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Heller Creditors Seek $150 Million, Detail Firm's Failings
The Recorder
October 29, 2009
The stakes have gone up.
Heller Ehrman's creditors now want $150 million from former partners, contending in a confidential mediation brief that the firm fraudulently conveyed that much to partners after it had become insolvent. Meanwhile, a group of 89 former Heller partners said in their own confidential brief that they've hired John Keker of Keker & Van Nest to represent them if creditors pursue a fraudulent conveyance suit.
The documents come to light as Heller's creditors and former partners prepare for their first mediation conference on Friday with Judge Randall Newsome of the U.S. Bankruptcy Court for the Northern District of California.
The creditors' brief, dated Sept. 22, contends that former Chairman Matthew Larrabee sent an e-mail describing a $9.3 million payout to partners late in 2007 as an "overdistribution." The creditors say the firm was already insolvent then, and that firm managers were trying to prop up the firm's profits-per-partner rankings to attract a merger partner.
The brief, signed by creditors' counsel Thomas Willoughby, also contends that former CFO Richard Holdrup directed that the payment be accounted for not as an "excess distribution" but as a "miscellaneous receivable."
Willoughby, a partner at Felderstein Fitzgerald Willoughby & Pascuzzi, declined to discuss the mediation and said he was distressed that his brief was provided to the media because the settlement discussions are confidential by order of the judge.
In his brief, he says the firm was insolvent because it had "unreasonably small capital" in 2007 and that payments made to partners in 2008 amount to fraudulent transfers.
The 89 former partners contend the firm collapsed because of wider economic conditions, and the departure of rainmakers responsible for $90 million worth of business in 2007. In their brief, they say creditors' "threats to bring fraudulent transfer claims against the former Heller shareholders rests on wishful lawyering, not credible evidence or viable legal theories."
The group of 89 partners that have retained Keker calls itself the "Dissolution Date Shareholders" and includes Larrabee.
The former partners point to clean audits by Ernst & Young and the continued willingness of their banks to lend them money as evidence the firm was profitable and well-capitalized at the end of 2007.
"The firm's undisputed financial results and the contemporaneous analyses of independent experts plainly demonstrate that Heller was financially healthy well beyond year-end 2007," the former partners say in their brief. "Even after spending more than $1 million, the [creditor's] committee has not found an expert willing to express a contrary view."
The brief, signed by David Stern of Klee, Tuchin, Bogdanoff & Stern, says Larrabee, Holdrup and Heller COO Brad Scott will all testify that the 2007 payment "complied fully with all applicable governance documents and lending covenants and was promptly disclosed to the firm's lenders (who expressed no objection or concerns) and was openly discussed with Heller's auditors. Far from evidencing fraudulent behavior or financial distress, the $9.5 million distribution reflected reasonable cash management practices."
The partners say a review by a "highly respected law firm consulting group" showed that Heller's financial condition was as good as other firms' at the end of 2007, with less debt per equity partner and less debt as a percent of revenue than the top 20 percent of firms with less than 500 lawyers. It also says two consulting firm reports found the firm was much better capitalized that its potential merger partners, Baker Botts and Baker & McKenzie.
Larrabee declined to comment Wednesday. He has previously denied wrongdoing and vowed to fight the creditors' allegations. Holdrup did not return a call and an e-mail seeking comment.
The mediation briefs disclose some details about Heller's leading rainmakers: The IP group headed by Robert Haslam and Robert Fram -- which jumped to Covington & Burling -- billed $50 million in 2007. Insurance coverage partners David Goodwin and Lawrence Hobel -- who also went to Covington -- were responsible for $21 million in billables in 2007. Four San Diego corporate partners that went to Goodwin Procter in April 2008 accounted for $12 million in 2007.
