Coudert Brothers may be dead, but its problems only seem to be getting worse.
The firm, which closed up shop in August 2005, is awash in debt, has declared bankruptcy, and was recently hit by by a pair of judgments totaling $2.8 million. Though the firm has paid off $23 million it owed to bank creditors Citigroup Inc. and JPMorgan Chase & Co., it still lists $18 million in liabilities. Former partners still owe the firm $8 million for loans, advances on tax payments, and overdistributions. Coudert faces malpractice claims in California and Connecticut. Five creditors-including the firm’s employee pension fund, tax authorities in Britain, and Coudert’s former landlord in Paris-are owed more than $1 million apiece. And that’s just the beginning. Bankruptcy filings show that some partners continued to bill the firm for items like a foot massage, a golf caddy, and private school tuition. Meanwhile, contract partners overseas complain that they weren’t paid, and a partner has stashed about $800,000 in Singapore bank accounts to ensure that the firm doesn’t get it.
Not since the epic crash of Brobeck, Phleger & Harrison in 2002 has a law firm flamed out as spectacularly as Coudert. The firm once had 28 offices across the globe and employed 600 lawyers, and though its financial performance had been fading for years, it was recognized as a pioneer in international law. But its worldwide scope also helped to undermine the firm. Coudert faced-and still faces-a jumble of lease obligations from Sydney to Singapore to San Francisco. It has had difficulties accessing money in Frankfurt, Tokyo, and Singapore. It was once common for Coudert partners to speak many languages. Now its creditors do.
All of this has bred resentment among former partners-particularly in the international offices. In Paris, for instance, ex-partners may be personally liable for a million-dollar lease because of the way the firm was structured in France. And in Australia, partners have petitioned the courts to file their own bankruptcy that would take precedence over the one in the United States.
Given the problems, the move into bankruptcy on September 22 may have been a smart strategic choice. Chapter 11 will give Coudert a number of protections: Litigation judgments are typically stayed, damages from landlords are capped, and the court will push to collect bills still owed Coudert (anywhere from $4.35 million to $25 million, depending on whom you ask). But bankruptcy filings may also make for some uncomfortable questions for the committee charged with the firm’s wind-down. The firm is “subjecting itself to microscopic examination from its creditors,” says David Gill, a partner at bankruptcy boutique Danning, Gill, Diamond & Kollitz. Among the questions the firm may face: Why did some partners get draws and not others? Why weren’t former partners asked to repay loans? And why, if it was having trouble paying its pensioners, did it allow partners to put in for trivial expenses?
No bankruptcy is pretty. Finley Kumble in the 1980s and, more recently, Brobeck have yielded tales of bad behavior and angry partners. But when it closed up shop, Coudert seemed different: Departing partners expected an orderly wind-down, one in which creditors would quickly get paid, and partners might see a nickel or two of capital returned. Perhaps Coudert proves that there’s no easy way to bury a law firm.
Coudert had been losing partners little by little for years when, in May 2005, the entire London and Moscow offices defected to Orrick, Herrington & Sutcliffe. Coudert, which had only recently talked merger with Orrick, didn’t take the departures lightly. Then-chair Clyde Rankin III sent letters to departing partners questioning whether they’d been speaking to Orrick during the merger discussions: “We have reason to believe that during this period you may have breached your fiduciary obligations to the firm and/or been complicit with Orrick in actionable wrongdoing. We are investigating whether this is the case, including by reviewing your e-mail and other communications.” There was no time for lawsuits. The firm was falling apart: Former partners say their draws were already restricted, and money was tight. Coudert made a last-ditch effort to find a merger, holding talks with Baker & McKenzie. They collapsed, former partners say, because Baker only wanted Coudert’s New York office rather than the whole firm. And so, in August 2005, the equity partners voted to dissolve the firm. After that, most Coudert partners jumped in groups: 32 lawyers in Paris to Dechert; a block to DLA Piper in Brussels, Singapore, and Tokyo; 40 lawyers in China to Orrick; and the majority of the New York office, including former chair Rankin, to Baker & McKenzie.
Successfully winding down a law firm usually rests on a quick intake of accounts receivable and on creditors waiting their turn for their money, explains Bennett Murphy, a bankruptcy partner at Hennigan, Bennett & Dorman, who represents the U.S. trustee in the Brobeck bankruptcy. “It only takes three creditors to lose patience to start a bankruptcy case,” says Murphy. To deal with the wind-down, Coudert’s partners appointed an Orwellian-sounding Special Situation Committee to collect outstanding accounts receivable, pay off the firm’s creditors, and negotiate deals with landlords.
But things starting going awry almost immediately. Former partners say that they received little guidance from the Special Situation Committee about how to wrap up business. “It was a very frightening and black time at the firm,” says Lance Miller, a former Coudert partner and executive board member who now heads the Tokyo office of DLA Piper. “Partners were scared. There wasn’t a free flow of information. We didn’t know what our liabilities were. We didn’t know where our partners were going. It was the blackest period in my 21-year career at Coudert.” And former partners say that as troubles developed, the Special Situation Committee never tossed them a lifeline. “[Take] the issue of saying, ‘Hello, we’ve been sued in Paris.’ Maybe they’d get back to you a month later, or maybe not. It’s not real-time response,” says Joseph Aragon�s, a former Paris partner now at Dechert.
The Special Situation Committee made the $22.8 million debts to Citibank and JPMorgan Chase, its two biggest bank creditors, a top priority. Coudert equity partners had personal guarantees on that debt (the allocation of the guarantees were laid out in the partnership agreement), so they’d be personally liable if the lines of credit were not repaid. Coudert moved fast. Baker & McKenzie paid $8 million for Coudert’s lease at the Grace Building in New York, as well as $5.5 million for Coudert’s work in progress for the past six months. Orrick agreed to pay $4.3 million for Coudert’s practices in China and Hong Kong. Meanwhile, Citibank and JPMorgan struck agreements with Coudert to gain access to the money shortly after it came in the door, according to an e-mail dated October 6, 2005, that former partner Tara Giunta wrote to more than 20 former partners. Giunta and five other partners had participated in a conference call with the Special Situation Committee three days before.
While it had success paying the banks, the Special Situation Committee lacked stability. The three members-Fred Konta, Andrew Hedden, and Anthony Williams-were negotiating deals with Baker & McKenzie, and Baker management did not want them focusing on Coudert, according to the October 6 e-mail. (Konta, in an interview, says he left the committee because he wanted to return to his practice. Hedden declined to comment. Williams, who headed the committee, did not return calls for comment.) In July the committee was reconstituted, and Patricia Kane, the firm’s executive director since 1992, now leads the wind-down effort with former partner Charles Keefe.
Meanwhile, money from the firm’s international offices wasn’t always flowing back to New York. Partners in Asia and France received final draws during September, although U.S. lawyers did not, the firm’s bankruptcy filing says. Lawyers in Asia received housing subsidies-$36,000, for one lawyer-and compensation for children’s tuition ($15,840, in one case). One partner was reimbursed for a $157 foot massage billed as “business development.”
Kane, the executive director, says it wasn’t supposed to happen that way. Immediately after the vote to disband, says Kane, management sent an e-mail to partners saying that draws should not be paid. Draws were usually paid from accounts in New York, says Kane, but some foreign offices used their local accounts to give themselves a payday. “When you send an edict, it’s very difficult to control what happens in bank accounts you don’t have control over,” says Kane.
Some international partners preferred to pay off their own creditors-employees, tax collectors, themselves-in part because they concluded that local laws dictated what they could do with the money. Take the $1.5 million that Coudert calls “converted or sequestered funds” in Tokyo and Singapore. According to Coudert’s bankruptcy filing, Oliver Wright and Dan Marjanovic, two former Coudert contract partners, improperly obtained signatory rights to Coudert bank accounts in Singapore. Wright, with Marjanovic’s help, transferred more than $425,000 into personal accounts and froze more than $400,000 in Coudert’s account with Standard Chartered Bank. Wright says he has not spent the money: “The funds are held in trust for the Singapore creditors”-himself, Marjanovic, and two former associates. Moreover, he says, he was given signatory powers to the bank account by Lance Miller, then head of the Singapore office. Miller says that all five Singapore partners were given signatory powers in Coudert’s final days because they had obligations to pay Singapore tax authorities. (Coudert owes the Singapore tax authority $215,000, its Chapter 11 filing says.)
In Tokyo, Coudert claims that between September 2005 and February 2006, Douglas Miller, the former head of the Tokyo office, “transferred, converted, and misappropriated a total of 81,341,330 Japanese yen, or approximately U.S.$700,000, to his personal bank accounts,” the bankruptcy filing says. In February, Miller died in a hotel room in London; Coudert says that his estate won’t turn over the funds. “[Miller] had received an opinion from Japanese counsel that [accounts receivable] was owned by him personally. He didn’t misappropriate funds, but he did feel he needed to take protective measures to protect creditors,” says Miller’s attorney, Damian Smith of Salt Lake City’s Parr Waddoups Brown Gee & Loveless. Smith also represents Wright and Marjanovic.
While it was trying to wrest money from partners in far-flung offices, the Special Situation Committee was also knee-deep in litigation at home. In October 2005 a U.S. bankruptcy trustee for a hospital estate in California sued for malpractice. Then Statek Corporation, a former client, filed a $30 million claim against Coudert and two former lawyers, including former London managing partner Steven Beharrell, for allegedly abetting a fraud scheme. Finally, SenoRx, Inc., another former client, alleged in a San Francisco court that Coudert was negligent in advice it gave over international patent applications.
Then, in May, Coudert was a defendant in a three-week trial in Los Angeles over claims of malpractice, breach of fiduciary duty, and fraudulent concealment. The suit dated to 2002, when Darryl Wong, a former client, and the apartment complex company he owned sued Coudert and then-partner Ralph Navarro. Wong claimed that Coudert had failed to advise him that he was required by federal law to disclose possible lead paint contamination in the complex, which he was selling. Wong claimed that after the sale, Coudert concealed that it knew about the requirement and his liabilities. In May a jury awarded Wong $1.06 million in compensatory damages and $1.5 million in punitive damages. (Navarro himself was not hit with damages. Coudert owes $208,000 to its counsel in the case, Lewis, Brisbois, Bisgaard & Smith.) Three months later, Coudert was hit in New York with a $316,000 judgment in a breach of contract case by a photocopy equipment leasing firm. Both judgments have been stayed, thanks to the Chapter 11 filing.
Litigation with Coudert’s former landlord in San Francisco was also a problem. In July the landlord won a $1.6 million judgment for a year’s back rent-a sum Coudert hasn’t paid yet. The landlord has since filed more suits: one for $11 million in future lost rent, and another claiming that Kane and Keefe breached their fiduciary duty by failing during the wind-down “to conduct business for the benefit of creditors.”
Coudert also couldn’t find subtenants to lease its $85,000-a-month space in Los Angeles. It was sued by landlords in Washington, D.C., and Palo Alto. In Sydney, Coudert had recently signed a new ten-year $25 million lease. Kane says an agreement with the landlord was reached but that “it is still a debt that is owed.” She declined to elaborate. And the firm’s former managing partner in Frankfurt spent nearly ten months negotiating with three German landlords. He says that partners could have been personally liable if creditors were not paid.
In Paris, partners still await a resolution. Groupama Immobilier, the Paris landlord, has sued, and Coudert owes it $1,098,550, according to the bankruptcy filing. And there’s another wrinkle in Paris: personal liability for the lease and other debts. Coudert Brothers had converted into a limited liability partnership; however, Coudert Fr�res, as the Paris office was known, was a New York general partnership, meaning that liabilities could spread to all partners. “It was always a very academic point,” explains Aragon�s, the former Coudert partner. “Because whoever thought Coudert Brothers or Coudert Fr�res would come to an end?” When it did, Paris partners were left to ponder on their own who owed what debts-and got no answer, they say. Kane says that the firm acted as one entity, and debts will be treated that way, too.
Coudert will now begin the delicate process of determining who owes and owns what. The firm has already filed claims to recover unpaid bills from more than a dozen former clients, including $81,000 from Jaguar Cars, $97,000 from Cable & Wireless USA, Inc., and $280,000 from The Phoenix Group. And it says it will soon begin collecting the money that former partners owe the firm.
Coudert’s bankruptcy will test the reach of foreign and U.S. courts: Can Coudert use U.S. courts to go after money in Singapore, or will U.S. courts uphold judgments in Germany? Coudert has filed turnover actions against Wright, Marjanovic, and the Miller estate. But “it’s not easy to determine the reach of the U.S. bankruptcy court overseas,” says Murphy, the attorney for Brobeck’s trustee. Perhaps this befits the pioneering nature of Coudert-multinational to the end.
Coudert’s partners don’t want to end up like Brobeck’s, who had to shell out $25 million to the firm’s estate to put the bankruptcy to rest. Perhaps Judge Robert Drain had the Brobeck bankruptcy in mind when he presided over the first hearing in Coudert’s case on October 10. He ended the hearing with a cautionary note, telling the small cluster of attorneys gathered in his courtroom that law firm bankruptcies “have a potential for becoming unduly protracted and expensive.” Judge Drain admonished the crowd to handle the case in a “consensual and organized” manner. So far, not everyone is listening.