By Nate Raymond

NEW YORK, Nov 29 (Reuters) - A U.S. bankruptcy judge on Thursday gave Dewey & LeBoeuf's creditors the authority to sue three former top executives at the fallen law firm, including former chairman Steven Davis.

The ruling, issued by U.S. Bankruptcy Judge Martin Glenn in Manhattan, followed a hearing earlier in the day. It will allow the creditors to pursue damages from the executives for allegedly breaching their fiduciary duties prior to Dewey's failure in May.

The former executives include Davis, former executive director Stephen DiCarmine and former chief financial officer Joel Sanders.

A hearing on the confirmation of the liquidation plan is scheduled for February. Once the plan is approved, a litigation trust would take charge of any lawsuits or settlements, said Edward Weisfelner of Brown Rudnick, the lawyer representing the unsecured creditors.

In the meantime, the creditors committee would act as a "place holder" for the litigation trust, said Weisfelner.

But how much the creditors could recover in litigation is uncertain. Insurers are disputing coverage under Dewey's $50 million management liability policies to the trio, said Ned Bassen, a Hughes Hubbard & Reed lawyer for DiCarmine and Sanders.

The executives contend that the creditors' potential claims would be covered by the policies. But according to Bassen, the insurers disagree, saying the policies contain an exclusion provision that prevents payment in cases where the insured, Dewey, sues the insured, the executives.

Given the insurers stance, Bassen in court papers objecting to the creditors' request questioned if it was in the best interest of the estate to pursue a lawsuit against the executives.

Without the insurance policies, any recovery would likely come from the assets of Davis, DiCarmine and Sanders.

"It seems to be in everybody's interest except for the insurance companies for there to be coverage," Bassen said Thursday.

SEEKING TO RECOUP CLAIMS

Dewey & LeBoeuf in May became the largest law firm in U.S. history to file for Chapter 11. Since the collapse, the firm's estate and creditors have been working to recoup money for secured and unsecured creditors who have an estimated $700 million in claims.

In October, Glenn approved a $71.5 million settlement in which 400 partners agreed to return between $3,000 and $3.5 million each in exchange for being released from further claims.

The settlement excluded Davis, who was also a partner, and DiCarmine and Sanders, who were not, leaving them open to litigation.

On Nov. 12, the creditors committee, with the support of the Dewey estate, sought an order allowing it to bring lawsuits and settle claims against the three individuals.

The committee said the executives "breached their fiduciary duties of care, loyalty and candor by recklessly doling out individual partner contracts that guaranteed compensation without regard to future performance."

In court documents, Davis, DiCarmine and Sanders disputed the charges and said they acted responsibility while heading up Dewey.

Glenn acknowledged that the exclusion provision of the insurance policies was "important" but in his written decision said questions surrounding it could not immediately be resolved and, in any event, would not be "determinative."

"The three proposed defendants all appear to be solvent potential defendants; in the event litigation of the claims results in a settlement of judgment, a substantial recovery is possible whether or not insurance coverage is available," Glenn wrote.

Representatives for the insurance companies -- XL Insurance, OneBeacon Insurance Group and Iron-Starr Excess -- either didn't respond to requests for comment or declined comment.

Bassen in an email following the decision noted that the judge in the opinion signaled that the creditors committee's allegations "would likely be paid from the $50 million insurance policies."

Paul Basta, a lawyer for Davis at Kirkland & Ellis, did not respond to a request for comment.

A spokeswoman for Dewey's advisors at restructuring firm Zolfo Cooper declined to comment.

The case is In re Dewey & LeBoeuf, U.S. Bankruptcy Court, Southern District of New York, No. 12-12321.

For Dewey: Al Togut of Togut Segal & Segal.

For Unsecured Creditors Committee: Edward Weisfelner of Brown Rudnick

For Stephen DiCarmine and Joseph Sanders: Ned Bassen, Hughes Hubbard & Reed

For Steven Davis: Kevin Van Wart, Kirkland & Ellis

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