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Dewey bonus plan passes muster

by Jamie Mason | Published August 1, 2012 at 12:52 PM

Bankrupt Dewey & LeBoeuf LLP can provide bonuses to its remaining employees through an incentive and retention plan.

Judge Martin Glenn of the U.S. Bankruptcy Court for the Southern District of New York in Manhattan issued a 14-page opinion on Monday, July 30, approving the non-insider employee incentive and retention plan, but denying the debtor's use of discretionary funds.

"The uncontroverted evidence establishes that the collection of receivables and the wind-down of the debtor's business will be a much less achievable goal if the debtor is unable to stem the tide of employee departures," Glenn wrote in the opinion.

The judge, however, did deny the use of up to $100,000 in discretionary funds, saying it was the one shortcoming with the proposed plan and that the debtor had lacked evidence to support the use of the funds.

Through the incentive and retention plan for its collection and operational staff, Dewey can provide for payment of varying amounts for additional weeks of salary for employees who remain with the debtor through certain dates, subject to job performance.

Dewey will pay a maximum amount of $450,000 under the retention plan, with $317,600 for its operational staff and $71,000 for its collection staff.

As of July 3, the debtor had 52 employees, exclusive of its senior management, to assist with the wind down of its affairs. Its employees have since been reduced to 48 people, court documents said.

In addition, the debtor can implement an incentive plan for five of its key employees, who are collecting its accounts receivable, including its director of billing and its collections manager.

According to court papers, the debtor has $217.4 million in noncontingent domestic billed and unbilled receivables. On-Site Associates LLC is the debtor's collection agent.

Through the incentive plan, On-Site would share its fees from the receivables collections with the key employees, up to a maximum of $250,000.

"The employees are integral to the efficient and expeditious wind down of the debtor's affairs, as well as the maximization of funds available for distribution to creditors and other stakeholders in this Chapter 11 case," Dewey said in court filings.

According to the motion, the debtor's bonuses won't exceed $230,000.

U.S. Trustee Tracy Hope Davis objected to the incentive and retention plan, claiming that the bonuses violate the Bankruptcy Code because it doesn't provide sufficient information to determine if it's economical to the estate.

"Further, the retention plan is deficient because it does not disclose the actual cost of retaining the employees. ... The debtor has provided no information to support the payment of up to $230,000 in bonuses," the trustee said in the objection.

The judge overruled the trustee's objection in his opinion.

Dewey filed for Chapter 11 protection on May 28.

During its bankruptcy case, Dewey plans to liquidate its assets, close its offices, dispose of former clients' files, evaluate and administer claims against its estate, and investigate and pursue potential causes of action.

Partners Janis M. Meyer and Stephen J. Horvath III are overseeing the liquidation.

The law firm, itself once a major player in bankruptcy, was confronted with liquidity constraints during the first three months of 2012, leading to the resignation of more than 160 of the firm's 300 partners by May 11, court documents said.

Among the partners who fled are bankruptcy heavy-hitters Martin Bienenstock and Bruce Bennett, who decamped for Proskauer Rose LLP and Jones Day, respectively.

Dewey decided it was in the best interest of its clients, creditors and employees to wind down its business after it was unsuccessful in structuring a transaction to maintain the core value of Dewey through a merger with another firm. Such a deal was hindered because no firm was willing to take on all of its obligations. The law firm also failed to renew or secure alternative financing and was faced with continuing defaults on its prepetition debt.

The vast majority of Dewey employees were notified that they would be terminated as of May 15, as the law firm was faced with the potential acceleration of approximately $225 million in secured debt.

Dewey has a $100 million credit facility with JPMorgan Chase Bank NA, Citibank NA and Bank of America NA that was set to mature on April 16 before it was extended through May 18.

The firm also has $40 million in 4.49% Series A senior secured notes due April 16, 2013; $15 million in 5.39% Series B senior secured notes due April 16, 2015; $40 million in 6.10% Series C senior secured notes due April 16, 2017; and $55 million in 6.65% Series D senior secured notes due April 16, 2020, court filings said.

Dewey owes $76.45 million on the secured credit facility and $150 million on the notes. JPMorgan Chase Bank is the collateral agent for the noteholders, court papers said.

The debtor operated 26 offices throughout the world, including Abu Dhabi, Beijing, Boston, Brussels, Chicago, Hong Kong, Houston, Los Angeles, Moscow, New York, San Francisco and several other locations.

Dewey was created in 2007 through the merger of Dewey Ballantine LLP and LeBoeuf, Lamb, Greene & MacRae LLP. As a result of the merger, Dewey & LeBoeuf became one of the largest law firms in the world, with more than 1,300 attorneys in 12 countries. But it also borrowed heavily.

"Unfortunately, Dewey & LeBoeuf was formed at the onset of one of the worst economic downturns in U.S. history, which had a devastating effect on the financial markets and related industries that constituted the majority of the firm's historic client base," court filings said.

The negative economic conditions, combined with the firm's rapid growth and debt expansion, left it without sufficient cash flow to cover its capital expenses and fulfill compensation expectations. The partners canceled deferred income of more than $100 million.

In December, Dewey's profit fell $30 million short for the calendar year, and the firm was advised not to use $25 million of its $100 million revolving credit facility in January.

"The resulting contraction of working capital by $55 million resulted in a liquidity crisis for the firm, which contributed to its ultimate demise," court papers said.

Debtor counsel is Albert Togut and Scott E. Ratner of Togut, Segal & Segal LLP.

Jonathan A. Mitchell of Zolfo Cooper Management LLC is Dewey's chief restructuring officer.

Edward S. Weisfelner and Howard S. Steel at Brown Rudnick LLP are counsel to the official committee of unsecured creditors.

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