A U.S. bankruptcy court judge approved a plan Wednesday that allows the Dewey & LeBoeuf estate to cover its costs for the next six-and-a-half weeks of the firm’s Chapter 11 proceedings. Come August, though, the estate’s ability to pay for ongoing operations may rest heavily on whether it can recover money from former Dewey partners through a settlement.
In stark contrast to the contentious hearing held the day after Dewey’s May 28 bankruptcy filing, Wednesday’s session—during which various parties involved in the matter pressed Judge Martin Glenn to approve a final order empowering the Dewey estate to use the cash collateral that protects its debt to secured lenders to fund its day-to-day operations—was mostly amicable.
Glenn, expressing surprise that the lenders, the Dewey estate, and the rest of the firm’s creditors had come to an agreement on the issue after two weeks of dispute, signed off on the motion after an hour of presentations and questioning.
The court’s approval gives the firm up to $24.8 million to fund operations from now through July 31, in addition to the $7.3 million it has spent since May 29, according to a budget contained in the court order. That includes $3.5 million for Dewey’s professional advisers, $753,000 for advisers to the unsecured creditors’ committees, and $2.2 million for other lawyers working on the bankruptcy. The past two weeks have seen an additional $1.8 million spent on professional advisers. The spending plan also earmarks $58,000 a week for Dewey’s dissolution committee, which is made up of Dewey’s general counsel Janis Meyer and Stephen Horvath, a Dewey partner who relocated from London to take over as executive partner in the firm’s final few months.
Questions raised during Wednesday’s hearing about why Meyer and Horvath deserved so much compensation—and whether the sums going to them reflected raises over what they received while the firm was alive—were flatly rejected by Dewey’s lawyer Albert Togut. “There has been no increase in their salary this year,” he said. (The weekly rate equates to an annual salary of $1.5 million for each.)
The proposed budget—which Togut stressed was the most the estate would spend, rather than the amount it would definitely spend—estimates that $39.5 million in accounts receivable will flow to the estate by the end of July. In the two weeks since the firm filed for bankruptcy protection, roughly $8 million has been collected, according to the schedule. Aside from any unpaid bills the firm is able to collect, there is little new money coming into the estate to help pay down the roughly $225 million owed to secured lenders led by JPMorgan Chase and hundreds of millions more in unsecured claims. (The firm also appears to be trying to convert its remaining physical assets into cash. The Dewey Web site now lists contact information for those who “would like to purchase Dewey & LeBoeuf property.”)
Since Dewey first proposed using the cash collateral, the estate’s lawyers have added provisions to give unsecured creditors a degree of control over how the money is spent. Lawyers for the official committee of unsecured creditors and a second creditors’ committee made up of former partners from Dewey predecessor firm LeBoeuf, Lamb, Greene & MacRae raised some issues at Wednesday’s hearing to make sure their groups’ interests were protected, but ultimately agreed to the proposal by Glenn.
David Friedman, a partner at Kasowitz Benson Torres & Friedman who is representing the committee of former partners, seemed interested in finding ways to trim the weekly spending, at one point saying to the judge, “There is a certain level of insanity in this budget” and “a lot of money [is] going out the door.” Asked by Glenn whether Dewey would “do better” in a Chapter 7 bankruptcy, which would put it in the hands of a trustee, Friedman replied: “We’ll know in six weeks.”
Beyond the cash collateral motion, Togut focused on what he calls a “global settlement” that Dewey hopes to recover money from former firm partners. Togut conceded that such a settlement has not successfully been reached before in a law firm bankruptcy—most such cases drag on for years before former partners wind up targeted in clawback claims—but that he was already working with counsel for some of those former partners and hopes to have a better idea of how that settlement might come together by the end of July.
Speaking to reporters after the hearing, Togut said it is still uncertain what types of claims the estate will have against former partners—whether it’s seeking the recovery of compensation, money from unfinished business taken with them to new firms, or other claims. Asked his thoughts on a lawsuit filed Wednesday by former Dewey partner Henry Bunsow against several former members of firm management, Togut said he hadn’t yet seen the suit but that it is common in the early stages of law firm bankruptcies for former partners to say “not me” when it comes to having to contribute to the bankruptcy proceedings.
Tracy Klestadt, a name partner with New York boutique Klestadt & Winters who is representing a group of former partners that currently numbers around 20, said after the hearing that some of his clients also believe they are owed money by the estate. Klestadt said it “remains to be seen” what will become of the settlement Togut is attempting to reach.