Top Defense Verdicts - Zacadia Financial Limited Partnership v. Klein

See clarification below

For defense attorneys of the trustees of a multimillion dollar estate, the $380 million question was whether general breach of contract principles of materiality apply in the context of an acceleration clause in a promissory note.

But first, some context: Seeking to reduce estate tax liability and avoid liquidating assets after the death of Mark Hughes, founder of Herbalife International of America Inc., his trustees - Conrad Lee Klein, Jack Reynolds and Christopher Pair - entered into an IRS-approved transaction in which the plaintiff Zacadia Financial Limited Partnership, a company owned by the family of the trust's then-general counsel, Kenneth Ziskin, served as a middleman between the estate and a limited liability company owned predominately by the estate.

The transaction allowed for future interest on a long-term loan originating from the LLC to be immediately deducted against estate taxes, saving more than $160 million, said one of the trustees' lawyers, Edward A. Woods of Akin Gump Strauss Hauer & Feld LLP. For its role, Zacadia was to receive $12 million in 2027 when the loan came due.

But Zacadia sued in 2008, alleging that the trustees breached the promissory note and security agreements of their contract. The company sought $380 million in damages and distributions. Zacadia Financial Limited Partnership v. Conrad Lee Klein, BC396443 (L.A. Super. Ct., filed Aug. 18, 2008).

The trust responded with a cross-complaint arguing that any breaches were immaterial and alleging that Ziskin used his intimate knowledge of the loan documents to manufacture defaults.

Absent California case law on point, Edward A. Woods and Susan K. Leader of Akin Gump Strauss Hauer & Feld LLP argued that breaches must be material in accordance with breach of contract convention and other courts' precedents.

"The judge ultimately agreed with that, and frankly, that was a key issue because the jury didn't even have to reach our affirmative defenses," Leader said. "Right off the bat they said, yes there was a default, but no, it was not material."

The case is currently on appeal, and as it moves forward, the defense attorneys believe the issue of materiality will be revisited and will likely set precedent in California.

"This will be a key issue on appeal, because there is the precedent in other jurisdictions that we cited and relied on," Leader said. "From a common sense perspective, there is no reason that the well established proposition that a breach of contract has to be material shouldn't apply in the context of a promissory note."

- CAITLIN JOHNSON

Clarification: An earlier version of this article quoted Susan Leader as saying "...that was a key issue because the jury didn't even have to reach an affirmative defensive."

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