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Dewey Unsecured Creditors May Find the Cupboard Is Bare

Dewey & LeBoeuf LLP’s unsecured creditors, meeting today in Manhattan to form a committee to represent their interests, may find the defunct law firm has nothing left to pay them.

Dewey’s Memorial Day bankruptcy filing disclosed $225 million of secured loans from banks and bondholders to be paid mostly from $255 million of bills to the defunct law firm’s clients that analysts value at as little as 40 cents on the dollar.

Secured creditors by law must be paid in full before unsecured creditors get anything.

Topping a list of Dewey’s unsecured creditors is the Pension Benefit Guaranty Corp., claiming $80 million for underfunded pensions. Second is Dewey’s landlord, Paramount Group, claiming $3.8 million for property taxes and May rent, followed by Thomson Reuters Corp., owed $2.4 million for legal research.

Former Dewey partners, including those with an estimated $100 million of guarantees, can rank equal to, or below trade creditors under bankruptcy law.

“Dewey is essentially a zero-asset bankruptcy for the unsecureds,” said Ed Reeser, a former managing partner for the Los Angeles office of Sonnenschein Nath & Rosenthal LLP who’s now a consultant. “There is nothing there for them to get. There is going to be terrible pain worked on many good people.”

Pennies Per Dollar

Vendor claims against Dewey, also known as trade paper, were recently quoted at 5 cents to 8 cents on the dollar, said Joseph Sarachek, managing director of claims trading at CRT Capital Group LLC, which buys and sells distressed debt including Dewey’s.

The 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.

Dewey’s secured bonds, which were privately placed and trade sparsely, were quoted at 45 cents to 55 cents on the dollar this month, CRT said.

Dewey unwound fast this year as at least 250 of its 304 partners quit to join rivals. Now it faces a long fight to collect money for secured lenders led by JPMorgan Chase & Co., from clients reluctant to pay bills and partners who might have carried off some of the firm’s business to rivals as they joined new firms.

Drawn-Out Cases

With few assets with which to pay debts except their collectible bills, law firms’ liquidations tend to be drawn out and contentious as the bankrupt estate scrounge for small amounts of money to pay debt.

Legal bills, Dewey’s main source of funds in the past, “are never worth 100 cents on the dollar, and they take a severe haircut if a firm is failing, because clients don’t want to pay all of it,” said Bruce MacEwen, a lawyer and law-firm consultant at Adam Smith Esq. LLC in New York.

Dewey had more than 1,300 attorneys in 12 countries after the 2007 merger of Dewey Ballantine LLP and LeBoeuf, Lamb, Greene & McRae LLP, making it the biggest bankruptcy in its business. It now has 150 employees in the U.S. to wind it down and pay creditors.

The case is In re Dewey & LeBoeuf, 12-12321, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

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