Those working on, and following, the Dewey & LeBoeuf bankruptcy will have to wait a bit longer to find out how the judge overseeing the case will rule on what has become a pivotal element of the defunct firm’s plan to make its way through Chapter 11: a proposed settlement that would recover $71.5 million from former partners.
An all-day hearing in lower Manhattan Friday ended inconclusively, with U.S. bankruptcy court judge Martin Glenn saying just after 5 p.m. that he would take both sides’ arguments under consideration but would not rule from the bench on whether the settlement will be approved.
The Dewey estate’s advisers and other parties already lined up behind the settlement sought over the course of two days to counter arguments that the so-called partner contribution plan does not maximize potential recoveries for the firm’s creditors and favors former partners with ties to those advisers.
During two-and-a-half hours of closing arguments Friday, Glenn pointedly questioned the dissenters, represented by two groups of retired partners that are the only parties to fully oppose the settlement. Both groups—one an official committee of former partners, the other an ad hoc committee of retirees—insist that a neutral third-party examiner should be appointed to ensure that the settlement deal is fair.
Attorneys for longtime Dewey chairman Steven Davis, former executive director Stephen DiCarmine, and former chief financial officer Joel Sanders also raised several objections to the plan during the proceedings, primarily to ensure that the “big three”—as Davis, DiCarmine, and Sanders have come to be known in the context of the case—aren’t being unjustly targeted as the sole perpetrators of the firm’s collapse. The three men are also eager to ensure that they have the means to defend themselves in the event of future litigation. (Speaking during a break in the hearing, Davis’s lawyer Ned Bassen, a partner at Hughes Hubbard & Reed, said that there has been no recent activity in a Manhattan district attorney’s investigation into Davis’s conduct running the firm. The investigation is one reason the estate has offered for leaving Davis, who has denied any wrongdoing, out of the settlement).
The closing remarks followed testimony from three witnesses: Paul Gender, who serves as chairman of Dewey’s unsecured creditors committee; Joff Mitchell, Dewey’s chief restructuring officer; and David Pauker, a key architect of the partner contribution plan.
Pauker and Mitchell provided the most detailed explanations to date about how the plan was conceived, as well as why the Dewey advisers chose to limit claw backs of compensation to 2011 and 2012. Mitchell cited a “clean audit” conducted on the firm’s finances in 2010 and the firm’s ability to refinance its debt that same year as two reasons why the settlement should not attempt to reach back into 2010 earnings.
The argument is a response to one made by the retiree groups: that more money could be recovered if the settlement went beyond 2011. (Dewey’s advisers also maintain that even if the settlement did reach back further, it would be unlikely to pull in more money than the current plan does.)
“You could never recover $440 million—ever,” lead Dewey lawyer Albert Togut of Togut, Segal & Segal said during his closing, referring to the total amount the firm paid to all of its partners in 2011 and 2012. The $71.5 million represents payments from some 450 former partners who have agreed to return a portion of money they earned during those years, as well as tax advances and unpaid capital contributions. Payments from retired partners, including some on both the official and ad hoc committees contesting the settlement, amount to $7 million of the total. (In exchange for the payments, plan participants have been offered waivers from Dewey-related liability.)
In response to allegations that the estate’s advisers are too cozy with former Dewey partners, Togut said, “We did not operate in an ivory tower” and that Mitchell, and not a wind-down committee composed of former partners Janis Meyer and Stephen Horvath, was ultimately in charge of the plan. (At one point, Togut also said, commenting on an email from former bankruptcy partner Martin Bienenstock that was entered as evidence Thursday, that “I got that email, and I did not answer it. I got a lot of emails from Bienenstock, and I did not answer them either.”)
Toward the end of the hearing, Glenn appeared to be siding with Togut and the Dewey estate. He asked Kasowitz Benson Torres & Friedman partner David Friedman, who represents the official committee of former partners: “Is there anything on the record before me that anyone other than Mr. Mitchell directed this effort?”
“The answer, I think, is ‘no,’ ” Friedman said, qualifying his response by saying you cannot ignore that every adviser to Dewey had been hired by members of the firm when it was still in existence. “ They know who their bosses are,” Friedman said. “That’s part of being a hired gun.”
Togut and others, including Edward Weisfelner, a partner at Brown Rudnick who represents the unsecured creditors committee, questioned the retirees’ motives in seeking to squash the plan and if they even have any standing to claim money from the estate.
Said Weisfelner: “They’re not here, with all due respect, and as the evidence makes clear, to preserve their claims or maximize their recovery,” a point that was later contested by Annette Jarvis, a Dorsey & Whitney partner representing the ad hoc group. Glenn agreed that questions about any party’s motives would not play into his decision.
In the end, the settlement’s fate rests on one key point: Whether it is in the best interest of Dewey creditors. The amount at stake, though significant, is still far from the $260 million owed to secured lenders and $300 million to $500 million owed to unsecured creditors.
Friedman said he expects creditors to receive less than 20 cents on the dollar and scoffed at the $9 million a month in administrative costs the estate has racked up.
Togut argued that the hefty bills are one of the main reasons the deal was put together quickly and without going into a detailed analysis of the role each individual former partner may have played in Dewey’s collapse. The approach the advisers have taken “represents a breakthrough,” Togut said. “It gets money to creditors’ hands in months rather than years.” He cited another law firm bankruptcy in which he played a key role, that of Finley, Kumble, Wagner, Underberg, Manley, Myerson & Casey, saying it took 20 years of litigation to resolve all of the issues involved in that case.
Earlier in the day, Mitchell expressed a similar sentiment, arguing that if the settlement is not approved, “This thing drags on for years and years like other law firm cases have dragged on, and everyone’s more miserable than they are today.”
An attorney representing JPMorgan Chase, which serves as the agent to Dewey’s secured lenders, voiced his support of the settlement even while saying that from the outset, the bank has not “viewed the PCP with enthusiasm.” The lawyer, Kenneth Eckstein of Kramer Levin Naftalis & Frankel, noted that the lender group will likely stop allowing the estate to use its cash collateral past the end of the month if Glenn rejects the plan.
Speaking after the hearing Mitchell said, “From my perspective the day went as well as it could have. I await the judge’s decision.”
Meanwhile, as the hearing stretched on, a filing was made with the bankruptcy court seeking to employ former Dewey partners Bruce Bennett, Sidney Levinson, Joshua Mester, and James Johnston, all of whom are now with Jones Day, to serve as special counsel to the Dewey estate.
Bennett and his team were hired in June 2011 while they were with Dewey to handle Chapter 11 proceedings for Major League Baseball’s Los Angeles Dodgers. The hard-fought case, which saw Dewey’s fees take center stage at various points, ended in late March when an investor group agreed to buy the storied franchise out of bankruptcy for $2.15 billion.
Dewey was required to submit a final fee application for its work on the matter in May, at roughly the same time it was making its own final descent into Chapter 11. A bankruptcy judge in Delaware agreed to postpone the firm’s final fee application in the Dodgers case until September 28.
According to a declaration filed Friday by Levinson in the Dewey bankruptcy, Jones Day is being hired solely for the purpose of “preparing, filing, and prosecuting” the final fee application in the Dodgers case. A stipulation and settlement agreement between Jones Day and Dewey that was also filed Friday reveals that if the bankruptcy court in Delaware “allows and approves payment” of a fee enhancement for the work of Bennett’s team in the Dodgers case, 15 percent of that amount will go to Dewey. The balance will go to Bennett to use at his discretion, according to the stipulation
Court filings in the Dodgers bankruptcy show that Dewey filed its last monthly fee application in the case February 29, when the firm reported that it had incurred $876,893 in fees and $91,380.94 in expenses for its work that month. At that point Dewey had already incurred more than $10 million in fees and expenses for its work on the case.
Court records show that the four Jones Day lawyers have also agreed to participate in the partner contribution plan if the stipulation is approved, though their names do not appear on a schedule filed Thursday with a full list of participating partners and the amounts they are set to pay the estate. The filing comes a week after a separate stipulation, which said the Bennett team was working on a settlement related to the partner contribution plan and claims it has against the estate, was recorded with the court. (Bennett declined to comment when reached Friday by The Am Law Daily. Levinson did not immediately respond to a request for comment.)
Brian Baxter contributed reporting.