Dewey & LeBoeuf LLP, the law firm that advised Los Angeles Dodgers LLC on restructuring, filed for bankruptcy after its chairman was ousted and almost all partners quit as creditors began suing for unpaid bills.
Dewey, based in New York, listed debt of $245 million and assets of $193 million in a Chapter 11 filing yesterday in U.S. Bankruptcy Court in Manhattan.
The firm, which had more than 1,300 attorneys in 12 countries after the 2007 merger of Dewey Ballantine LLP and LeBoeuf, Lamb, Greene & McRae LLP, now has 150 employees in the U.S. to wind it down, Jonathan A. Mitchell, the firm’s restructuring officer, said in court papers. Dewey will be liquidated, he said.
Dewey & LeBoeuf “was formed at the onset of one of the worst economic downturns in U.S. history,” wrote Mitchell, who works for the restructuring adviser Zolfo Cooper Management LLC. “These negative economic conditions, combined with the firm’s rapid growth and partnership compensation arrangements, created a situation where the cash flow was insufficient to cover capital expenses and full compensation expectations.”
Dewey hired Togut, Segal & Segal LLP as bankruptcy counsel. It is closing offices in Hong Kong, Beijing, Sao Paulo, London, Paris, Madrid, Frankfurt and Johannesburg. All U.S. offices have been closed or are closing. The firm is recovering equipment and artwork and securing client records, according to the filing.
Dewey’s plan to save part of its business through a merger was dealt “a body blow” when the Manhattan District Attorney said he was probing possible wrongdoing at the firm, Dewey’s bankruptcy lawyer Al Togut told U.S. Bankruptcy Judge Martin Glenn at a court hearing today. Dewey has no reason to believe that money was stolen, Togut said.
Dewey, which has been collecting bills to pay lenders, had about $13.4 million of cash in its bank accounts on May 25, according to a U.S. budget published in a court filing. Cash could rise by June 25 to $30.3 million as more clients of the law firm pay their bills, according to the filing.
Expenses in coming weeks will include $375,000 for rent on the 10th floor of Dewey’s Manhattan headquarters including storage space; $340,000 per week of restructuring costs for lenders and $58,000 a week for a so-called dissolution committee, according to Dewey’s budget.
Dewey has accounts receivable and work in progress in the U.S. valued at $255 million, according to filings. The firm has historically collected about 95 percent of its accounts receivable and converted 84 percent of work-in-progress to accounts receivable, it said.
“It is unlikely the debtor will attain historical collection rates on its accounts receivable,” according to the filing. “The Chapter 11 process will enable the debtor to maximize collections on its accounts receivable in the most effective and expeditious manner as possible.”
Dewey owes secured banks and bondholders $225 million, with an additional $50 million owed to secured property lessors and $40 million in accounts payable, pension and deferred compensation claims and claims by employees for accrued paid time off, it said.
The law firm said it consolidated its bank debt on April 16, issuing $150 million of notes. From Jan. 1 to March 30, about 20 percent of the firm’s equity partners resigned or left, it said. As of last week, at least 250 of Dewey’s 304 partners had found new jobs.
“These partner departures led to a continuing cycle of decreased potential revenues, which itself caused further partner attrition,” Mitchell said.
District Attorney Probe
On or about April 27, the office of the chairman advised the partnership it had learned that the office of Manhattan District Attorney Cyrus Vance Jr. was investigating allegations of wrongdoing by Steven Davis, Dewey’s former sole chairman, the firm said. People who approached the district attorney didn’t identify themselves or provide the firm with any evidence, it said. Davis was removed from all leadership roles on April 29.
The firm’s creditors include bank lenders owed at least $75 million and bondholders owed $150 million. Other creditors range from partners who got pay guarantees worth about $100 million to the firm’s janitors, who have sued for about $300,000 in unpaid bills.
To save money, Dewey plans to hold a series of so-called omnibus hearings where creditors and other parties can make requests to the judge, according to filings. No dates have been set for those hearings.
In a series of amendments to its agreements with banks and bondholders staring in April, Dewey pledged more and more assets and potential claims to secured lenders, according to the filings.
Those lenders now have first claim on everything from daily cash receipts, promissory notes, expense compensation -- whether billed or not -- and insurance payments, to equipment, equity in affiliates, trademarks and legal claims from any effort to recover payments to former partners, the filings show.
Unsecured creditors might try to take back the extra collateral that went to banks and bondholders, saying they received so-called preferential payments ahead of other creditors that aren’t allowed by law, said Chip Bowles, a bankruptcy lawyer with Bingham Greenebaum Doll LLP in Louisville, Kentucky.
“If a secured creditor gets additional security and doesn’t give anything in return, that constitutes a preference payment,” he said. “Generally it’s 90 days before a bankruptcy.”
Banks could argue they gave Dewey valuable advantages in exchange for the collateral, including continued use of their cash and forgiveness of Dewey for defaulting on its loan covenants, he said.
“It comes down to an argument about what constitutes value,” he said.
Jennifer Zuccarelli, a spokeswoman for JPMorgan Chase & Co., agent for secured bank lenders, didn’t immediately respond to an e-mail seeking comment on Bowles’s remarks about collateral.
Dewey’s U.K. affiliate is guarantor to its parent’s obligations under the bank line and bond issue, having pledged current and future assets to the lenders, filings show.
In the U.K. yesterday, BDO LLP business restructuring partners Mark Shaw and Shay Bannon were appointed administrators over the unit that operates Dewey’s London and Paris offices, BDO said in a statement.
Separately in the continuing exodus, Dewey’s South African team of lawyers joined the rival law firm Baker & Mackenzie, which today announced the opening of a new Johannesburg office.
Like Chicago Fire
“The Dewey debacle has all the orderly progression of the Great Chicago Fire,” said Ed Reeser, a former managing partner for the Los Angeles office of Sonnenschein Nath & Rosenthal LLP, who’s now a consultant. Including a bankruptcy, he said, “I wouldn’t be surprised if the wind-down took a minimum of six to seven years. It could take 10.”
Dewey & LeBoeuf was the result of a merger between Dewey Ballantine, a firm dating from 1909 whose most famous partner was two-time Republican presidential candidate Thomas E. Dewey, and LeBoeuf Lamb Greene & MacRae. Created to enter the club of powerhouse international law firms, Dewey collapsed amid a culture characterized by a lack of disclosure and controls where an inner circle of partners reaped most of the rewards.
“The combination of outsized debt and widely spread pay guarantees divorced from performance put the firm in a situation with almost zero margin for error,” said Bruce MacEwen, a lawyer and law-firm consultant at Adam Smith Esq. LLC in New York. “Markets have a habit of punishing firms in that posture.”
Biggest to Fail
Dewey, which at the time of the merger had revenue of more than $900 million, is the biggest U.S. law firm to fail, Reeser said. Other firms that have collapsed, including Brobeck, Phleger & Harrison LLP in 2003 and Heller Ehrman LLP in 2008, are still unwinding their debts and obligations, Reeser said.
More than 50 former Dewey partners have hired lawyer Mark Zauderer of Flemming Zulack Williamson Zauderer LLP to protect their interests, he said. He’ll do such things as sue former managers or defend his clients from lawsuits to claw back pay they received, according to a person familiar with his hiring.
Dewey’s bondholders are mainly insurance companies, including London-based Aviva Plc’s U.S. subsidiary, which owned $35 million in Dewey bonds at the end of last year, said Aviva spokesman Kevin Waetke.
Aviva’s holding bonds was the biggest on a list of insurance companies disclosing the investment in the U.S., according to SNL Financial LC, which provides data to financial companies. Hartford Financial Services Group Inc. owned about $20 million of Dewey bonds, SNL said. Hartford has since sold its bonds, said Thomas Hambrick, a spokesman for Hartford.
Dewey’s privately placed bonds, which trade sparsely, were quoted at 45 cents to 55 cents on the dollar earlier this month, according to a May 3 report by CRT Capital Group LLC, which buys and sells distressed debt, including Dewey’s.
Some of Dewey’s former partners were the beneficiaries of pay guarantees that totaled about $100 million a year for about 100 partners, including as much as $6 million a year for a select few, said people familiar with Dewey’s finances. Those guarantees are now worth no more than 8 cents on the dollar, if anything.
For example, Dewey’s executive director, Stephen DiCarmine, had a deal putting his salary and bonus at $2 million a year, said a person who wasn’t authorized to comment on these matters and didn’t want to be identified.
Effect of Liquidation
In a liquidation, partners with guaranteed pay become unsecured creditors, ranking equal to, or below trade creditors, said Stephen Lubben, a bankruptcy law professor at Seton Hall University in Newark, New Jersey.
Vendor claims against Dewey, also known as trade paper, are being quoted at 5 cents to 8 cents on the dollar, said Joseph Sarachek, managing director of claims trading at CRT. That category includes a unit of ABM Industries, which provided janitorial services at Dewey’s offices at 1301 Avenue of the Americas in New York, and sued the firm for about $300,000 in unpaid bills, according to a complaint filed in New York State Supreme Court in Manhattan.
The firm laid off 533 nonunion workers at its Manhattan building on May 15, according to a notice on the New York State Department of Labor website. A lawsuit filed earlier by Vittoria Conn, a former document specialist, claims Dewey fired workers without giving them adequate notice required by federal and state laws. The Pension Benefit Guaranty Corp. sued the firm on May 14 to take over pension plans covering 1,776 lawyers and staff.
In a bankruptcy, Dewey partners could be sued for pay taken when the firm was already insolvent, or for taking work begun at Dewey to other firms, lawyers said.
Defections at Dewey reached about 50 in early April, topping 120 in May. The five-man chairman’s office, announced on March 26, featured the heads of the firm’s most profitable groups, including Martin Bienenstock, Rich Shutran, Jeffrey Kessler and Charles Landgraf. All those four quit. The fifth member, Steven Davis, was ousted on April 29.
Kessler went to Winston & Strawn LLP with about 20 other Dewey litigation partners; Shutran, head of the corporate group, took four partners to O’Melveny & Myers LLP; Proskauer Rose LLP took Bienenstock, who ran the restructuring group, with five colleagues; and Landgraf, known as a Washington lobbyist, joined Arnold & Porter LLP.
Dewey was doomed as soon as partners, its main assets, started walking out of the doors this year, said Chip Bowles, a bankruptcy lawyer with Bingham Greenebaum Doll LLP in Louisville, Kentucky.
“When a law firm fails, it’s like a dam bursting,” Bowles said. “It starts with a trickle of partners leaving, and what’s coming in isn’t enough to cover expenses, and the trickle speeds up,” he said. Soon, “the leaders start leaving and it bursts and floods.”
The case is In re Dewey & LeBoeuf, 12-12321, U.S. Bankruptcy Court, Southern District of New York (Manhattan).
Editors: John Pickering, Stephen Farr