A proposed settlement presented Wednesday to former Dewey & LeBoeuf partners asking them to chip in between $25,000 and $3 million apiece in exchange for a waiver of liability related to the bankrupt law firm is already meeting serious resistance, with initial reactions ranging from skepticism to anger.
On Thursday, former partners and the lawyers they have hired were questioning, among other things, why the plan makes no effort to more heavily charge those who helped lead the firm into its downward spiral. Instead, partners are being unilaterally asked to return a portion of their earnings from 2011 and 2012 on a sliding scale ranging from 10 percent for the lowest earners to 30 percent for its most highly paid rainmakers.
“It’s designed to help the people who got them all into this mess,” says one former partner, echoing the view of several others interviewed by The Am Law Daily.
Lead Dewey bankruptcy counsel Al Togut has trumpeted the so-called partner contribution plan since the day after Dewey filed for Chapter 11 protection on March 28, calling it necessary to accelerate the bankruptcy process and beneficial to all involved. Togut has also warned repeatedly that a failure to reach an agreement could result in former partners being targeted in litigation seeking even larger sums if a trustee takes command of the bankruptcy. Togut, who was hired by the firm in April to help it avoid a full-fledged Chapter 11 bankruptcy, presented the plan at Wednesday’s meeting along with Dewey’s chief restructuring officer, Joff Mitchell of Zolfo Cooper, who began working for Dewey weeks before it became the largest law firm ever to go bankrupt.
Those interviewed Thursday—five former partners from across Dewey’s compensation scale, all of whom spoke on condition of anonymity, and an attorney representing nearly 60 former partners—cited what they view as several inequities built into the proposal. Those points of contention include the fact that the two former Dewey partners getting paid to help guide the firm through bankruptcy, Stephen Horvath III and Janis Meyer, aren’t being asked to make any payments to the estate but would still be released from liability; that partners who neglected to pay their full capital contributions before the firm collapsed only have to return 50 percent of that amount while others remain saddled with debt related to capital contribution loan programs; that partners who received extra money in 2012 while the rest of the partnership took only standard draws have to pay just 20 percent of that money back; and that the maximum contribution is capped at $3 million, which Dewey leaders said applies to two unidentified former partners.
(Through a Zolfo Cooper spokeswoman, Horvath and Meyer declined to comment. Mitchell and Togut did not return requests for comment Thursday).
“I’m not seeing overwhelming enthusiasm for the proposal,” says Mark Zauderer, a partner at New York law firm Flemming Zulack Williamson Zauderer who represents 57 former partners. One disappointing aspect of the plan, Zauderer says, is that claims that former partners believe they have against the firm for money due to them received no consideration whatsoever. “While it’s understandable that such claims might be discounted to an extent in an overall settlement, giving them no weight at all does not appear to many to be appropriate.”
Partners have until July 24 to agree to the deal, and it will only be presented to the court for approval if at least $50 million of the total 103.6 million being sought is raised.
“People at both ends of the spectrum aren’t happy,” says one former partner.
Mitchell stressed Wednesday that if not enough people sign on to the plan, the bankruptcy could be converted to a Chapter 7 liquidation as soon as August. At that point, a trustee would replace Mitchell, Togut, and the others leading the firm through bankruptcy. Dewey leaders insist that a trustee would not be as forgiving in seeking clawbacks from former partners.
Still unclear is whether partners who do not sign on to the plan, assuming it does succeed, could sue former Dewey colleagues. When asked Wednesday if a third-party release preventing such actions would be approved, Togut said he and the rest of the leadership team are still grappling with that issue.
The plan could become more attractive if certain tax benefits are provided, one former partner says. Mitchell said Wednesday that they are working on a way to make it tax deductible.
Other partners interviewed Thursday said they are still consulting with counsel to determine if they want to participate. One former partner, however, was already set in his decision: “I think this is destined to fail. Let the trustee go for it.”