(Illustration by Phil Foster)
More than two years have passed since Dewey & LeBoeuf’s stunning collapse, but the storms surrounding the largest law firm bankruptcy in history show no sign of abating. A range of actions are pending in U.S. courts, including a criminal case against former Dewey leaders, the U.S. Securities and Exchange Commission’s parallel civil suit, and the bankruptcy estate’s clawback actions to recover compensation from former partners.
Across the Atlantic, meanwhile, a series of suits filed by U.K.-based Barclays plc over loans that the bank made to Dewey partners—ostensibly to cover the attorneys’ capital contributions—is moving through English courts. Although this litigation has remained largely out of the spotlight, it reveals new aspects of the Dewey debacle, including the perilous state of Dewey’s finances as early as 2009. Court filings, interviews with two former partners who are not involved in the litigation and internal documents related to the loans raise troubling questions about what Dewey leaders did or didn’t do to prevent the faltering giant from failing.
The suits will proceed to trial in 2015, now that a U.K. High Court judge has rejected the bank’s summary judgment motion and ruled that the explosive assertions by three former Dewey partners targeted by the bank are credible enough to warrant a further hearing. The trio claims that Barclays conspired with Dewey leaders to dupe the lawyers into taking out loans, and that instead of repaying the loans as promised, the firm leaders used the money to shore up the firm’s shaky finances.
A Barclays spokesman said in a statement: “Barclays maintains full confidence in its claims against the Dewey partners and will continue to robustly pursue the significant debts due. The vast majority of partners have repaid the sums owed.”
The three ex-Dewey partners—Arnold & Porter’s Charles Landgraf, formerly part of the five-member group that led Dewey just before the bankrutpcy; entertainment attorney L. Londell McMillan; and Elias Farrah of Winston & Strawn—are among as many as 50 former partners from whom Barclays is seeking repayment of more than $15 million in outstanding loans. Last month, the trio combined their litigations against the bank; all three declined to comment on their case or did not respond to requests for comment.
The Barclays loans date back to 2006, when Dewey Ballantine—which a year later merged with LeBoeuf, Lamb, Greene & MacRae to form Dewey & LeBoeuf—began requiring partners to make their full capital contributions up front. To help, the firm arranged a loan facility with Barclays. If a partner left the firm, the loan balance would immediately be due, and former partners would see their capital go directly toward repaying the loan instead of being returned in monthly payments. Once a loan was repaid, any remaining capital went to the partner.
According to two ex-Dewey partners who took out capital loans from Barclays, the firm made the scheduled monthly repayments at first. That began to change in 2009, however, when “it became clear that the combined firm wasn’t doing well,” says one former partner. Dewey’s revenue declined 15.3 percent in 2009, according to American Lawyer reporting. In September 2009 a memo from then-finance director Francis Canellas told partners that the firm was changing its capital distribution arrangement—and therefore its repayment of the Barclays loans—from monthly to quarterly. (Canellas has pleaded guilty to second-degree grand larceny, agreeing to testify against Dewey defendants who include former chairman Steven Davis, former executive director Stephen DiCarmine and former chief financial officer Joel Sanders, who have pleaded not guilty to charges against them.)
When the first quarterly payments came due in February 2010, Dewey paid just one-quarter of the amount owed to the bank, according to two former partners who had capital in the firm at that time. Partners were told that the shortfall would be made up with the next quarterly payments, in April. However, at an April 2010 meeting, chaired by DiCarmine, the firm asked ex-partners to let it to defer the capital payments for up to five years so that it could pay its current partners, according to two former partners who were on hand.
“We were told that the firm couldn’t afford to make these payments, and that if we stuck it to them and made them pay us what we were owed, the whole house of cards would come falling down,” says one of them, who spoke on condition of anonymity. Dewey agreed to issue promissory notes to the partners, and outlined a payment schedule whereby the firm would defer 70 percent of the repayment in the first year and 50 percent in the second year. Full repayments would be made in the third year, with the deferred amounts repaid by 2015.In 2011, one ex-partner says, Dewey issued a series of statements to former partners showing that the firm was using their capital to repay the Barclays loans, as planned. However, this partner says that when he and others contacted Barclays in September 2011 to verify the repayments, they were told that no payments had been made that year, and that only partial payments had been made in 2010.
“The firm was providing us with accounting information that simply wasn’t true,” says one former partner. Furious ex-partners demanded an explanation. In a February 2012 letter, Dewey’s general counsel, Janis Meyer, stated that the firm was making deductions from partners’ capital accounts on a quarterly basis, but would repay Barclays only at the end of each year. Partners had not been informed of this change, Meyer said, because the accounting form only had space for 15 characters of text.
“The argument was that they couldn’t tell us because there wasn’t enough space on the statement—it would be funny if it wasn’t so serious,” says one former partner. Meyer did not respond to a request for comment.
When Dewey filed for bankruptcy in May 2012, the Barclays loans became due, and the bank began to seek payment from former partners. Among the ex-partners sued were McMillan, who Barclays says took out a $540,000 loan in 2010, and Landgraf, who faces a claim for $496,000 from a loan agreement signed in 2010.
McMillan sued the bank in U.S. district court in New York in February 2013, challenging what he called “a fraudulent scheme orchestrated and arranged” by Barclays and Dewey management. He later added several former Dewey leaders as defendants, including Davis. McMillan told sibling publication The Am Law Daily in December: “Dewey & LeBoeuf owes me and many of my former partners millions of dollars. The notion that I owe any debt is unconscionable and without merit.”
In Landgraf’s defense and counterclaim, filed with the U.K. High Court last May, his attorneys claim that he was “consistently and repeatedly” told by Davis, DiCarmine and Sanders that the firm had primary responsibility for repaying the loans. Lawyers for DiCarmine call those claims “patently false.” Davis and Sanders could not be reached for comment.
Barclays sought summary judgment against Landgraf, but the High Court rejected its application in February. Mr Justice Popplewell held that the wording of the loan documents “seems clearly to favor” the bank’s claim. But, he added, “it is not fanciful” that Landraf could show at trial that the bank “knew that the true purpose of the loan was to provide the firm with the liquidity it required to meet its day-to-day liabilities, not to enable him to make a capital contribution.”
Popplewell also found that “it is at least arguable” that Barclays knew that default events triggering repayment of the loan had already been met at the time the loans were made, potentially “supporting the submission that the terms of the contractual documents were to some extent a sham.”
In May, Landgraf and McMillan proposed joining their litigations with Barclays’ suit against a third former Dewey partner, Farrah. The three cases will be heard as a joint action in the Commercial Court next year.
Will other ex-Dewey partners join them? One former partner, who says he took out a personal loan to repay a six-figure sum to Barclays, says he considered suing Dewey, and even banded together with other former partners to retain New York litigator Gregory Joseph of Joseph Hage Aaronson. But he ultimately decided against filing a suit. “I had already spent years dealing with this nonsense,” he says. “I just needed to move on.”