Dewey & LeBoeuf LLP, the law firm that advised Los Angeles Dodgers LLC on its restructuring, filed its own bankruptcy after its chairman was ousted, almost all its partners quit and 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, said Jonathan A. Mitchell, the firm’s restructuring officer, in the filing. Dewey will be liquidated, he said.
Dewey & LeBoeuf “was formed at the onset of one of the worst economic downturns in U.S. history,” said Mitchell, who works for Zolfo Cooper, said in the statement. “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’s 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’s records, according to the filing.
Dewey has accounts receivable and work-in-progress in the U.S. valued at $255 million, according to the filing. 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 lenders $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. Between Jan. 1 and 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.
On or about April 27, the office of the chairman advised the partnership that 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 and 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 $125 million or more. 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.
“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.”
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 in the past, including Brobeck, Phleger & Harrison LLP in 2003 and Heller Ehrman LLP in 2008, are still unwinding their debts and obligations, Reeser said.
Lawyers Hire Lawyer
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.
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 non-union 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.”
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