By Jennifer Smith
- Reuters
Lawyers for failed law firm Dewey & LeBoeuf LLP and its many creditors took a spin down memory lane this week, revisiting the firm’s turbulent last six months in a hearing over a proposed $ 71.5 million settlement with ex-partners.
At issue: whether a federal bankruptcy judge should approve the “clawback” plan, which would grant some 440 participants immunity from future lawsuits in exchange for a portion of their 2011 and 2012 earnings. The settlement represents about 17% of the roughly $ 400 million those partners got in compensation or other benefits during that time, as the firm headed toward bankruptcy.
On Friday witnesses who helped devise the plan said they thought the firm could likely have been declared insolvent at the end of 2011. Asked by Dewey’s bankruptcy lawyers why they didn’t attempt to get more money from the partners—well, it turns out, they thought there wasn’t much more to get.
“The majority of these partners were not necessarily highly compensated,” said Joff Mitchell, Dewey’s chief restructuring officer and a senior managing partner at Zolfo Cooper LLC. “There were 200 retirees in the group…. Many [lawyers] were relatively early in their careers, they had mortgages, and significant capital loans. Even if we felt that we could succeed for a claim for $ 400 million, we didn’t believe there was $ 400 million there to claw back.”
Lawyers for two groups of former partners, many of them retirees who say they are owed tens of millions in promised pension benefits, object to the $ 71.5 million settlement. They call it a cheap deal (“20 cents on the dollar,” at best) that doesn’t maximize the value of the estate and was designed at the behest of Dewey insiders. Those groups want the court to appoint an independent examiner to investigate potential tort claims against partners, including any role in the firm’s demise, and also to determine when the firm became insolvent—a date they believe could go as far back as 2009.
But Dewey’s bankruptcy advisers say the plan is the best, and most cost-efficient, way to settle up quickly and avoid a quagmire of future litigation.
It also has the backing of Dewey’s secured lenders, who are funding the Chapter 11 proceedings, and of its unsecured creditors. Those groups have agreed to share any proceeds of the settlement, which at this point represents the largest single recovery they are likely to get.
Dewey’s estate owes about $ 260 million to its secured lenders, who are first in line to get paid back. The firm also faces hundreds of millions more in claims submitted by the unsecured group, which includes federal pension regulators, landlords and trade creditors. They typically only get paid after the secured lenders have been made whole.
Highlights of the day-and-a-half long hearing on the plan included a few attempts to explain Dewey’s, ahem, somewhat unorthodox compensation system to Judge Martin Glenn. (LBers, you’ll recall that about one-third of Dewey’s partners had special pay deals that guaranteed them set amounts of money no matter how well or poorly the firm fared; disclosure of those deals and fights over compensation helped trigger a partner exodus in 2012.)
David Pauker, a restructuring consultant who also worked out a partner settlement for the defunct law firm Coudert Brothers LLP, assigned ultimate responsibility for the pay deals to former firm chairman Steven Davis, former executive director Stephen DiCarmine and former chief financial officer Joel Sanders.
The triumvirate’s names came up regularly on the subject of who sunk Dewey–and therefore who could be liable for mismanagement suits—prompting frequent interjections by the group’s lawyer, Ned Bassen of Hubbard Hughes & Reed LLP.
“Are you aware that the debtor’s professionals have never spoken to any of our clients about this, or obtained any information whatsoever from them,” Mr. Bassen asked Paul Gendler, the head of the unsecured creditors committee, on Thursday.
Another lawyer for Mr. Davis, Paul Basta of Kirkland & Ellis LLP, told Judge Glenn on Friday that his client wanted to be sure the liability releases in the settlement wouldn’t result in Mr. Davis having to bear more than his share of responsibility in future lawsuits.
“Let’s say somebody finds there is $ 100 of fault, and that Mr. Davis is responsible for $ 15 of it,” Mr. Basta said. “That by doing the settlement, Mr. Davis has not become $ 100 at fault for something for which he is only $ 15 at fault. Your honor does not have before you a record of who is responsible [for the firm’s downfall].”
Stay tuned for Judge Glenn’s decision, which is pending. . .