A group of about 90 former Heller Ehrman partners has logged a defense against creditors' claims that the firm was insolvent in 2007, a key point the creditors need to prove to build a fraudulent transfer suit.
The brief (.pdf) is the first peep out of any of Heller's former partners in the 10-month-old bankruptcy.
It asserts that creditors cannot possibly prove that Heller was undercapitalized by the end of 2007, or that funds were fraudulently transferred thereafter. It blames the recession for the firm's demise.
"In fact, the evidence will demonstrate that the firm failed in September 2008 as a result of the most precipitous and severe economic downturn since the Great Depression," says the filing in the U.S. Bankruptcy Court for the Northern District of California.
The partners are currently in the midst of confidential mediation with the creditors committee before Judge Randall Newsome. The creditors have threatened to sue former partners and the firms they went to on fraudulent transfer and Jewel v. Boxer claims.
The brief appears to have been filed in part to make public the partners' legal defense theories. Creditors have frozen about $14 million of the firm's retirement funds, and sought court approval to sue one of Heller's pension plans for the money. It's not clear it would be legal to take the funds, but the committee is clearly using the move as leverage in negotiations with the partners.
Heller was adequately capitalized at the end of 2007, and audits did not raise any red flags, the filing says. Payments to partners in early 2008 count as compensation for services rendered, not as bonuses -- as creditors contend -- and so can't be considered fraudulent transfers, the brief asserts.
Also, case law shows an "unforeseeable calamity" can put a dent in fraudulent transfer cases and remove liability. Under case law such calamities can include fires or storms, but also, for instance, the failure of a leveraged buyout, according to the brief.
"The shareholders contend that there were a number of unforeseen events, including primarily the economic downturn, the unforeseen departure of a number of significant shareholders and finally the banks deciding to call our line of credit and seize our cash flow," said Michael Rugen, a former Heller partner in the group.
The 90 partners are not named, but they consist of lawyers who were still at the firm when it dissolved, according to Rugen. They are represented by David Stern at Klee, Tuchin, Bogdanoff & Stern.
The brief was filed last week in response to the creditors committee's request to be the party to sue the pension fund, which Judge Dennis Montali approved. The brief noted that the partners didn't have standing to oppose the request. Montali agreed, noting in a memo that the group also had not specifically asked for any relief.
Thomas Willoughby, partner at Felderstein Fitzgerald Willoughby & Pascuzzi, which represents the creditors committee, declined to comment on the defense theories in the filing, saying only that, "Everything we are doing with respect to the shareholders is operating under the confidential mediation order."
The committee intends to file a liquidation plan by a Thursday deadline. The plan is the first step toward ending the bankruptcy, and creditors want to have it confirmed before the end of the year.