Heller Ehrman paid out more than $7 million to 35 departing or retiring partners in 2008, a Friday bankruptcy filing by the firm shows (.pdf).
The filing paints a picture of Heller’s shrinking capital coffers as a steady stream of partners left in 2008. The departures led to the firm’s breaking a loan covenant and having its accounts frozen, which precipitated its collapse.
The document also shows who Heller’s creditors could target as they seek to be paid through Heller’s bankruptcy, which was filed Dec. 28. Creditors can try to reclaim payments dating back as far as four years.
Thomas Willoughby, of Felderstein Fitzgerald Willoughby & Pascuzzi, who represents the creditors committee, said Tuesday the committee will be looking at any payments that were made when the estate was insolvent or distributions that “led to it being insolvent.”
“The recovery of distributions prior to the [bankruptcy] filing will be investigated,” Willoughby said, but added that he’s also “thinking about people way beyond shareholders,” whom he declined to name. “No, not the banks,” he said. Heller and the committee believe the banks, Bank of America and Citibank, are not secured creditors because of a 2007 “clerical error,” and that they should give back $50 million paid them in the 90 days leading up to the bankruptcy.
The filing details capital distributions and amounts still owed to 53 partners who left, retired or were fired before Sept. 26. (See chart here.)
At the same time, several former partners are on the creditors list, asserting claims for their capital.
The majority of the distributions, $5.3 million, went to 13 lawyers who received all of their capital because of a “change of status or termination.” The highest distribution went to Douglas Schwab, who received $920,000 and was listed as a senior of counsel at the time the firm said it would dissolve. Schwab, who retired in 2008 and was at Heller for more than 35 years, declined to comment for this story.
Dissolution committee member Paul Sugarman was also among the 13, and received $513,000. Sugarman retired in early 2008.
Some partners collected 25 percent of their investment in the firm, and 40 of them collectively left behind $8 million in capital. Lawrence Hobel is out the most cash, with $573,000 left behind. Hobel could not be reached for comment Tuesday afternoon.
To accumulate capital, Heller would withhold between 7 percent and 8.5 percent per year of each partner’s profits, and withholdings would stop after a maximum was reached. A partner reaching 65 and retiring or switching to senior status received all capital back, according to two former partners who declined to be named.
Firms often take years to pay back capital contributions to partners who leave for other firms. In Heller’s case in 2008, partners were paid 25 percent of their capital upon departure, with the expectation that 25 percent a year would be distributed over the following three years. By June 1, however, the policy changed and partners who moved were told they would not begin to be paid until 2009, the two partners said.
Suing former partners would not be new. The estate of Brobeck has successfully sued hundreds of former partners, though Brobeck’s partners were targeted for allegedly taking business away from the collapsed firm. Brobeck’s partnership agreement did not limit individual liabilities as much as Heller’s, Bennett Murphy, counsel for Ronald Greenspan, the trustee in the Brobeck bankruptcy, told The Recorder in January.
And any suits against partners would likely come years down the line, he said.
“Litigation to recover on the law firm’s causes of actions against a third party will generally be the last thing pleaded,” Murphy said. “A bankruptcy case will last as long as the longest litigation that the trustee or [debtor in possession] has to bring.”
As of a year ago, Greenspan had collected an estimated $24 million from some 200 former Brobeck partners for various claims.
Then, the Brobeck estate sued 10 former partners last spring for profits “related to unfinished business or work done as the result of opportunities that originated at Brobeck.”
Also, Morgan, Lewis & Bockius paid Brobeck’s estate $10.2 million in 2004 to settle claims related to its acquisition of 58 Brobeck partners. Clifford Chance agreed to a similar $3.75 million settlement that same year.
Those suits cite precedent set by Jewel v. Boxer , 156 Cal.App.3d 171, which dealt with liabilities of partners after a dissolution.