $300,000 bill for their prior representation of the company, according to the lawsuit.

“No court would have allowed them to continue as an advocate in this case,” the lawsuit says. “The only possible explanation for K&L Gates’ stubborn persistence appears to be an effort to make the litigation as expensive as possible for kill Quantum’s resolve by death from a thousand expensive wounds.”

“K&L Gates has demeaned the character of the legal profession in a real life parody of lawyer jokes,” the lawsuit alleges.

Quantum is represented in the matter by Houston lawyer Michael Louis Minns of Minns & Arnett.

Though K&L Gates conceded the courtroom conflict, the lawsuit says the firm “to this date, has never formally resigned from representing Quantum, and has remained legal counsel to Quantum,” the lawsuit says.

“This suit constitutes final, official, unambiguous notice that K&L Gates is terminated from Quantum for cause,” the lawsuit says.

© 2018 The Texas Lawbook.