Stephen DiCarmine, left, former executive director, and Joel Sanders, former chief financial officer at Dewey & LeBoeuf
Stephen DiCarmine, left, former executive director, and Joel Sanders, former chief financial officer at Dewey & LeBoeuf (Carlo Allegri / Reuters)

Two former Dewey & LeBoeuf leaders say they should not have to return as much as $21.8 million that the firm paid them in the years leading up to its bankruptcy, arguing they provided years of value while working there.

Former executive director Stephen DiCarmine and chief financial officer Joel Sanders also argued that the Dewey trustee’s complaint against them in Southern District Bankruptcy Court is “squarely at odds” with previous statements by the Dewey estate about the date of the firm’s insolvency.

Sanders and DiCarmine, along with former chairman Steven Davis and ex-client relations mangers Zachary Warren, are facing criminal charges alleging they orchestrated a massive fraud that contributed to the biggest law firm collapse in U.S. history. Meanwhile, Sanders and DiCarmine are in bankruptcy court battling Alan Jacobs, the firm’s liquidating trustee and president of consulting firm AMJ Advisors.

Jacobs, in a clawback suit filed in November in Jacobs v. DiCarmine 13-01765, is seeking up to $21.8 million in payments made to DiCarmine and Sanders while the firm was insolvent, arguing the payments were “objectively unreasonable, if not arbitrary and capricious.”

According to Jacobs’ suit, in August 2007, on the eve of the ill-fated merger that created Dewey & LeBoeuf, DiCarmine and Sanders signed employment agreements, which Davis signed on behalf of the firm. The contracts provided the two with four types of compensation for six years beginning January 2008, including a salary, contractual and discretionary bonuses and trust payments.

The non-discretionary payments under the contracts totaled $15.9 million over six years, plus an opportunity for unlimited discretionary bonuses—”an astronomically generous arrangement for law firm administrators, and far in excess of the reasonably equivalent value of the services,” Jacobs said.

Specifically, he noted that by at least Jan. 1, 2009, the firm was insolvent, unable to pay its debts as they came due, and undercapitalized.

But in court papers seeking to dismiss Jacobs’ suit, Sanders and DiCarmine argue they had received “substantial compensation” as senior officers of the predecessor LeBoeuf firm, and the trustee “does not allege, because he cannot, that DiCarmine’s or Sanders’ services had no value, or even insignificant value.” They claim they provided value as senior managers in merging LeBoeuf, Lamb, Greene & MacRae with Dewey Ballantine, and the payments were made according to existing contracts.

“There is no serious question as to whether Messrs. DiCarmine and Sanders provided value: they worked at Dewey and performed their jobs for almost five years,” the pair argued.

They also claim the trustee’s complaint is at odds with statements by the Dewey estate in favor of the partnership contribution plan (PCP), in which former partners returned a portion of their earnings from 2011 and 2012 in exchange for a waiver of liability.

Specifically, they point to statements by estate representatives, summarized in an opinion by Southern District Bankruptcy Judge Martin Glenn approving the plan, that there was strong evidence to support that Dewey was insolvent in 2012, but insolvency was more difficult to prove for 2011 and 2010.

Those statements “are totally inconsistent” with the trustee’s allegations that Dewey was insolvent by at least January 2009, DiCarmine and Sanders argued.

“When it benefitted Dewey to represent that it could not show insolvency earlier than January 1, 2012, the debtor in possession did so,” the two claim. “But now that this fundamental position would bar the majority of the claims here … the trustee has changed the story to now claim that Dewey was insolvent years before January 1, 2012″ to recover “years’ worth of justifiably earned compensation.”

“Here, it would be a huge blow to judicial integrity to unravel a position that was integral to Dewey’s efforts to obtain approval of the PCP, and, correspondingly, its plan of liquidation, over a year after consummation of the Dewey plan,” Sanders and DiCarmine said.

If the trustee’s allegations about Dewey’s solvency are true, then the statements made relating to the partnership contribution plan are “a concealment of facts or a false misrepresentation,” they argued.

Dewey’s audited 2008, 2009 and 2010 financial statements show solvency, they said. Dewey “had plenty of cash to pay its debt obligations, even during the years in question that were in the midst of a worldwide financial crisis,” the former executives argued. “Dewey’s ultimate problem was that its partners, and the associated revenue they generated, walked out the door shortly before” the firm filed for bankruptcy.

Prosecutors in the Manhattan District Attorney’s Office, in announcing criminal charges against the firm’s leaders, claim that Davis, DiCarmine and Sanders caused others at the firm to make tens of millions of dollars of fraudulent accounting entries beginning in late 2008, continuing into 2012, and their wrongdoing contributed to the collapse of Dewey.

Ned Bassen, a Hughes Hubbard & Reed partner representing Sanders, said in an interview about the trustee’s arguments: “You can’t say for one purpose, when it suits you, that the firm was insolvent until very late because you don’t want to go after the partners for a lot of money,” and then find another date for another purpose.

If the earlier date is true, Bassen said, “the remedy would be to re-do, undo the partnership contribution plan.”

DiCarmine’s attorney, Mary Beth Buchanan, a partner with Bryan Cave, said, “We feel we have very strong grounds for which the bankruptcy court should dismiss the trustee’s action.”

Andrew Ryan, an attorney for the trustee and a partner at Diamond McCarthy, declined to comment.