Law Firm Collapse Bankrupts Attorney in a Billion-Dollar Way

Steven Kray says he is bankrupt. Is he ever.

The Newport Beach attorney recently filed a petition for personal bankruptcy in federal court here saying that his liabilities outstrip his assets by $2.3 billion.

That’s billion, a 10-digit number.

The reason is about as clear as some court briefs.

In the mid-1980s, Kray was a partner in the Irvine office of New York-based Finley, Kumble, Wagner, Heine, Underberg, Manley, Myerson & Casey. The law firm was the nation’s fourth-largest before it collapsed in 1988 under a huge debt burden.

The failure has spawned enough lawsuits to keep an army of attorneys employed. Malpractice suits pending seek $2.5 billion in damages. And the trustee overseeing the Finley Kumble bankruptcy is suing 40 former law firm partners to contribute to a fund to pay off creditors.

Rather than fight some of these suits, Kray figured the best way out was to declare bankruptcy. His Chapter 7 petition lists $2.5 billion in liabilities, presumably the total malpractice claims outstanding against Finley Kumble, and assets of $2 million.

He listed no personal assets, only a potential $2-million claim against the Finley Kumble trustee. Kray, who was making $250,000 when he left Finley Kumble in 1987, now works in the two-attorney firm of Stephens & Kray, which does taxes, estate planning, mergers and acquisitions.

While Victor Preston of Irvine, Kray’s attorney, said it is unlikely that Kray could be held liable for $2.5 billion, his client would bankrupt himself fighting the lawsuits in New York.

“It would cost me too much money,” said Kray, estimating the legal battle could run up a $200,000 bill in attorneys’ fees and lost time at work. “The system does work, but it’s expensive for the little person.”