Heller's attorney blames bank intransigence and a landlord's "ridiculous" move for the firm's bankruptcy decision.
Two banks are short $6 million, a San Francisco landlord is looking at $30 million less than a court said it was owed, and the finger pointing has begun.
Defunct Heller Ehrman filed for Chapter 11 bankruptcy protection on Sunday, putting a stay on at least five suits filed against the firm since it announced on Sept. 26 that it would dissolve. According to a memo sent from the firm's dissolution committee to former Heller employees, the decision to file for bankruptcy protection was driven by its San Francisco landlord, 333 Bush Associates, which sought and received a writ of attachment on Dec. 19, making it a secured creditor to the tune of $48 million. A lack of cooperation from the firm's banks, Bank of America and Citibank, was also blamed.
"The San Francisco landlord went and got this ridiculous attachment ... which was a mistake on their part and they never should have done it," said Greenberg Traurig's Leslie Corwin, who represents Heller. "That also spooked the banks."
Corwin said the firm's dissolution committee had wanted to avoid the extra costs of bankruptcy, so that more money could go to creditors. He also said that Heller and the landlord had agreed on a settlement that had to be paid immediately in cash. But the banks wouldn't cough up the money.
"As a result of the levy of the landlord's writ of attachment and internal bank procedures that (according to the banks) were triggered by that levy, the firm was unable to make this payment before it became apparent that a Chapter 11 filing would be necessary in any event due to the bank's intransigence during settlement negotiations," said a memo sent Sunday to all former Heller employees.
The employee memo said the bankruptcy was not prompted by the firm running out of money, and that "collection of accounts receivable over the past three months has been strong."
By filing for bankruptcy, Heller hopes to negate the security interests of two creditors -- its banks and its San Francisco landlord. A bankruptcy court can review changes to a debtor's secured creditor status that were made 90 days before the bankruptcy filing. The landlord's Dec. 19 writ is such a change.
The firm is also seeking to void its banks' status as secured creditors. A year ago, Bank of America, acting as an agent for Citibank as well, made a uniform commercial code filing that the dissolution committee claims terminated its security stake in the firm. The bank has said this was a "clerical error" and in October filed an amendment to renew its security interest. On Monday, Heller asked a bankruptcy court to void that October amendment.
By stripping the banks and landlord of their status as secured creditors, the court would put them on more equal footing with unsecured creditors, including employees seeking unpaid wages.
The landlord blames Heller and the banks, saying it "regrets" they couldn't reach an agreement.
"Although we had obtained a writ of attachment against the assets of the firm, we agreed last week to modify that in the manner requested by the committee to permit it to proceed with its dissolution plans, including reducing the amount of the attachment to the level requested by the committee," George Clever, a spokesman for 333 Bush Associates, said in a statement.
Under bankruptcy, the landlord would only be entitled to a year's rent, about $18 million.
Since its decision to dissolve, Heller has paid the banks $51 million. Another $5.7 million is owed, according to court filings.
"If the banks are held by a bankruptcy court not to be a secured creditor, then they have already received more from Heller than they would have under bankruptcy," Corwin said.
Citibank's lawyer, Gibson, Dunn & Crutcher partner Jonathan Landers, declined to comment.
The firm has long blamed its banks for its inability to pay employee severance and accrued vacation, which has prompted two lawsuits alleging state and federal WARN Act violations. Bankruptcy proceedings guarantee around $11,000 to each employee that earned at least that much in the last six months.
Consultant Peter Zeughauser of The Zeughauser Group said it may be that the firm's partners sought to protect their own economic interests.
"It may be that the partners had personal liability under the WARN Act suits," Zeughauser said. "If so, that would explain their motivation for wanting to make sure that the claims of the employees under the WARN Act were paid out of the firm's estate. That may be their motivation. It may not be that altruistic."