Font Size: 
Orrick Tightens Its Grip on Capital
The Recorder
May 06, 2009
Partners who leave Orrick, Herrington & Sutcliffe aren't getting their money back for a while because of a new loan requirement by the firm's bank, according to the firm and several former partners.
A letter sent to former partners last month and obtained by The Recorder said that Orrick had amended its "primary credit agreement with our banks" and that a new provision meant repaying partners at the usual time, in the spring, would cause it to default on the loan.
It's unclear whether Orrick is the only large law firm facing such a restriction. In a statement on Tuesday, Orrick called the change "standard," and the letter to former partners said the firm's bank had required it.
Two industry experts said it's not something banks usually require. Danilo DiPietro, head of Citi Private Bank's Law Firm Group, which counts many Am Law 100 firms as clients, said deferring capital payouts to departed partners is not one of his bank's requirements.
"We've not added that as a covenant, but more and more firms are modifying their partnership agreements to allow for more extended payback of capital," DiPietro wrote in an e-mail. He did not respond by press time to a follow-up question asking whether Orrick is a client.
An Orrick spokeswoman declined to discuss the agreement or name the firm's banks. The firm's statement said, "A standard requirement contained in a new credit agreement we entered into this year now requires that these payments be made in the fall rather than the late spring/early summer."
Managing partners have said their banks are placing more and more requirements on loans. Many businesses are having to renegotiate lines of credit more frequently, and face more hurdles to obtain the same amount of credit.
Under Orrick's new credit agreement, the firm cannot pay departing partners their capital until the fourth quarter of the year following the one in which the partner departed. For instance, if someone leaves Orrick in January, that partner would not receive their capital for at least 22 months.
The change is consistent with the firm's partnership agreement, Orrick said in the April letter to the ex-partners. Former partners confirmed the letter but declined to comment on the record.
Orrick's partnership agreement requires capital payouts after an audit is completed of the fiscal year during which the partner left, unless the payments "cause the firm to be in default under any material credit agreement or other financing arrangement."
It's not clear whether the bank's requirement was enacted for an existing loan on which Orrick owes money or on a line of credit, typically tapped by firms for just a few days or weeks.
As few as eight partners left Orrick last year, so the amount of money at stake this year might not be more than $2 million. Former partners speculated that the move may instead be aimed at preventing any future laterals from taking too much capital too quickly.
Two months ago, one chairman of an Am Law 100 firm said firms are under more pressure from banks to change their capital requirements, whether it's how much capital is required by current partners or how the previous year's profits are distributed.
"There might well be a covenant on how much capital would be paid out," he said at the time, speaking on condition of anonymity. "Usually a combination of inflows to outflows, with tests to make sure it's not depleting capital."
Either way, said consultant Peter Zeughauser, the legal industry considers it a best practice to defer capital payouts, but when told of Orrick's new deferral time, he said, "that's a long withhold period" and could damage lateral recruiting efforts.
"Firms are doing it. That's not uncommon at all. But if the bank's leading it, I haven't heard of that," Zeughauser said, adding Orrick could have opted to use another bank.
"Depends on how bad you want to borrow the money," he said.
