How American Sniper’s Death Caused a Headache for a Texas Hedge Fund...

Hedge fund manager J. Kyle Bass never thought his friendship with American Sniper Chris Kyle would lead to a nasty legal battle with Mr. Kyle’s widow nearly three years after the former Navy SEAL was killed on a Texas gun range.

Mr. Bass became close friends with Mr. Kyle, who claimed to be the deadliest sniper in U.S. military history, and helped him open a law enforcement-training business after he left the military. But his effort to help Mr. Kyle has ended badly: the business is bankrupt, a host of A-list investors are out of the money and Mr. Kyle’s widow, Taya, is accusing the top lawyer at Mr. Bass’s firm of trying to trick the family with bad legal advice.

Mr. Bass, who made a fortune shorting subprime mortgage bonds, turned to the Navy SEAL community in search of a workout to get him back in shape. Soon, he was calling on Mr. Kyle and other SEALs to do exhibition shoots at his annual economic summit, letting them blow stuff up at his ranch in front of his Wall Street buddies.

Mr. Bass let the Kyle family stay at his North Dallas estate while they looked for homes in 2010, and he gave Mr. Kyle rent-free space in his investment firm’s headquarters to start a business that would instruct police officers, SWAT teams and the military on crisis situations.

“You could tell he was dealing with inner demons. He drew you in. You wanted to help him,” Mr. Bass told The New Yorker magazine in 2013. (He declined to comment on this story.)

Mr. Bass also rounded up a group of Dallas A-listers—among them former Cowboy great Roger Staubach, ex-Texas Rangers owner Tom Hicks’s son and a bunch of other famous people listed here—to invest in the business. Those investors will probably take over ownership of the company, which filed for bankruptcy in May, instead of being repaid as originally planned.

Mr. Kyle’s widow is suing the top lawyer at Mr. Bass’s $2.3 billion hedge-fund firm, who gave free legal advice to the Kyle family.

That lawyer, Christopher Kirkpatrick, was also an investor in Mr. Kyle’s business and, thus, could profit from Mr. Kyle’s faulty business decisions, according to the suit.

Ms. Kyle says, for example, her husband was nudged to give up his rights to his business’s iconic skull-shaped logo. The logo could become even more valuable once the “American Sniper” movie, starring Bradley Cooper, hits theaters in December.

The suit also claims Mr. Kirkpatrick “never fully explained his conflict of interest” to the Kyle family—a violation of Texas’s professional code of conduct for lawyers.

But lawyers for Mr. Kirkpatrick said in court papers that he “always made it clear to Mr. Kyle that his ultimately professional loyalty was (and would always remain) to his employer – Mr. Bass’ entities.”

Mr. Bass and Ms. Kyle also disagree over whether the family need to repay a loan on their Midlothian home, which is owed to Mr. Bass’s firm. The firm put up the cash when a bank wouldn’t, according to court papers. Ms. Kyle’s lawyers say she stopped paying back the loan because Mr. Bass promised to cancel the debt after her husband’s death.

Finally, the two are at odds over the profits from Mr. Kyle’s 2012 autobiography, which became a bestseller. Lawyers on Mr. Bass’s side say the profits were supposed to be donated to other military families, while Ms. Kyle’s lawyers say she and her kids were supposed to get the money in the event of Mr. Kyle’s death.

Write to Katy Stech at [email protected]. Follow her on Twitter at @KatyStech.