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Dewey & LeBoeuf creditors pull no punches

by Jamie Mason  |  Published November 15, 2012 at 4:35 PM
The official committee of unsecured creditors for Dewey & LeBoeuf LLP is looking for court approval to prosecute claims against the defunct law firm's former management.

Judge Martin Glenn of the U.S. Bankruptcy Court for the Southern District of New York in Manhattan will consider the request on Nov. 29.

According to the unsecured creditors committee's motion, filed on Nov. 12, the panel wants leave, standing and authority to prosecute and settle claims for the debtor's estate against its former management team for breaches of fiduciary duty to the firm and its creditors.

Dewey's erstwhile management team includes the former chairman, Steven Davis; ex-executive director, Steven DiCarmine and its past CFO, Joel Sanders.

The team "grossly mismanaged the firm and engaged in rampant self-dealing that caused, ultimately, the firm's demise," the unsecured creditors said.

According to court documents, the team was responsible for the firm's compensation and financing decisions, and because of their management positions had fiduciary duties of "care, loyalty and candor to all partners and the firm and its creditors."

In court filings, the unsecured creditors accused the former management team of over-distributing Dewey's cash to select partners, an abusive reliance on guarantee agreements that bore no economic rationality and concealment of the firm's true financial condition to its partners, employees and creditors.

The team's "self-serving behavior was motivated by greed," and they paid themselves more than $7 million within one year of the petition date, despite Dewey's dire financial condition, the unsecured creditors said in court documents.

"As the firm was insolvent in 2011 (and may have been insolvent even earlier), the [former management team] caused the distribution of at least $180 million to certain partners during a time when the firm should have been holding such funds in trust for creditors," the committee said.

Dewey is in support of the unsecured creditors committee's request, court filings said.

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 dismantle 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 Dewey's 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.

The debtor operated 26 offices throughout the world, including Abu Dhabi, United Arab Emirates; 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 became one of the largest law firms in the world, with more than 1,300 attorneys in 12 countries -- but it also borrowed heavily.

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. Its partners ultimately canceled deferred income of more than $100 million.

Scott E. Ratner of Togut, Segal & Segal LLP is debtor counsel.

Joff Mitchell of Zolfo Cooper LLC is Dewey's chief restructuring officer.

Edward S. Weisfelner and Howard S. Steel of Brown Rudnick LLP represent the official committee of unsecured creditors.

Tags: Brown Rudnick LLP | Bruce Bennett | Dewey & LeBoeuf LLP | Dewey Ballantine LLP | Edward S. Weisfelner | Howard S. Steel | Janis M. Meyer | Joel Sanders | Joff Mitchell | Jones Day | Judge Martin Glenn | LeBoeuf Lamb Greene & MacRae LLP | Martin Bienenstock | Proskauer Rose LLP | Scott E. Ratner | Stephen J. Horvath III | Steven Davis | Steven DiCarmine | Togut Segal & Segal LLP | U.S. Bankruptcy Court | Zolfo Cooper LLC

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Jamie Mason

Senior Editor: Out of Court Restructuring

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