Ex-Firm Returns to Haunt Partners : Suits: Defunct accounting concern has filed for bankruptcy protection, but many who severed ties with the agency years ago may still be liable for losses.

Daniel Matter thought he had ended his ties with Pannell Kerr Forster when he resigned from the now-defunct accounting firm in April, 1986. He was wrong.

Last month, the Agoura resident and 260 other former partners of Pannell Kerr were hit with a 78-page lawsuit seeking $24 million from them. The suit, filed in federal court in Tennessee, alleges that Pannell Kerr was negligent in preparing financial reports for a Tennessee thrift that failed in 1989, and it is holding former partners liable for some of those losses.

Matter, who runs a small accounting practice in Woodland Hills, says he had nothing to do with any Tennessee thrift reports. Yet the accountant knows better than most that in a partnership structure, unlike in corporations, former partners may still bear personal financial responsibility for the liabilities of the firm.

Matter, 53, now fears losing much of what he owns. “I really don’t know what will come of this.”

Even though Pannell Kerr ceased operations as a national firm more than a year ago and filed for bankruptcy court protection in Los Angeles last month, the problems are far from over for partners of what was the nation’s ninth-largest accounting firm.

The Tennessee suit is one of 18 remaining malpractice claims against Pannell Kerr. Because those claims seek a total of about $250 million--25 times more than what the firm now has in assets--the lawsuits have become the biggest hurdle for Pannell Kerr’s attorneys as they begin work on a plan to satisfy creditors.

Arthur Greenberg, an Encino lawyer who is handling Pannell Kerr’s bankruptcy, said insurance policies should help pay for some claims, and he contended that a few suits against its former partners have no merit. Still, Greenberg said it was likely that up to 320 former partners of Pannell Kerr would be required to make personal contributions.

“We’re hopeful that the contributions will be modest,” said Greenberg, whose small firm, Greenberg & Bass, specializes in bankruptcy and, over the years, has represented such clients as San Fernando Valley real estate magnate Mike Glickman and now-defunct Valley Federal Savings.

But Thomas Coleman, an attorney who is the court-approved chairman of Pannell Kerr’s creditors committee, offered a grimmer scenario for the former partners.

“The creditors are going to expect them to make substantial contributions,” he said.

Pannell Kerr filed for Chapter 11 bankruptcy Jan. 4, partly because the landlord of its former headquarters--the One Wilshire Building--sued the firm and 18 former partners for about $4.5 million in rentals from a long-term lease. Pannell Kerr’s principal offices were on the 18th floor of the downtown Los Angeles building before the firm ceased operations in December, 1991.

Under U. S. bankruptcy laws, suits against a company in Chapter 11 are put on hold while the company tries to formulate a repayment plan, which must be approved by the creditors committee and the court.

Pannell Kerr, founded in New York, was a major accounting firm that specialized in serving the real estate market and consulting for hotels, clubs and hospitals. In 1985, it had almost 200 partners in 42 offices in the United States. But its operations suffered because of the national real estate slump and because of a 1990 judgment of $24 million against Pannell Kerr in a slander and libel lawsuit in Texas.

So in 1992, the firm began spinning off its U. S. offices and sold its name and practice to individuals and other accounting firms. As such, the bankruptcy filing doesn’t involve the six accounting firms now operating as separate corporations, including one in Los Angeles, or eight separate consulting firms that now operate under the Pannell Kerr name.

Pannell Kerr, now a shell company that receives royalty income, renamed itself Madison Associates.

Attorney Greenberg said Madison Associates had not intended to file for bankruptcy protection, but it did so in January because the company wanted to protect its remaining assets and the personal assets of the former partners.

In its bankruptcy filing, Pannell Kerr listed assets of $10.3 million, which included $6.5 million from the sale of its operations. It listed liabilities of $8 million, including $4 million in secured debt to a Dallas firm for furniture and equipment. However, the liability figure did not include a variety of other unsecured claims, including unexpired leases such as the one involving One Wilshire, and numerous lawsuits.

Among the lawsuits filed against the company were some by former Pannell Kerr partners, who expected to receive profits or retirement payments after they left the firm. Instead, Greenberg said, they are now looking at contributing to a pool to settle the 18 malpractice claims.

Greenberg’s firm identified 320 accountants who were partners at Pannell Kerr from 1982 to the end of 1991, and each was notified by letter last month of their potential liability. But how much each contributes may depend on how long they worked at Pannell Kerr, during what period and in what capacity.

Matter, the Agoura accountant, said he thought that he wasn’t liable because he was a contract partner at Pannell Kerr, not an equity partner who put money into the business.

But Greenberg said it’s unclear whether that will make a difference. Indeed, Greenberg’s biggest challenge will be to establish a formula determining how much each of the former partners pays, and then get that approved by the partners as well as the bankruptcy court creditors’ committee.

Attorneys said about a dozen former Pannell Kerr partners, mostly in Texas, have filed for personal bankruptcy to protect themselves against malpractice claims.

The 18 malpractice claims range from $15,000 to $50 million, and all essentially argue that Pannell Kerr negligently performed its duties. The biggest suit was filed in 1988 by investors of the Marlin Properties, a now-defunct Los Angeles partnership that raised money from 1,000 investors by falsely telling them that the partnership would buy and rehabilitate historic buildings.

Coleman, the creditors committee chairman, is also the court-appointed receiver of the bankrupt Marlin entities. He said the suit by Marlin investors seeks $50 million because Pannell Kerr “made forecasts about the financial performance of the Marlin entities, and they were essential to selling to potential investors.”

Speaking as Pannell Kerr’s attorney, Greenberg thinks he can defend all 18 malpractice suits.

In past years, however, accounting firms have lost negligence suits, including a whopping $338-million judgment against Price Waterhouse. And such claims are a big reason that many accounting, law and other partnerships were changed to corporations. (Although corporations must pay income taxes, their executives are generally protected from personal liability.)

But while malpractice claims have clearly hurt accounting firms, including Laventhol & Horwath, which collapsed in 1990, Pannell Kerr previously prevailed in all 41 malpractice suits filed against it, according to Harold Gutenberg, an Encino attorney who was the firm’s in-house attorney from 1987 to 1992.

“It has a very impeccable record,” he said.

Yet attorneys believe that it would be painfully costly for the former Pannell Kerr to fight each of the 18 suits in court.

Gutenberg believes that former partners may be worried about nothing, because they may not have to contribute.

But others, including those representing former partners, said there was cause for concern.

“Sure, there’s hope for a settlement,” said Matt D. Ober, a Century City lawyer who is representing Daniel Matter and others in the Tennessee suit. “But certainly it’s possible that their personal assets could be affected.”