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With Settlement Deadline Looming, Will Dewey Case Break Law Firm Bankruptcy Mold?


When former Heller Ehrman shareholder Nancy Sher Cohen thinks back on what it was like to live through the aftermath of that firm’s 2008 collapse, the memories aren’t pleasant. And one of the most difficult things about that period, she says, was the pressure she felt from those overseeing her former firm’s bankruptcy to make what seemed like a no-win choice: repay the Heller estate money she felt she had rightfully earned in order to satisfy creditors or face the threat of litigation that could drag on for years.

“It is a pretty darned awful experience,” says Cohen, who is now a partner at Proskauer Rose in Los Angeles.

Some 700 former Dewey LeBoeuf partners facing a similar choice presumably know how she feels. They must decide by Tuesday whether to opt in to a proposed $90.4 million settlement plan that requires them to pay the Dewey estate between $5,000 and $3.5 million apiece to offset excess compensation they received in 2011 and 2012, as well as additional money related to tax advances and unpaid capital contributions. Those who sign on to the so-called partner contribution plan must also agree not to sue anyone connected to Dewey. Partners who agree to participate will receive a waiver from all liability related to the firm.  

When Dewey advisers first unveiled the plan on July 11, they drew sharp criticism for, among other things, failing to demand more from the firm’s former leaders. Hoping to overcome that resistance, the estate presented a revised proposal two weeks later that asks former executive committee members to pay a premium and lessens the burden on retirees and junior partners. Those working to pay off Dewey’s creditors, who are owed more than $225 million in secured claims alone, have stressed that if a quick settlement isn’t reached, the case could wind up in the hands of a trustee and become much more litigious.

Cohen, who ultimately went along with the Heller settlement rather than risk being sued, says that even though the Dewey partners may be having a hard time agreeing to contribute to a plan with which they disagree, the alternative is not much more appealing. “My heart goes out to those Dewey people,” she says. “They are trying to find a solution to this problem that will not drag them through the mud for years to come. … And that’s a worthy thought.”

If Dewey’s advisers persuade the requisite number of partners to settle with the estate quickly—$50 million has been identified as the minimum sum that needs to be raised for creditors to even consider accepting the plan—it would represent a first in a law firm bankruptcy: a tidy unwinding. A review of what happened in the wake of a half-dozen other major law firm failures—from Finley Kumble’s 1987 flameout to Howrey‘s dissolution in 2011—shows that prolonged, acrimonious fights over how much partners owe their former firms are more typical. 

And while the speed and scope of Dewey’s settlement plan are unique, the underlying principle has been applied many times before. Bankrupt law firm estates typically ask that former partners return money received in a variety of forms, including: profits distributed after a law firm becomes insolvent (which would constitute a fraudulent transfer); loans extended to partners (including advances used to make tax payments); and the payment of any unpaid capital. (Apart from the claims pursued against former partners directly, bankrupt law firms also spend years pursuing so-called Jewel v. Boxer claims seeking the return of money related to business taken by partners to other firms.)

If a sufficient number of Dewey partners, some of whom have continued to express doubts about the plan even since it was revised, fail to sign on by Tuesday, lead Dewey bankruptcy lawyer Al Togut’s hope that this law firm bankruptcy will be “different”—a sentiment he has voiced at nearly every Dewey meeting and hearing since the firm’s filed for bankruptcy May 28—may go unfulfilled. Contacted Friday about what kind of support the plan has garnered so far, Togut and chief restructuring officer Joff Mitchell declined to comment through a spokeswoman.

Togut—who was involved in two of the most notable law firm collapses in modern history, Finley Kumble’s and the 1994 collapse of Shea Gould—knows firsthand how long such cases can linger. 
In the case of Finley Kumble, 10 former partners were still embroiled in litigation with the estate a decade after the firm filed for bankruptcy. As for Shea Gould, news reports show it took four years for 141 former firm partners to agree to a settlement plan that paid the firm’s estate $5.4 million. At the time, the firm’s advisers were still pursuing a total of $600,000 from nine former partners who refused to cooperate. 

About a decade after Shea Gould’s death, San Francisco–based Brobeck, Phleger Harrison dissolved in February 2003, ultimately liquidating via Chapter 7. In November 2004, the trustee in the case, Ronald Greenspan, presented a plan calling for 223 former partners to contribute to the estate. When the proposal failed to yield much in the way of a response by January 2005, Greenspan began filing suits aimed at recovering $275 million paid to Brobeck partners in 2001 and 2002—a period during which, it turned out, the firm was already insolvent. (In something of a twist, former Dewey partner Bennett Murphy, who has not yet joined a new firm, represented Greenspan in the matter for a time).

By now, settlements with nearly 200 of those partners have added about $24 million to the Brobeck estate’s coffers. In one high-profile example of a former partner balking at Greenspan’s plan, former Brobeck chairman Tower Snow fought the trustee in court. The estate was seeking $2.7 million from Snow, the largest sum asked of any former partner. Snow and the estate settled the dispute in 2006. Though the terms were confidential, Greenspan wrote in court filings that Snow was offered a “discount” to encourage him to end the spat.

Coudert Brothers, which was considered one of the first international law firms, was the next large firm to fail, filing for Chapter 11 protection in September 2006. In a 50-page memorandum filed with the bankruptcy court about a year and a half later, restructuring adviser Goldin Associates laid out the factors at play in its plan to collect $11.8 million from 265 former partners. Within a few months, it had settled with about 80 percent of the partners in conjunction with a broader dissolution plan. (Goldin is also working on the Dewey settlement proposal. But while it took the firm a more than a year to craft what it considered the perfect formula in the Coudert case, it took just a matter of weeks to put together the first version of the Dewey plan. )

For the Coudert plan to succeed, a large number of partners in other countries had to agree to opt in, recalls Thomas Brislin, a former Coudert partner and executive committee member who now works in the finance industry. “I was called by a pretty good number of partners outside the U.S. [for advice],” he says. “I did recommend they all do it.”

The two large law firms that followed Coudert into bankruptcy did so in the depths of the so-called Great Recession: Heller Ehrman and Thelen, which dissolved in October 2008 and voluntarily entered Chapter 7 in September 2009. 

Heller began pursuing former partners in earnest in 2009, holding mediation sessions to go over the proposed clawback plan. Updating the court on the proceedings in May 2010, Heller advisers noted that “vigorous opposition” to the plan was expected. The settlement model had evolved, Heller’s lawyers wrote at the time, to “a conservative approach intended to give former Shareholders an incentive to settle now or soon in order to avoid burdensome and costly litigation.”

Thomas Willoughby, a Sacramento bankruptcy attorney who represents the unsecured creditors in the case and was the driving force behind the settlement, says the sums being sought by the estate included $9.5 million in what were described as excess profits, as well as money tied to loans given to partners and additional profits the estate deemed above and beyond what each lawyer should have earned.

Four years after the firm went under, the Heller estate has collected some $15 million from former shareholders, according to Willoughby. Meanwhile, a handful of Heller shareholders are still fighting the settlement.

Pat Gillette, a former Heller shareholder who is now a partner at Orrick, Herrington Sutcliffe, says she believes she and her colleagues from the defunct firm should have fought harder—and that Dewey partners should not be scared to do so.

“You ended up being out there on your own if you were going to litigate,” say Gillette, who did not end up litigating with the estate. She says she wondered, “Why aren’t we fighting? Why are we rolling over? … It was aggravating.”

In the case of Thelen, 250 of the firm’s former partners were targeted. So far, $6.17 million has been pulled in via settlements with 130 former partners; the holdouts are involved in either settlement talks or litigation. According to court filings, the amounts collected from former partners are between 39 percent and 73.5 percent of what the estate hoped to bring in.  

Former partners from Howrey, the most recent large law firm to fold prior to Dewey’s collapse, have so far not been asked to repay money to the firm’s estate. They won’t be spared for long, however. Howrey trustee Allan Diamond said in a recent interview that he will pursue former partners for excess compensation they received, but isn’t ready to do so yet.

Even if enough Dewey partners agree to the settlement, the plan still has to pass muster with creditors. Willoughy, Heller’s unsecured creditor counsel, says the lack of what he calls a key figure—the amount of over distribution given to partners—doesn’t appear to be part of the equation in the Dewey settlement, which could provide a hold up. On its face, Willoughy says he suspects the amount being asked is far below the amount overpaid to Dewey partners.

“The question is really: Is it going to be such a big number sitting by itself that even if it’s a small percentage of over distribution and profits, everybody will say, ‘Let’s just do it,’?” Willoughy says. “There’s a momentum just in the number.”

Related Stories:

Revised Dewey Partner Contribution Plan Would Take Bigger Bite from Former Firm Leaders, July 26, 2012

Proposed Settlement with Dewey Partners on Hold, July 19, 2012

In Early Reviews, Former Dewey Partners Pan Settlement Plan with Mix of Skepticism and Anger, July 12, 2012

Ex-Dewey Partners’ Price Tag for Settling All Future Claims: $103.6 Million, July 11, 2012

 

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