Dewey & LeBoeuf update - possible settlement with Ex- Partners in the works ?

http://abovethelaw.com/2012/06/dewey-have-good-prospects-for-a-speedy-settlement-with-former-partners/#more-168451

• 20 Jun 2012 at 3:06 PM
• BANKRUPTCY, BIGLAW, DEWEY & LEBOEUF, DISSOLUTION, JPMORGAN CHASE,MONEY, PARTNER ISSUES, S.D.N.Y., VICIOUS INFIGHTING

Dewey Have Good Prospects for a Speedy Settlement With Former Partners?

By DAVID LAT

Clean-up efforts are underway at Dewey & LeBoeuf— and we’re not talking about the work of the janitors (at least not the ones who were allegedly stiffed on $300,000). Rather, we’re talking about the work being done by Dewey as debtor, aided by itshigh-priced advisory team, to put its affairs in order and to maximize the recovery for its creditors.

One of the biggest messes: how to deal with the firm’s hundreds of former partners. Dewey’s lead lawyer, Albert Togut of Togut Segal & Segal, has already made clear his plans to seek some funds from them.

In a conference call yesterday afternoon, Dewey’s bankruptcy advisers informed ex-partners about the contours of a possible global settlement….

The call lasted about 90 minutes and was open to former partners and their lawyers, according to Am Law Daily. Participants included Dewey’s two remaining partners, general counsel Janis Meyer and executive partner Stephen Horvath III; its chief restructuring officer, Joff Mitchell of Zolfo Cooper; and, of course, Al Togut.

Here’s a report on the call from the WSJ Law Blog:

Ex-partners from around the globe were briefed on the settlement’s progress during an hour-and-a-half conference call Tuesday afternoon with Dewey’s bankruptcy advisors and the two partners overseeing the dismantling of the firm. The swift timetable is intended to secure an agreement before the end of July, when a six-week plan to fund the bankruptcy process using lenders’ cash collateral expires, according to two ex-partners who participated in the call….

Partners who agree to the settlement may be released from future claims by Dewey’s estate and creditors, and also from claims against them by other partners, those ex-partners said. The latter provision is intended to secure participation from some of the firm’s top earners, the former partners said. Many of Dewey’s most prominent partners had lucrative pay guarantees or held leadership positions that could open them up to lawsuits from partners who blame them for the firm’s demise.

E.g., the lawsuit filed in California state court by IP litigator Henry Bunsow.

Such a deal sounds reasonable in principle. Both the Dewey estate and former D&L partners would benefit from a speedy and certain resolution, as opposed to a long, drawn-out, and expensive battle in court (which is what we’ve often seen in prior law firm bankruptcies). As one of our sources noted:

[Potential clawback claims against ex-partners] could potentially go back in time for several years of distributions. These will be scary numbers for any equity partner, and [raising them] begins the process of acculturating the partners to why it makes sense to make a deal now rather than fight. This first step would not be unlike forcing all the partners to watch gory films of traffic accidents for hours on end as part of the driver training program.

So some partners might want to strike a deal to avoid the flaming wreckage of Dewey — to pay up, walk away, and get on with their lives. But as they say, the devil is in the details — and there are a lot of messy details here that have not yet been worked out. As one former partner told the WSJ, “There were a lot of angry people on the phone. People felt that they should ask for higher contributions from the more highly-compensated people.”

What factors might go into the calculus in deciding how much partners should pay? Togut previously mentioned unfinished business the partners took with them to their new firms and how much they received in compensation before Dewey went under.

Of course, there are some catches, as noted by Am Law. For example, a critical mass of partners would have to agree to the plan in order for it to take effect. And, in a move that should shock no one, former chairman Steven Davis — whom some blame for driving the firm into the ground — will not be allowed to participate.

Can enough partners be convinced to participate in such a deal? Let’s discuss — and also consider whether former associates might get dragged into the mess….

A knowledgeable observer shared these thoughts with us:

It is easy to see why [a global settlement] would be highly attractive to the prominent partners. The real question is whether they will throw enough money into the pot to let those more junior and uninformed/non-management participating partners willing to go along with it. What leverages and pressures will there be against the junior partners to convince them to let the upper tier escape in the absence of a “fair” contribution? Could it be capital loans that have to be repaid to the lenders personally? Will the lenders cut a deal with those partners to ameliorate that personal exposure? Remember, these deals are separate and apart from the working line of credit and bond issuances, but they are inextricably linked to the overall capital structure of the firm and its failure.

That’s what is taking place on the partner front. Do other folks who had financial dealings with the pre-bankruptcy Dewey & LeBoeuf have anything to worry about? One reader sent these thoughts our way:

Team Togut has been handling the Saint Vincent’s Hospital bankruptcy. Just prior to the two-year filing deadline, Team Togut filed hundreds of preference complaints against the doctors who chose to stay with St. Vincent’s to the end rather than abandon ship. I can’t speak for all, but if the complaint they filed against the doctor who came to talk to me about it is any indication, the preference actions were mostly bulls**t, seeking payments that were obviously made in the ordinary course of business. Team Togut knows this, and it also knows that all the doctors would settle for a few thousand dollars rather than hire a lawyer to establish the defense to the preference action. I guess we want to encourage doctors to flee financially troubled hospitals.

Point is, the drawback actions won’t necessarily be limited to partners. Dewey associates have to worry about drawbacks? Maybe.

We shall see. Of course, dealing with former partners (and associates) isn’t the only Dewey mess requiring remediation. An ATL reader pointed out:

What happens with issues of SEC investigations regarding the bond offerings, PBGC investigations with funding of the defined plans, possible individual liability with unfunded 401k plans for which contributions were withheld, and DA investigations with respect to criminal transgressions? These are probably all outside the capability of resolution in this plan. But one can only do what one can do….

A more difficult reflection here is…. would this “solution” as it is headed be the best for the profession, the “have not” junior partners, and the creditors? Or does it set a poor precedent for responsible leadership and management of law firms by allowing the upper tier to drive the firm hard and fast into the wall, and on balance walk away with a lot of money in their pockets at the expense of junior partners, associates, staff, creditors, landlords, the PBGC, etc.? We will have to see what the terms proferred may be, and what issues are avoided to learn that answer, if a settlement is reached. If a settlement plan is not reached, we will learn a lot from that as well.

Dewey have a lot of fodder for reflections on law firm (mis)management? Most definitely.

P.S. For a collection of interesting articles raising related issues about law firm management, check out JD Supra.