Memorandum of Law in Support of Defendants’ Motion to Dismiss — Covington & Burling LLP and Reed Smith LLP v. Vyaire Medical, Inc., Adv. Proc. No. 25-52381 (BLS) (Doc 1146-4)

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A memorandum of law filed November 24, 2025 as Doc 1146-4 in Case No. 24-11217 (BLS) in the United States Bankruptcy Court for the District of Delaware, supporting the defendants' motion to dismiss in Covington & Burling LLP and Reed Smith LLP v. Vyaire Medical, Inc. and Vyaire Holding Co., as Wind-Down Debtors, and others, Adv. Proc. No.: 25-52381 (BLS). The defendants ask the Court to dismiss Count II, for conversion and misappropriation of the settlement proceeds, with prejudice under Rule 12(b)(6). They argue that the law firms at most hold a charging lien under N.Y. Judiciary Law § 475 and that the defendants cannot convert their own property. John D. McLaughlin, Jr. of Ciardi Ciardi & Astin signed it.

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Case 24-11217-BLS Doc1146-4 Filed 11/24/25 Page 2 of 14

IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF DELAWARE

In re: Chapter II
VYAIRE MEDICAL, INC., et ai.,! | Case No. 24-11217 (BLS)

Debtor.

COVINGTON & BURLING LLP? and
REED SMITH LLP,

Plaintiffs, |
Adv. Proc. No.: 25-52381 (BLS)
V. |

VYAIRE MEDICAL, INC. and VYAIRE
HOLDING CO., as WIND-DOWN
DEBTORS, DAVID M. BARSE, in his
capacity as Plan Administrator of Vyaire
Medical, Inc., and JOHN DOE
LIQUIDATING TRUST,

Defendants.

MEMORANDUM OF LAW IN SUPPORT OF DEFENDANTS’
MOTION TO DISMISS

Dated: November 24, 2025 CIARDI CIARDI & ASTIN
Wilmington, Delaware

/s/ John D. McLaughlin, Jr.
John D. McLaughlin, Jr.
No. 4123
Ciardi Ciardi & Astin
1204 N. King Street
Wilmington, DE 19801

' The chapter | 1 case is now being administered by the Plan Administrator pursuant to the terms of the Findings of
Fact, Conclusions of Law, and Order Approving he Debtors’ Disclosure Statement for and Confirming the Second
Amended Joint Chapter 11 Pian of Vyaire Medical, Inc. and its Debtor Affiliates Pursuant to Chapter 11 of the
Bankruptcy Code [Docket No. 745}. The Plan Administrator’s mailing address is Vyaire Medical, Inc., Attn: David
M. Barse, Plan Administrator, c/o Cole Schotz P.C., 500 Delaware Avenue, Suite 600, Wilmington, DE 19801.

? Capitalized, yet undefined, terms herein have the meaning ascribed to them in the Plainuff's Complaint [Adversary
Docket No. 1] or the Plan [Docket No.348].
Case 24-11217-BLS Doc1146-4 Filed 11/24/25 Page 6of14

STATEMENT OF THE NATURE AND STAGE OF PROCEEDINGS

After failing to recover for Vyaire in the Insurance Coverage Action over the course of
five (5) years, Plaintiffs filed the Complaint seeking declaratory and monetary relief to enforce
their alleged attorney charging liens on the Settlement Proceeds under New York law.
Specifically, Plaintiffs seek to recover contingent fees and costs from the Defendants and,
otherwise, to obtain payment for the reasonable attorney time they incurred in representing
Vyaire in the Insurance Coverage Action — a matter counsel for the Plan Administrator settled
less than two (2) months after the Plaintiffs withdrew their representation in the Insurance
Coverage Action. Indeed, Defendants submit they have several defenses to the alleged attorney
charging liens — not the least of which is a claim against the Plaintiffs. Significantly, the
Defendants believe Plaintiffs violated their duty to the Defendants when they failed to
adequately represent the Defendants, unnecessarily delayed the Insurance Coverage Action, and,
after the Petition was filed, attempted to enhance their recovery from the Defendants by
renegotiating better terms for themselves in a new engagement letter. This ultimately harmed the
Defendants’ position in the Insurance Coverage Action by forcing the Defendants to replace the
Plaintiffs. While none of these claims are before the Court now, the Court should be aware that
this is a contested matter.

On June 9, 2024 (more than four (4) years after the commencement of the Insurance
Coverage Action), Vyaire (along with its Debtor affiliates, collectively the “Debtors’’) filed for
relief under chapter 11 of the Bankruptcy Code. See Complaint, J 28. This Court entered an
order confirming the Debtors’ Plan on November 14, 2024 [Docket No. 745] (the
“Confirmation Order”). Id. at J 30. The Confirmation Order became effective by its terms on

November 27, 2024. /d. at [ 4. On the Effective Date, (i) both the Covington Engagement
Case 24-11217-BLS Doc1146-4 Filed 11/24/25 Page 7 of 14

Letter and Reed Smith’s engagement letter with Vyaire were deemed rejected; (ii) the Plan
Administrator became the sole director, officer, and representative of the Wind-Down Debtors
and was charged with administering the Wind-Down in accordance with the Plan; and (iii) the
Wind-Down Debtor Assets and Retained Causes of Action, including the Insurance Claims,
immediately vested in the Wind-Down Debtors. Id, at { 5. On January 24, 2025, this Court
entered a Final Decree Closing Certain Chapter 11 Cases, leaving Vyaire Medical’s Chapter
11 Case as the only remaining bankruptcy case. Id. at | 7; see also Docket No. 974.

Following the Effective Date of the Plan, the Defendants settled the Insurance Coverage
Action without the assistance of the Law Firms. /d. at [ 8. Subsequently and pursuant to the
Settlement Agreement, the Defendants received the Settlement Proceeds. /d. at | 9. Defendants
retain the Settlement Proceeds in a Wind-Down Debtor account under the control of the Plan
Administrator pursuant to the Plan. See Docket No. 719. Defendants now move pursuant to
Federal Rule of Civil Procedure 12(b)(6), made applicable in this proceeding under Federal
Rule of Bankruptcy Procedure 7012(b), to dismiss Count II [Conversion / Misappropriation of
Funds — Theft of Settlement Proceeds] of the Complaint, for failure to state a claim, with
prejudice.

SUMMARY OF THE ARGUMENT

The Complaint, at Count II, asserts, “Defendants have knowingly and intentionally
exercised dominion or interference over the Settlement Proceeds in derogation of the Law Firms’
rights and interests.” See Complaint at J 55. Count II further alleges that, “[a]s a direct and
proximate result of Defendants’ conversion and misappropriation, the Law Firms have been
deprived of specifically identifiable Settlement Proceeds and have suffered damages in the
amount of their respective shares of those proceeds...” Jd. at] 56. Count II is based upon a false

premise (that the Settlement Proceeds are not the property of the Defendants, in the first place, or
Case 24-11217-BLS Doc1146-4 Filed 11/24/25 Page 8of14

that the unknown, alleged amount of the contingency fee owed to Plaintiffs is an asset that is
fundamentally separable from the Settlement Proceeds) and should be dismissed with prejudice.
Simply, Defendants cannot convert their own property, in this case the Settlement Proceeds.
Plaintiffs allege they are owed “a fee equal to 35% of any recovery resulting from the Dispute,
whether a judgment, settlement or other type of payment or award” and that the “Defendants’
refusal to disclose the settlement agreement or remit the Law Firms’ contractual share constitutes
an intentional interference with and conversion of property to which the Law Firms hold
equitable title under New York law.” See Complaint JJ 20 and 36. Indeed, throughout the
Complaint, Plaintiffs liken themselves to the holders of an equitable interest (lien, mortgage,
whatever term fits the scenario) in real property. But it cannot be said that Defendants have
converted (misappropriated or committed civil theft of) their own property the same way it
cannot stand that the owner of a car is liable, to the holder of their car loan, for conversion, if a
payment is missed. Finally, the Complaint, and specifically, Count II is silent on the timing of
payment of the contingency fee to the Plaintiffs. Indeed, the Plaintiffs have demanded several
things: the Settlement Agreement to which they are not parties, information related to the
Settlement Proceeds that resulted from the Settlement Agreement, and payment despite the fact
they are aware the Defendants have several defenses to the alleged charging liens — not the least
of which is a malpractice claim. However, each of these demands and the Complaint are silent
as to the timing of payments and the length of the alleged interference and deprivation. How
long have the Plaintiffs been deprived of their assets by the Defendants? Based on the allegations

in the Complaint, no one knows.
Case 24-11217-BLS Doc1146-4 Filed 11/24/25 Page 9of14

STATEMENT OF FACTS
Vyaire engaged Covington in April 2020 to represent them in the Insurance Coverage

Action. See Complaint J 1. Reed Smith later joined Covington as co-counsel in the Insurance
Coverage Action. /d. at { 2. More than four (4) years later and prior to a costly and precarious
trial on the Insurance Coverage Action, the Debtors each filed a voluntary petition for relief
under chapter 11 of title 1] of the United States Code, 11 U.S.C. § 101 ef seg. Id. at J 3. The
Debtors obtained the Confirmation Order on November 14, 2024 [Docket No. 745] over the
objection of the Plaintiffs. In this regard, the Confirmation Order provides,

Nothing in Article IX.C or any other provision of the Plan or Confirmation Order

shall affect the attorney’s liens and ownership interests asserted by the Law

Firms...in the claims asserted in the [Insurance Coverage Action] (the “Coverage

Claims”), the related attorney files, and any proceeds resulting from the Coverage

Claims. For the avoidance of doubt, nothing in this Confirmation Order shall be

deemed a finding or determination as to whether any such liens or ownership

interests exists. Both the Law Firms and the Debtors and/or Wind-Down Debtors

reserve all rights and defenses with respect to such claims, liens, and ownership

interests.
See Confirmation Order, J 111. Because the Engagement Letters were rejected by operation of
the confirmation of the Plan and because the Defendants and the Plaintiffs were unable to
negotiate a new engagement letter and contingency fee arrangement for the Insurance Coverage
Action, at the Plan Administrator’s request, the Law Firms moved to withdraw as counsel in the
Insurance Coverage Action in February 2025. See Complaint, I 31. This request to withdraw as
counsel was granted by the New York State Supreme Court in April 2025. Jd. Less than two
months later, counsel for the Plan Administrator settled the Insurance Coverage Action and

caused to be filed a stipulation of discontinuance. /d. at { 31. The Defendants subsequently

received and continue to retain the Settlement Proceeds.
Case 24-11217-BLS Doc1146-4 Filed 11/24/25 Page 10 of 14

STANDARD OF REVIEW

Defendants move to dismiss Count II of the Complaint pursuant to Rule 12(b)(6) of the

Federal Rules of Civil Procedure, made applicable to this case by Rule 7012 of the Federal

Rules of Bankruptcy Procedure. As this Court has previously explained:

With the Supreme Court’s decisions in Bell Atlantic Corp v. Twombly and
Ashcroft v. Iqbal, “pleading standards have shifted from simple notice pleading to
a more heightened form of pleading, requiring a plaintiff to plead more than the
possibility of relief to survive a motion to dismiss.” As a threshold matter,
therefore, “[t]o survive a motion to dismiss, a complaint must contain sufficient
factual matter, accepted as true, to ‘state a claim [for] relief that is plausible on its
face.’” Given this heightened standard, it is insufficient to simply provide
“threadbare recitals of the elements of a cause of action, supported by mere
conclusory statements.” Thus, a complaint “must contain either direct or indirect
allegations respecting all the material elements necessary to sustain recovery
under some viable legal theory.”

In re LMI Legacy Holdings, Inc., No. 13-12098, 2017 WL 1508606, at *3 (Bankr.

D. Del. Apr. 27, 2017) (citations omitted).

I.

ARGUMENT

Count IT should be dismissed because Plaintiffs fail to State a Claim for Relief that
is Plausible on its Face.

Section 475 of the New York Judiciary Law provides:

From the commencement of an action, special or other proceeding in any
court or before any state, municipal or federal department, except a
department of labor, or the service of an answer containing a
counterclaim, or the initiation of any means of alternative dispute
resolution including, but not limited to, mediation or arbitration, or the
provision of services in a settlement negotiation at any stage of the
dispute, the attorney who appears for a party has a lien upon his or her
client's cause of action, claim or counterclaim, which attaches to a verdict,
report, determination, decision, award, settlement, judgment or final order
in his or her client's favor, and the proceeds thereof in whatever hands
they may come; and the lien cannot be affected by any settlement
between the parties before or after judgment, final order or determination.
Case 24-11217-BLS Doc1146-4 Filed 11/24/25 Page 11 of 14

The court upon the petition of the client or attorney may determine and
enforce the lien.

See N.Y. Judiciary Law § 475. It is plain from the language of section 475 that the attorney's lien
attaches “[f]rom the commencement” of the relevant action. Jn re Rivera, No. 18-11855 (MEW),
2020 WL 5047422, at *4—-5 (Bankr. S.D.N.Y. Aug. 26, 2020); see also In re E.C. Ernst, Inc., 4
B.R. 317, 320 (Bankr. S.D.N.Y. 1980) (the lien attaches by operation of law to the cause of
action when commenced and to the judgment or final order when it is rendered). The statute also
states explicitly that the lien attaches to the cause of action itself and to the proceeds thereof, “in
whatever hands they may come.” /d.

A retained attorney often is replaced by other counsel, but under New York law that
replacement does not terminate the original attorney's lien under section 475. /d. Instead, the
original attorney retains a lien for the “reasonable value” of the services that the attorney
provided. Ellis, 193 Misc. 956, 85 N.Y.S.2d 398; Kodenski, 5 Misc.2d 809, 161 N.Y.S.2d 301;
Grossgold, 7 Misc.2d 922, 167 N.Y.S.2d 72; Paulsen v Halpin, 74 A.D.2d 990, 427 N.Y.S.2d
333, 335 (4th Dep't 1980). That “reasonable value” may represent a percentage recovery (to be
determined after the conclusion of the litigation), but it does not have to be the original
contractual percentage. Paolillo v. Am. Exp. Isbrandtsen Lines, Inc., 305 F. Supp. 250 (S.D.NLY.
1969); Antaya v. Majett, 12 Misc. 2d 585, 177 N.Y.S.2d 242 (1958). In the absence of an
agreement on a percentage recovery the former attorney retains a charging lien, and the value of
services may be determined by the Court at the conclusion of the case. /d. The relevant factors to
consider “include the difficulty of the matter, the nature and extent of the services rendered, the
time reasonably expended on those services, the quality of performance by counsel, the
qualifications of counsel, the amount at issue, and the results obtained (to the extent known).” Id.

(citing In re Emanuel, 422 B.R. 443, 449 (Bankr. S.D.N.Y. 2009), aff'd sub nom, Heller v.
Case 24-11217-BLS Doc1146-4 Filed 11/24/25 Page 12 of 14

Emanuel (In re Emanuel), 450 B.R. 1 (S.D.N.Y. 2011), affd 460 F. App'x 48 (2d Cir. 2012),
cert. denied, 568 U.S. 816, 133 S. Ct. 131, 184 L-.Ed.2d 28 (2012)). At best, therefore, Plaintiffs
have a lien on the property of the Defendants (the Settlement Proceeds) in an undetermined
amount that will later be found by the Court. Defendants, if you believe the Plaintiffs’ claims,
therefore took possession of the Settlement Proceeds subject to the Defendants’ alleged charging
lien. The Plaintiffs’ cases describing a charging lien indicate Plaintiffs could have a “vested
ownership interest” in the Settlement Proceeds unless they were discharged for cause. This
situation is akin to a lien or judgment on real property in a specific amount. The real property
owner holds the real property subject to that lien or judgment, payable upon sale or dissolution,
but cannot be said to have converted the lienholder’s interest (or property) simply by possessing
(and not selling) the subject real property to which it holds title.

A conversion (or civil theft), on the other hand, takes place when someone, intentionally
and without authority, assumes or exercises control over personal property belonging to
someone else, interfering with that person’s right of possession (emphasis added). Colavito v.
New York Organ Donor Network, Inc. 8 N.Y. 3d 43, 49-50 (2006). In order to succeed on a
cause of action to recover damages for conversion, a plaintiff must show (1) legal ownership or
an immediate right of possession to a specific identifiable thing and (2) that the defendant
exercised an unauthorized dominion over the thing in question to the exclusion of the plaintiff's
right. Giardini v. Settanni, 159 A.D.3d 874, 875, 70 N.Y.S.3d 57, 58 (2018)(see Mackey Reed
Elec., Inc. v. Morrone & Assoc., P.C., 125 A.D.3d 822, 824, 6 N.Y.S.3d 65; Zendler Const. Co.,
Inc. v. First Adj. Group, Inc., 59 A.D.3d 439, 873 N.¥.S.2d 134). Importantly, Defendants had
the authority to settle the Insurance Coverage Action and the authority to receive and retain the

Settlement Proceeds until such time as their defenses to the alleged charging liens are heard by

10
Case 24-11217-BLS Doc1146-4 Filed 11/24/25 Page 13 of 14

the appropriate trier of fact. To be clear, there is no dispute that the Defendant owned the cause
of action and owns the Settlement Proceeds. Without a claim to ownership or unrestricted
possession, the conversion claim fails as a matter of law.

Generally, conversion requires a more active interference with property than a simple
failure to pay an alleged debt. Similarly, a conversion claim cannot be predicated upon a mere
breach of contract for failure to pay for services rendered. Yeterian v. Heather Mills N.V. Inc.,
183 A.D.2d 493, 494, 583 N.Y.S.2d 439, 440 (1992) (An action for conversion cannot be
predicated on a mere breach of contract, plaintiff's conversion claim was properly dismissed
because it merely restates the cause of action for breach of contract and alleges no independent
facts sufficient to give rise to tort liability.) citing (Peters Griffin Woodward, Inc. v. WCSC, Inc.,
88 A.D.2d 883, 452 N.Y.S.2d 599)).

Here, Plaintiffs have not demonstrated an immediate right to ownership to the exclusion
of the Defendants. Indeed, throughout the Complaint, Plaintiffs claim Defendants are the owners
of the Settlement Proceeds subject to their charging lien. Because Defendants cannot convert
their own property, have not disposed of the Settlement Proceeds, and have not otherwise taken
anything from or deprived the Plaintiffs of a future payment, a cause of action based in
conversion, civil theft, or misappropriation cannot stand and should be dismissed with prejudice.
Defendants maintain several defenses to the alleged charging lien, not the least of which is a
malpractice claim against the Law Firms. Because these defenses have not yet been raised or
decided, it simply cannot be said that the Defendants are depriving the Plaintiffs of an interest in

the Settlement Proceeds.

11
Case 24-11217-BLS Doc1146-4 Filed 11/24/25 Page 14 of 14

CONCLUSION

For the reasons and arguments stated herein, Defendants respectfully requests that the

Court dismiss Count II of the Plaintiffs’ Complaint with prejudice.

Dated: November, 2025
Wilmington, Delaware

CIARDI CIARDI & ASTIN

/s/ John D. McLaughlin, Jr.

John D. McLaughlin, Jr.

No. 4123

Ciardi Ciardi & Astin

1204 N. King Street

Wilmington, DE 19801

Telephone: 484-437-2676

Email: jmclaughlin@ciardilaw.com

-and-

Albert A. Ciardi, III, Esquire
1905 Spruce Street
Philadelphia, PA 19103

(215) 557-3550 telephone
Email: aciardi@ciardilaw.com
Counsel to Defendants

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