May 30 (Reuters) - As law firm Dewey & LeBoeuf embarks on
the humbling process of working through bankruptcy, creditors
and former partners are bracing themselves for a nasty court
battle that could drag on for years.
Dewey, a storied firm with deep Wall Street connections,
filed for Chapter 11 protection on Monday night. The firm had
veered toward collapse over the last six months amid revelations
of fat salary guarantees, risky loans and a culture of secrecy.
Some former partners have hired lawyers in anticipation of
clawback suits by the estate. Law firms that offered positions
to former partners could also get embroiled in fights over
rights to client fees. Creditors ranging from banks to temp
services have started jockeying for position to maximize limited
Some contentiousness was on display at a bankruptcy hearing
in Manhattan on Tuesday. Lenders were especially aggressive,
asking the judge to approve a lien on certain litigation
proceeds in exchange for letting Dewey fund its bankruptcy with
money owed to the lenders. Judge Martin Glenn denied that
request as unreasonable, at least in the interim, saying he
would prefer to wait to make his decision until an official
committee of unsecured creditors was in place.
There also appeared to be communications issues during the
hearing. Albert Togut, Dewey's bankruptcy attorney, announced
that the firm was "close" to a settlement framework. But he was
contradicted by Mark Zauderer, an attorney representing a group
of ex-Dewey lawyers, who said settlement talks were only
WHEN ASSETS WALK AWAY
In a typical Chapter 11, a corporation uses its existing
assets to continue generating revenue to fund a reorganization.
The theme park Six Flags, for example, continued to sell tickets
while in Chapter 11 in 2009. The company also had tangible
assets -- the theme-park rides themselves, real estate,
merchandise -- which could have been sold off to raise money for
creditors had it been necessary.
Dewey has different kinds of assets: Its lawyers and their
books of business, or clients. Once the lawyers walked away --
by now nearly all of its 300 partners have left the firm - the
company had little means to produce revenue.
"Our assets went home every night," Togut said, "until one
night, they went home and never came back."
According to bankruptcy filings, all that is left of Dewey's
once-robust operations are accounts receivable of about $255
million, about $13 million in cash, various pieces of artwork of
unknown value, and about $11 million invested in an insurance
How effective Dewey will be in getting clients to pay those
accounts is unclear, especially since the incentive of an
ongoing client-firm relationship has disappeared. "You find
reasons not to pay," said Jonathan Landers of Jager Smith, who
represented Citigroup Inc in prior law firm collapses.
CREDITORS, GET IN LINE
As of now, Dewey & LeBoeuf effectively exists to service its
creditors, whose place in line to collect will be determined by
a number of factors, including whether the debts were secured or
not, and the vagaries of bankruptcy and employment law.
Typically, secured creditors get first dibs under federal
bankruptcy statutes. In the Dewey proceeding, those include
Dewey's lenders and bondholders. JPMorgan Chase & Co and
a group of lenders had a tab of $76.5 million under a secured
credit agreement, according to bankruptcy filings. A group of
investors who bought privately placed bond notes that Dewey
issued in April 2010, meanwhile, are owed $150 million,
according to court papers.
Next in line come employees who were terminated in the
period prior to the bankruptcy. Under U.S. law, these people
have priority status, ahead of other unsecured creditors.
Then the other unsecured creditors get their shot. Among
these the U.S. Pension Benefit Guaranty Corporation has asserted
the largest claim. The PBGC sued Dewey earlier this month to
seize three pension funds it said were underfunded by $80
million. Dewey's New York landlord, Paramount Group, claims to
be owed $3.78 million for a lease at Dewey's Manhattan
headquarters on Avenue of the Americas.
Other unsecured creditors include HireCounsel, a staffing
firm that put in a claim for $1.56 million, and HBR Consulting
LLC, a legal consulting firm that claims about $656,700. Thomson
Reuters, the parent of legal research company Westlaw as well as
Reuters, entered a claim for $2.36 million, and rival Reed
Elsevier's Lexis-Nexis said it is owed $1.41 million.
A spokesman for PBGC said the pension fund is continuing
efforts to take over the pension plans. Representatives for
Paramount group, HireCounsel, HBR Consulting and Thomson Reuters
Corp did not return calls for comment. A representative for Reed
Elsevier declined to comment.
The last group to recover money would likely be the former
partners themselves. The firm, like most of its contemporaries,
required members to make a capital investment at the time of
partnership. Dewey's fund as of Monday stood at $52.4 million.
It is far from clear whether there will be money left in that
fund for ex-partners. What's more, some of them could be
vulnerable to clawbacks that would offset any money they are
Former partners have said privately for weeks that they've
anticipated both bringing claims and being sued. Tracy Klestadt,
who represents about 20 ex-Dewey partners, said he expected the
estate would consider filing claims against all of Dewey's
Already one former Dewey partner, James Woods, has initiated
arbitration before the New York City Bar Association for
compensation he's owed, according to bankruptcy filings. Woods,
now with Mayer Brown, did not respond to requests for comment.
While Dewey's bankruptcy attorney Togut said Tuesday that
Dewey was nearing a settlement with former partners, it is
unclear how many would participate. "I just heard it for the
first time in court," said Klestadt.
GOING AFTER THE FIRMS
The firms that poached the former Dewey partners could also
be vulnerable to litigation by the Dewey estate.
When partners leave one firm for another they typically take
their clients along. In some past law-firm bankruptcies the
trustee for the bankrupt firm claimed that at least some of the
fees generated by those clients belonged to the estate.
Just last week a U.S. district court judge in Manhattan
ruled that revenues generated by former Coudert Brothers lawyers
on cases they took with them after that firm dissolved in 2006
belong to Coudert's bankruptcy estate.
That ruling could pave the way for the Dewey estate to
pursue its former partners' new employers to collect on the
profits of the so-called unfinished business. Among the firms
that recruited the most Dewey & LeBoeuf partners are Morgan
Lewis & Bockius; DLA Piper; Willkie Farr & Gallagher; Proskauer
Rose; and Sutherland Asbill & Brennan.
Spokespeople for Willkie, DLA, Morgan Lewis and Sutherland
declined comment, while a representative for Proskauer had no
Until fairly recently, liquidations like Dewey's usually
were pursued under Chapter 7 of the bankruptcy code. Chapter 7
puts a debtor's estate under the control of a trustee tasked
with selling assets quickly and using the proceeds to pay off
Dewey, though, has chosen to file under Chapter 11, which
provides for a more cooperative, deliberative process. Debtors
typically prefer Chapter 11 because it lets them remain in
control of their estate, usually without interference from a
Creditors often prefer Chapter 11 as well, because it allows
them to form official committees paid for by the estate, gives
them access to operating reports, and lets them exercise more
control over how the debtor liquidates and how their bankruptcy
claims are treated.
Given the sheer volume of competing interests and
unresolved issues in the Dewey case, the unwinding could be slow
going. According to Dewey's bankruptcy attorney Togut, about 90
firm employees are working to conclude the process.
"We're ready to work to maximize recoveries ... and not have
this case deteriorate into chaos," Togut said.
The bankruptcy is In re Dewey & LeBoeuf LLP, U.S. Bankruptcy
Court, Southern District of New York, No. 12-12321.
(Reporting by Nate Raymond and Nick Brown)
Follow us on Twitter @ReutersLegal | Like us on Facebook