FILED: NEW YORK COUNTY CLERK 06/15/2012

NYSCEF DOC. NO. 1

INDEX NO. 652092/2012 RECEIVED NYSCEF: 06/15/2012

SUPREME COURT OF THE STATE OF NEW YORK COUNTY OF NEW YORK DAVID LICHTENSTEIN, THE LIGHTSTONE GROUP, LLC, and LIGHTSTONE HOLDINGS, LLC, Plaintiffs, v. WILLKIE FARR & GALLAGHER LLP, MARC ABRAMS, MATTHEW FELDMAN, and MARGOT SCHONHOLTZ, Defendants.

SUMMONS Index No. ___________________ Date Purchased: The basis of venue is : Residence of a defendant .

To the above-named Defendants: YOU ARE HEREBY SUMMONED and required to serve upon Plaintiffs’ counsel an answer to the Complaint in this action within 20 days of service of this summons, exclusive of the day of service, or within 30 days after service is complete if this summons is not personally delivered to you within the State of New York. In case of your failure to answer, judgment will be taken against you by default for the relief demanded in the complaint.

Dated: New York, New York June 15, 2012 LAW OFFICE OF SOLOMON N. KLEIN

By:

/s/ Solomon N. Klein

1410 Broadway, Suite 1802 New York, New York 10018 Tel.: (212) 575-0202 Fax: (212) 575-0233 Email: sklein@solomonklein.com

Counsel for Plaintiffs David Lichtenstein, The Lightstone Group, LLC, and Lightstone Holdings, LLC

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SUPREME COURT OF THE STATE OF NEW YORK COUNTY OF NEW YORK DAVID LICHTENSTEIN, THE LIGHTSTONE GROUP, LLC, and LIGHTSTONE HOLDINGS, LLC, Plaintiffs, v. COMPLAINT WILLKIE FARR & GALLAGHER LLP, MARC ABRAMS, MATTHEW FELDMAN, and MARGOT SCHONHOLTZ, Defendants.

Index No. ___________________

Plaintiffs David Lichtenstein, The Lightstone Group, LLC, and Lightstone Holdings, LLC, (together, “Lichtenstein”), through their undersigned counsel, allege as follows: PRELIMINARY STATEMENT 1. This case arises out of the failure of Willkie Farr & Gallagher LLP

(“Willkie”) to provide Lichtenstein with independent and competent legal advice regarding the restructuring of Extended Stay, Inc. and related entities (“ESI”), where Mr. Lichtenstein served as President, CEO, and Chairman. Lichtenstein retained Willkie as counsel separate from ESI, since Lichtenstein was concerned about individual liability, including certain guarantees that he had signed. 2. Instead of providing competent advice and advocacy, Willkie insisted that,

as a matter of fiduciary law, Lichtenstein had no alternative but to place ESI into bankruptcy. This advice was not merely wrong advice; it was tainted and motivated by the self-interest of defendants to avoid their own exposure. By following Willkie’s insistence that he place ESI into

bankruptcy, Lichtenstein triggered $100,000,000 in liabilities under certain personal guarantees he had provided to ESI’s lenders, resulting in a judgment against him for over $100,000,000. 3. Willkie then switched sides. After advising Lichtenstein to have ESI file

for bankruptcy protection and trigger $100,000,000 in liabilities under the guarantees, Willkie later represented Bank of America, N.A. (“BoA”) in its effort to enforce those very same guarantees against Lichtenstein. Even after Lichtenstein discovered that Willkie was representing the other side and sought to disqualify Willkie, it still continued doing so – until Judge Schweitzer ordered Willkie to stop representing Bank of America. The judge admonished Willkie for “problematic” conduct and for making sworn statements that were “improbabl[e].” 4. The losses suffered by Lichtenstein because of defendants’ self-interested

conduct and ethical lapses are staggering, totaling well over $104,000,000 in out-of-pocket damages. This action seeks redress for these losses. THE PARTIES 5. Plaintiff David Lichtenstein is a successful residential and commercial real

estate professional. He is the principal of a group of “Lightstone” entities that own and manage various real estate holdings. During the relevant period, Mr. Lichtenstein also served as President, CEO, and Chairman of ESI. 6. Plaintiff The Lightstone Group, LLC, is a New Jersey limited liability

company, with its address at 1985 Cedar Bridge Avenue, Lakewood, New Jersey 08701. Mr. Lichtenstein is the managing member of The Lightstone Group, LLC. 7. Plaintiff Lightstone Holdings, LLC (“Lightstone Holdings”), is a

Delaware limited liability company, with its address at 1985 Cedar Bridge Avenue, Lakewood, New Jersey 08701. Mr. Lichtenstein is the sole member of Lightstone Holdings, LLC.
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8.

Defendant Willkie Farr & Gallagher LLP is a Delaware limited liability

partnership with its principal office at 787 Seventh Avenue, New York, New York. 9. Defendant Marc Abrams (“Abrams”) is an attorney admitted to the bar of

New York and a partner at Willkie’s New York office. 10. Defendant Matthew Feldman (“Feldman”) is an attorney admitted to the

bar of New York and a partner at Willkie’s New York office. 11. Defendant Margot Schonholtz (“Schonholtz”) is an attorney admitted to

the bar of New York and a partner at Willkie’s New York office. FACTUAL ALLEGATIONS A. Lichtenstein’s Purchase of ESI 12. In 2007, Mr. Lichtenstein and his company, Lightstone Holdings, together

with a consortium of investors, purchased ESI, which owns and manages hotels. 13. In addition to more than $200 million invested by Lichtenstein directly,

the acquisition of ESI was financed by a set of loans from various lenders (the “Lenders”). Of the $8 billion purchase price, $7.4 billion was financed through a combination of $4.1 billion in mortgage loans made to ESI and $3.3 billion in ten mezzanine loan tranches made to ESI subsidiaries (collectively, the “Loans”). 14. The Loans were generally non-recourse. However, the loan documents

contained a set of eleven personal guarantees (the “Guarantees”) signed by Mr. Lichtenstein and Lightstone Holdings. The Guarantees provided for $100,000,000 personal liability against Mr. Lichtenstein and Lightstone Holdings to the Lenders in the event of particular “bad boy” acts, including the voluntary filing of a bankruptcy petition by ESI.

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15.

At the insistence of the Lenders, the structure of the Loans and the

borrowing entities was “bankruptcy remote” – whereby the Lenders sought to limit the ability of the borrowing entities to file for bankruptcy. 16. of Extended Stay, Inc. 17. Soon after the purchase of ESI, as the overall economy suffered, the Mr. Lichtenstein managed ESI and was the President, CEO, and Chairman

financial situation of ESI declined, and by late 2008, ESI faced a liquidity crisis. ESI retained Weil, Gotshal & Manges LLP (“Weil Gotshal”) to advise ESI on its restructuring efforts. 18. Since Weil Gotshal could not represent both ESI and Lichtenstein, Marcia

Goldstein of Weil Gotshal referred Lichtenstein to Marc Abrams at Willkie. 19. In December of 2008, Lichtenstein retained Willkie to advise and

represent Mr. Lichtenstein in his role as an officer and director of ESI, particularly as to the liability of him and his entities in any restructuring, as well as to advise and represent affiliates of The Lightstone Group regarding their interests in ESI. 20. The representation by Willkie was handled primarily by partners Marc

Abrams and Matthew Feldman, for which Lichtenstein ultimately paid over $1.2 million in legal fees and costs. B. Willkie’s Self-Interested and Incompetent Advice as to the Guarantees 21. In its representation of ESI, Weil Gotshal recommended that ESI file for

bankruptcy and claimed that the board members, including Mr. Lichtenstein, had an obligation as fiduciaries to achieve that result. Willkie did not challenge, and indeed embraced, this erroneous position by Weil despite the fact that it would result in a contractual liability of $100,000,000 to its client.

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22.

Mr. Lichtenstein and representatives of Lichtenstein-related entities

comprised a majority of the members of the board of directors of ESI. Thus, the ultimate decision whether ESI was going to file for bankruptcy rested on Lichtenstein. 23. As the financial condition of ESI continued to deteriorate, Mr.

Lichtenstein was faced with a choice to either a) have ESI file for bankruptcy (in which case Lichtenstein would incur $100,000,000 in individual contractual liability) or, b) seek an alternative, including to refuse, or at least delay, any bankruptcy filing and force the Lenders’ hand to file a petition for involuntary bankruptcy or foreclose on the collateral (in which case Lichtenstein would risk a lawsuit under a breach of fiduciary claim). 24. Throughout the representation, Messrs. Abrams and Feldman made full-

throated warnings about Mr. Lichtenstein’s drastic exposure if ESI failed to file for bankruptcy. 25. This advice provided by Willkie was wrong, given that Lichtenstein would

ultimately prevail in any such a lawsuit. In particular, the Lenders had insisted on a “bankruptcy remote” architecture in structuring the loans, and, as such, Willkie failed to advise Lichtenstein that he held no fiduciary duty to these very same creditors to file for bankruptcy. Upon information and belief, this failure to provide competent advice was motivated by self-interest on the part of Willkie and its attorneys. 26. Willkie did not disclose to Lichtenstein the fundamental self-interest that

interfered with Willkie’s ability or willingness to provide competent advice on this issue: In any contractual claim, Willkie itself would not face a lawsuit from the Lenders even if the breach of contract claim against Lichtenstein was ruled to be meritorious.

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27.

By contrast, in a breach of fiduciary duty claim, even if Lichtenstein’s

conduct was defensible, Willkie faced exposure to a lawsuit under an aiding and abetting claim if Willkie advocated a legal justification for Lichtenstein to avoid putting ESI into bankruptcy. 28. Lichtenstein was facing a lawsuit regardless, and was dependent on

Willkie’s advice on the comparable defenses of the potential claims against him. Willkie, on the other hand, was focused on avoiding its own lawsuit and much preferred for Lichtenstein’s exposure to be a contractual one. 29. Lichtenstein retained Willkie to be independent counsel and to present him

with all the options available to him and the relative risks of each approach. 30. Willkie, however, acting in its own self-interest, adopted the position of its

sponsoring law firm (Weil Gotshal) and refused to advocate or seek legal justification for any other course of conduct. Nor did Messrs. Abrams or Feldman inform Lichtenstein that they had their own skin in the game when they were emphatically insisting that a failure or delay by ESI in filing the bankruptcy petition must be avoided at all costs. 31. Willkie’s insistence on having Lichtenstein place ESI into bankruptcy

became more inexplicable as the financial condition of ESI deteriorated. 32. Before filing for bankruptcy, Lichtenstein offered to hand over the

collateral of ESI to all the Lenders as a group. However, some of the Lenders refused to accept possession and indeed later went to court to block any handover – in a likely effort to squeeze ESI into a voluntary bankruptcy and trigger the “bad boy” guarantee. 33. Despite the fact that the Lenders refused to accept the collateral and had

the opportunity to force ESI into bankruptcy on their own, the advice did not change. Mr. Abrams continued to insist that Mr. Lichtenstein had a fiduciary obligation to have ESI file a

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bankruptcy petition for the benefit of the Lenders. Mr. Abrams warned Lichtenstein that he faced the prospect of unequivocal and uncapped personal liability in any subsequent action initiated by the Lenders in the absence of a filing. 34. On June 14, 2009, in a phone call with Mr. Abrams just hours before ESI

filed its bankruptcy petition, Mr. Lichtenstein resisted and argued that it does not make sense that ESI would have to file for bankruptcy when it was the Lenders that refused to accept the collateral and that it was the Lenders that considered the bankruptcy filing as a “bad boy” act. 35. Nonetheless, Mr. Abrams pushed hard for Mr. Lichtenstein to agree to the

filing: “I have been doing this for 30 years . . . and you have to file.” Mr. Abrams gave vague assurances that Lichtenstein’s good behavior would be considered by the Lenders and the bankruptcy court in helping Lichtenstein mitigate the $100,000,000 liability under the Guarantee. 36. Based on the advice of Mr. Abrams, Mr. Lichtenstein agreed to have ESI

file a bankruptcy petition, which was filed by Weil Gotshal in the early morning hours of June 15, 2009. 37. Willkie had also predicted that any lawsuit against enforcing the

Guarantees would probably not be immediately filed by the Lenders. However, the Lenders raced to the courthouse to enforce the Guarantees, and the first of the Lenders filed suit on June 16, 2009, the day after ESI filed its bankruptcy petition. Other lenders following their lead with separate actions. (Line Trust Corp., et. al v. David Lichtenstein, et. al, Index No. 601951/2009 (Sup. Ct., New York Cty.) (the “Line Trust Action”); Bank of America, N.A., et. al v. Lightstone Holdings, LLC, et. al, Index No. 601853/2009 (Sup. Ct., New York Cty.); U.S. Bank, N.A. v. Lightstone Holdings, LLC, Index No. 651951 (Sup. Ct., New York Cty.) (the “BoA Action”);

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Ashford Hospitality Finance LP v. Lightstone Holdings, LLC, et. al, Index No. 652372/2011 (collectively, the “Lender Litigation”).) 38. Willkie’s advice also ignored or failed to consider the insurance coverage

implication of their advice. By triggering the Guarantees, Lichtenstein faced a lawsuit where he would not have any insurance coverage to defend a claim under the Guarantees. However, in a breach of fiduciary claim, Lichtenstein would have had access to a $50,000,000 insurance policy to cover his legal fees or settlement costs. 39. The damages resulting from Willkie’s malpractice and self-interested

counsel are staggering – well over $100,000,000 in direct damages. In the Lender Litigation, Justice Schweitzer granted summary judgment and entered judgment against Mr. Lichtenstein and Lightstone Holdings for $100,000,000 (which Mr. Lichtenstein has paid into escrow while the judgment is appealed), plus claims for interest and attorneys’ fees that are still being litigated. Additionally, Lichtenstein was forced to expend over $4 million in defending the Lenders’ enforcement of the Guarantees. C. Willkie Switches Sides and Represents BoA in its Enforcement of the Guarantees 40. In a breathtaking violation of base ethical obligations, Willkie accepted

the representation of BoA in its enforcement of the Guarantees against Mr. Lichtenstein and Lightstone Holdings. Upon information and belief, Willkie represented BoA in the Lender Litigation knowing full well that it had already represented the other side in the same matter. So, after advising Lichtenstein regarding his exposure under the Guarantees, Willkie then sought to enforce the same Guarantees on behalf of BoA.

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41.

Initially, BoA was represented in the Lender Litigation by Kaye Scholer

LLP. On May 21, 2010, Margot Schonholtz, announced her departure from Kaye Scholer LLP and joined Willkie as a partner. Sometime between May 21 and September 8, 2010, the representation of BoA transferred to Willkie without the knowledge or consent of Lichtenstein. On September 8, 2010, Willkie notified the court that it was now representing BoA in all the Lender Litigation cases. Willkie did not seek the consent of Lichtenstein or notify him prior to the filing. 42. This representation was a violation of Rule 1.9(a) of the New York Rules

of the Professional Conduct that prohibits lawyers from switching sides: “A lawyer who has formerly represented a client in a matter shall not thereafter represent another person in the same or a substantially related matter in which that person’s interests are materially adverse . . ..” 43. Willkie’s representation of BoA included a senior paralegal (the “Practice

Group Coordinator” of the entire Willkie bankruptcy group) that worked on both the Lichtenstein matter and the BoA representation. That same Practice Group Coordinator accessed the Lichtenstein files just several days before Ms. Schonholtz joined Willkie. 44. The Practice Group Coordinator claimed, however, that she did not

remember why she accessed those document immediately prior to Schonholtz’s arrival; nor did her affidavit explain the contemporaneous access of the documents at the same time Willkie was apparently preparing for Schonholtz’s move to Willkie. Upon information and belief, the affidavit by the Practice Group Coordinator presented by Willkie contained material misrepresentations and omissions and was intended to mislead the court and plaintiffs.

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45.

Further, one of the Willkie associates representing BoA acknowledged

that she accessed and printed a document from the Lichtenstein matter to assess the arguments made by Lichtenstein in moving to disqualify Willkie in the Lender Litigation. Willkie claimed that, although the associate printed the document, she tore it up and did not actually read it. Upon information and belief, the affidavit by the associate presented by Willkie contained material misrepresentations and was intended to mislead the court and plaintiffs. 46. Even after Lichtenstein filed a motion to disqualify Willkie in October

2010, Willkie continued to represent BoA in the Lender Litigation for several months. On January 7, 2011, Willkie withdrew as counsel in two of the Lender Litigation cases, but not the Line Trust case. Willkie made technical arguments that the motion to disqualify was not filed in the Line Trust case, and that it should be allowed to continue to represent BoA in that action. 47. Willkie also did not deny that the relevant partners were aware of the

conflict of interest when it switched sides. 48. In an order dated November 17, 2011, Justice Schweitzer granted the

motion to disqualify Willkie, and admonished Willkie for conduct that was “problematic in the eyes of the court.” The court added that the limited record “afford but a glimpse of a failed procedure” by Willkie. Justice Schweitzer also found that the statement in the sworn affidavit that the associate destroyed the document she printed before reading it was “improbabl[e]”. 49. Willkie’s refusal to comply with basic conflict of interest rules is

indicative of and part of a pattern. Indeed, Willkie was admonished in an unrelated case by a federal court in February 2011 for having “sub-standard” screening procedures and failing to provide adequate screening procedures to avoid conflicts of interest.

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50.

Lichtenstein incurred approximately $125,000 in costs to successfully

move to disqualify and cure Willkie’s violation of its attorney-client obligations. COUNT I (Legal Malpractice) (Against Defendants Willkie, Abrams and Feldman) 51. Plaintiffs repeat and re-allege the allegations in the previous paragraphs of

this complaint as if fully set forth herein. 52. David Lichtenstein, The Lightstone Group, LLC, and Lightstone

Holdings, LLC, had an attorney-client relationship with Willkie, Abrams and Feldman. 53. Willkie, Abrams and Feldman, because of negligence and self-interested

motives, failed to provide plaintiffs with independent representation using the degree of care, skill and prudence commonly possessed by members of the legal profession, and wrongfully advised Lichtenstein that he had no legal alternative but to have ESI file a bankruptcy petition. 54. Had Willkie, Abrams and Feldman provided plaintiffs with independent

representation using such degree of care, skill and prudence, Mr. Lichtenstein and Lightstone Holdings would not have been liable under the Guarantees and it would not be subject to a judgment of over $100,000,000 in the Lender Litigation and incurred the fees and costs of over $4,000,000 defending the Lender Litigation. 55. As a result of defendants’ malpractice, plaintiffs have been damaged in an

amount to be determined at trial, but no less than $104,000,000.

COUNT II (Breach of Fiduciary Duty) (Against Defendants Willkie, Abrams and Feldman) 56. Plaintiffs repeat and re-allege the allegations in the previous paragraphs of

this complaint as if fully set forth herein.
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57.

David Lichtenstein, The Lightstone Group, LLC, and Lightstone

Holdings, LLC, had an attorney-client relationship with Willkie, Abrams and Feldman, who owed plaintiffs a fiduciary duty of due care, loyalty and honesty. 58. Willkie, Abrams and Feldman breached their fiduciary obligations by

putting their own interest ahead of plaintiffs’ interest in advising Lichtenstein that he had no legal alternative but to have ESI file a bankruptcy petition. Further, Willkie, Abrams and Feldman failed to inform plaintiffs of their conflicted interests. 59. As a result of defendants’ breaches of their fiduciary duties, plaintiffs have

been damaged in an amount to be determined at trial, but no less than $104,000,000. COUNT III (Breach of Fiduciary Duty) (Against All Defendants) 60. Plaintiffs repeat and re-allege the allegations in the previous paragraphs of

this complaint as if fully set forth herein. 61. David Lichtenstein, The Lightstone Group, LLC, and Lightstone

Holdings, LLC, had an attorney-client relationship with Willkie, Abrams and Feldman, who owed plaintiffs a fiduciary duty of due care, loyalty and honesty. 62. As former counsel to plaintiffs, Willkie, Abrams, and Feldman continued

to owe such fiduciary obligations to plaintiffs. Defendant Schonholtz also owed such fiduciary obligations to plaintiffs once she joined Willkie. 63. Willkie, Abrams, Feldman and Schonholtz breached their fiduciary

obligations by representing BoA and taking positions directly adverse to plaintiffs. 64. Willkie, Abrams, Feldman and Schonholtz neither sought nor received

informed consent prior to taking positions adverse to plaintiffs.

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65.

Defendants continued to breach their fiduciary obligations, and plaintiffs

were required to take action to move to disqualify defendants and to cure defendants’ breaches. 66. As a result of defendants’ breaches of their fiduciary duties, plaintiffs have

been damaged in an amount to be determined at trial, but no less than $125,000. COUNT IV (Unjust Enrichment) (Against All Defendants) 67. Plaintiffs repeat and re-allege the allegations in the previous paragraphs of

this complaint as if fully set forth herein. 68. Defendants were enriched by the fees and costs paid by plaintiffs and by

any fees and costs paid by BoA as part of defendants’ breaches of fiduciary duties and malpractice. 69. Defendants’ enrichment came at the expense of plaintiffs, who became

subject to a judgment and expenses resulting from liability under the Guarantee and were required to move to disqualify defendants. 70. As a result of defendants’ conduct, it is against equity and good

conscience to permit defendants to retain the fees they received from plaintiffs and BoA. COUNT V (Judiciary Law § 487) (Against All Defendants) 71. Plaintiffs repeat and re-allege the allegations in the previous paragraphs of

this complaint as if fully set forth herein. 72. In their representation of BoA in the Lender Litigation, defendants

repeatedly acted with deceit and collusion, or consented thereto, against plaintiffs and the court,

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including by hiding their inappropriate representation of BoA, and presenting multiple misleading affidavits to the Court. 73. As a result of defendants’ deceit and collusion, plaintiffs have been

damaged in an amount to be determined at trial, but no less than $125,000, to be trebled pursuant to Judiciary Law § 487. WHEREFORE, Plaintiffs demands judgment against defendants as follows: (1) As to Count I, for damages on the legal malpractice claim, in an amount to be determined at trial, but which is currently no less than $104,000,000; (2) As to Count II, for damages on the breach of fiduciary duties claim, in an amount to be determined at trial, but which is currently no less than $104,000,000; (3) As to Count III, for damages on the breach of fiduciary duties claim, in an amount to be determined at trial, but which is currently no less than $125,000; (4) As to Count IV, for damages on the unjust enrichment claim, in an amount no less than $1,200,000 in fees and costs paid to Willkie by plaintiffs, in addition to any amount paid by BoA to be determined at trial; (5) As to Count V, for damages under Judiciary Law § 487 in the amount of $375,000; and (6) Such other and further relief as this Court may deem just and proper, together with all costs, fees, pre and post judgment interest and disbursements relating to this proceeding.

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Dated: New York, New York June 15, 2012

LAW OFFICE OF SOLOMON N. KLEIN By: /s/ Solomon N. Klein

1410 Broadway, Suite 1802 New York, New York 10018 Tel.: (212) 575-0202 Fax: (212) 575-0233 Email: sklein@solomonklein.com Counsel for Plaintiffs David Lichtenstein, The Lightstone Group, LLC, and Lightstone Holdings, LLC

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