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Law Firm Dewey Files for Bankruptcy

Source: WSJ - Jennifer Smith

Posted on 29 May 2012 by Neilson

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The embattled New York law firm Dewey & LeBoeuf LLP has filed for bankruptcy protection, a move that effectively ends what had been at its height a 1,300-lawyer global enterprise and marks one of the largest law-firm failures in U.S. history.

The Chapter 11 filing, submitted Monday evening in federal bankruptcy court in Manhattan, followed a rocky six months for the debt-laden firm, which had seen an exodus of partners amid disputes over compensation and concerns about the firm's financial stability.

Legal experts predict lawsuits will follow. Bankruptcy administrators for failed firms often sue former partners to recover money paid out before the firm went under. They also target law firms where ex-partners from a dissolved firm go, taking unfinished legal work with them, under the theory that profits from that business rightly belong to the old firm.

By the end of May some two-thirds of Dewey & LeBoeuf's roughly 320 partners had left, and the Manhattan District Attorney's Office had launched a criminal investigation into activities at the firm. Regulators have sued to take over its pension plans, which they say are underfunded by $80 million.

The firm has essentially been in wind-down mode for several weeks. It has closed most offices, sold off some overseas branches and dismissed hundreds of staff and associate attorneys. At Dewey's New York headquarters, a skeleton crew working with lenders and bankruptcy consultants has been trying to collect outstanding client bills.

The firm enters bankruptcy owing approximately $315 million to a list of more than 5,000 creditors, including secured lenders, landlords, vendors and employees, according to papers filed in support of the petition.

The firm has assets of approximately $13 million in cash and approximately $255 million in accounts receivable and ongoing legal work, according to papers accompanying the filing. Funds should be available to unsecured creditors, the filing said.

Dewey's secured creditors include J.P. Morgan Chase & Co.—the lead agent for a bank syndicate that lent the firm $75 million through a revolving credit line.

The filing represents an ignominious end to the firm, the product of a 2007 merger between Dewey Ballantine LLP and LeBoeuf, Lamb, Greene & MacRae LLP, two old-line New York law firms that date to the early part of the last century.

In the years before the merger, LeBoeuf Lamb's senior-most executives, including former Chairman Steven Davis, started luring top partners from other firms with outsize pay packages, some of which guaranteed millions to lawyers for a number of years, according to current and former Dewey partners.

The firm's leaders used similar tactics to keep lawyers from both Dewey Ballantine and LeBoeuf Lamb from bolting when the firms merged, a strategy some partners questioned. Last year, despite deepening debt and mounting questions over the firm's financial stability, firm heads stepped up the practice, bringing in dozens more splashy lateral hires with big pay packages.

Ultimately, the deals left little money for hundreds of rank-and-file partners. More recently, even some with the deals started getting shortchanged by the firm, according to current and former partners, prompting a trickle of defections that by May became a flood.

While the firm is in bankruptcy, the earnings of some partners could be subject to clawbacks from creditors, as happened after the failures of the California law firms Heller Ehrman LLP and Brobeck, Phleger & Harrison LLP several years ago.

Lawsuits could also pile up between Dewey partners, legal experts say, as divisions form between those who had the special pay packages and those who didn't.

"You have very disparate interests and agendas among the partners, and battle lines are going to form," predicts Peter S. Kaufman, the head of Gordian Group LLP, a restructuring firm based in New York. "It's a recipe for a storm of lawsuits."

In recent weeks the firm was sued by regulators who said its pension plans were underfunded by $80 million; by a janitorial services company that said it is owed $299,000; and by a former staffer who said the firm failed to provide adequate notice of mass layoffs.

The firm expects most of the Chapter 11 process to be completed in the next few months, and in the interim it will be operating on a budget and timetable to be determined by the bankruptcy court, according to a statement issued Monday evening.

The firm has asked the court for permission to continue to pay staff salaries and benefits, and will ask approximately 90 employees to remain on staff for the wind-down, the statement said. The firm's London and Paris offices, which are operated through a separate legal entity, were place into administration Monday, a U.K. legal process similar to Chapter 11 bankruptcy, the firm said.

"We are proud of the dedication and professionalism that has characterized Dewey & LeBoeuf over many years, and we intend to bring the same focus to the unfortunate task of closing out our affairs," said Stephen J. Horvath, executive partner.