Thelen's New York landlord obtained a key court ruling late Thursday that could drive the firm's other unsecured creditors to force it into bankruptcy.
Los Angeles County Superior Court Judge Brett Klein granted the landlord, 875 3rd Avenue LLC, a writ of attachment reserving $25 million of Thelen's assets for it. A similar court order in December quickly threw Heller Ehrman into bankruptcy.
The writ bumps all unsecured creditors behind the landlord in line for Thelen's money. Those unsecured creditors include Thelen's employees, who have filed a class action against the firm estimated to be worth as much as $25 million.
"We haven't decided what we are going to do in response, but it seems likely now that Thelen will be in bankruptcy in the next 90 days," said Craig Collins of litigation boutique Blum Collins, which represents Thelen's employees in the class action.
Collins said they are considering forcing the firm into bankruptcy. Three creditors can force a bankruptcy if they are owed more than $13,475.
But the drawback of a bankruptcy is that more of the debtor's money goes to pay lawyers instead of creditors, Collins said. Attorneys working on Heller's bankruptcy have already asked for more than $2 million in fees.
"The lawyers that feed on the bankrupt carcass are expensive," Collins said. "The bankruptcy sucks a lot out of the estate that otherwise would go to creditors."
In any bankruptcy, each employee has claims of about $10,000 that take priority over other unsecured creditors. Thelen estimates that the priority claims would total around $6 million for Thelen's former employees.
Citibank, Thelen's only secured creditor, is still owed $9 million, while Thelen estimates in court filings it's still owed $40 million in accounts receivable.
It's unclear how many unsecured creditors Thelen has besides its former employees. The firm has settled with its San Francisco landlord, with Reed Smith moving into the firm's old office space.
Thelen's attorneys at Latham & Watkins downplayed the significance of the order, saying it will have "no effect" on Thelen's wind-down effort. Partner Wayne Flick said there isn't money available for the landlord to seize.
"No assets have been attached, and none may be at this time because Citibank and Thelen's former employees have significant claims that have priority over the claim of the New York landlord," he said in an e-mail. "Thelen continues to work outside of bankruptcy to wind down its affairs in an orderly manner and in a way that maximizes the potential recovery for its creditors."
Like any other move that affects a debtor's financial status, the writ is obviated if Thelen files for or is forced into bankruptcy within 90 days. The bankruptcy would put all unsecured creditors back on equal footing.
In December, the writ granted to Heller's landlord infuriated Heller's lawyers, and led bankruptcy attorneys not related to the case to predict that bankruptcy was imminent because such writs are considered extremely aggressive and make other creditors uneasy. Nine days later, Heller landed in bankruptcy court. However, the quick timing was likely more related to a "clerical error" that threw Bank of America's status as a creditor into doubt. There's no indication such a situation exists for Thelen, and Citibank is apparently the one with first dibs on its money, in or out of bankruptcy.
Thelen said it would dissolve in October after partner defections over the previous year triggered a lending covenant that puts the firm's bank in charge of expenditures.
The attorney for Thelen's landlord, Todd Whitman at the Century City office of Allen Matkins Leck Gamble Mallory & Natsis, would not say whether the landlord preferred a bankruptcy.
"Plaintiff was happy with the court's ruling and didn't want to speculate as to what Thelen's next moves would be," Whitman said.