Law360 (October 16, 2018, 10:13 PM EDT) — K&L Gates LLP was hit with a lawsuit Tuesday in Texas state court by former client Quantum Materials Corp., which alleges the firm committed malpractice through its simultaneous representation of it and its lenders in a payment dispute.
Quantum — a publicly traded nanotechnology manufacturer that makes components used in digital displays — alleged in a Hays County District Court suit that K&L Gates had represented the company in a lending arrangement only to turn against it and show up in court representing investors against Quantum.
If the firm’s conduct is determined to be either criminal or a violation of insider trading laws, Quantum will seek punitive damages of $100 million, it told the court. It said it would seek a punitive award that size “to prevent this type of conduct in the future when a billion-dollar elitist law firm considers trampling on a client without adequate resources to defend themselves.”
“Predatory lenders prey on financial difficulties. A predatory law firm can prey on the concept of justice itself,” Quantum said in the suit.
K&L Gates did not immediately respond to messages seeking comment on the suit Tuesday.
According to the suit, Quantum hired K&L Gates in 2016 at a rate of about $100,000 a month to draft lending agreements with investors L2 Capital LLC and SBI Investments LLC 2014-1.
Disputes over payments arose from those agreements, and Quantum sued L2 and SBI. To Quantum’s surprise, K&L Gates attorneys showed up in court to represent those parties against Quantum, according to the lawsuit. At some point after that, much of that work for Quantum was transferred to a different attorney unaffiliated with K&L Gates, but the firm “to this date, has never formally resigned from representing Quantum, and has remained legal counsel to Quantum,” the lawsuit alleges.
“In other words, K&L Gates was [in essence] 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. “K&L Gates was suing Quantum for the work initiated while K&L Gates was counsel for Quantum.”
Quantum claims the firm is liable for legal malpractice, deceptive trade practices and breach of fiduciary duty. Michael Minns of Minns & Arnett, who represents Quantum, told Law360 on Tuesday that it would require an expert economist to “make any sense” out of the damages K&L Gates’ alleged actions have caused.
“But I can tell you the minute the [lending documents were] signed there was immediate default,” he said. “It was impossible not to default.”
Quantum also alleges that the lenders insisted on taking stock in the company rather than a 50 percent return on their investments when Quantum was going through the process of paying off the note. Quantum said it presumes the entities “had arrogated Quantum’s information vis-a-vis their law firm, K&L Gates, which impelled them to demand stock (over good cash money) at predatory conditions.”
According to the lawsuit, Quantum makes “tetrapod quantum dots,” which are used to improve the energy efficiency and performance of displays in computers, smart phones and televisions.
In March 2017, Quantum borrowed money from SBI and L2, but alleges in the malpractice suit that it signed “unconscionable” documents drafted by the lenders that allowed Empire Stock Transfer Inc., the lenders’ stock transfer agent, to “reserve a sufficient number of shares of common stock.”
When the payment disputes began, Quantum filed a request for an injunction in Hays County District Court against Empire in 2017, alleging conversion.
The request was granted by the trial court on Oct. 2, 2017, prohibiting Empire from conveying any shares of Quantum. On Oct. 10, 2017, the lenders — represented by K&L Gates attorneys — intervened in Quantum’s proceeding against Empire, opposed the injunction and brought claims against Quantum for monetary damages.
The injunction order was extended by the trial court later that month, and in March was upheld by the Third Court of Appeals in Austin, according to the lawsuit.
Quantum is represented by Michael Louis Minns and Ashley Blair Arnett of Minns & Arnett and Seth Kretzer of Law Offices of Seth Kretzer.
Counsel information for K&L Gates was not immediately available Tuesday.
The case is Quantum Materials Corp. v. K&L Gates LLP, case number 18-2393, in the District Court of Hays County, Texas.