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Financial woes are certain to dog Brobeck, Phleger & Harrison partners long after their firm has shuttered its doors. Partners may not only lose their capital contributions — typically worth hundreds of thousands of dollars — but could be forced to fork over additional money to pay off the firm’s current debt of approximately $55 million. In addition, partners also may face potential liability for claims made against the firm following its dissolution. Partners won’t be able to retrieve their capital unless Brobeck is able to collect its accounts receivables and liquidate its assets, said Brobeck partner Franklin Brockway Gowdy. “It’s a distinct possibility that some or all capital accounts will end up the property of the bank,” Gowdy said. “It will take months, maybe even years, before that’s worked out.” Legal consultant Peter Zeughauser, with The Zeughauser Group in Newport Beach, said if it takes that long to figure out, the answer is partners won’t be getting their capital back. “I think the real question is whether they are going to have to take in more capital to pay off the debt,” he said. “That wouldn’t be surprising.” Citibank, the firm’s principal lender, virtually took control of the firm’s finances after Brobeck Chairman Richard Odom informed partners, associates and staff Jan. 30 that the firm would disband. The firm’s nine-member policy committee made the decision hours after merger discussions with Philadelphia’s Morgan, Lewis & Bockius collapsed. Some firms hiring Brobeck partners have made deals to accommodate their financial situation. Morgan, Lewis, which hired about 60 Brobeck partners, is allowing them to defer putting capital into Morgan, Lewis for two years. “That’s not uncommon,” said Morgan, Lewis Chairman Francis Milone. “We typically take into consideration the circumstances of whether a partner is getting capital back immediately or not.” Morgan, Lewis is also giving Brobeck partners an advance, though Milone declined to say how much. That’s a boon to Brobeck partners, who gave up their distributions for the first quarter of 2003 to pay off $26 million of the firm’s debt. Gowdy said the money has been put back into the assets of the firm. The deal also allowed Brobeck partners off the hook for much of the liability for the remaining debt, said a lawyer familiar with the terms. Other firms scrambling to pick up top talent have also made arrangements to help Brobeck partners cope with a drop in income. One firm paid a signing bonus to one Brobeck partner it hired, a senior partner at the firm said. “I think you will find that firms are going to be highly creative and do things outside the box in order to bring them on in an orderly transition,” said recruiter Lawrence Watanabe, who is representing Brobeck’s San Diego office. While Brobeck partners will find some financial security in their new homes, they face other headaches in the wake of Brobeck’s dissolution. One issue is whether they will be liable for future malpractice claims against Brobeck. It’s uncertain whether the firm is purchasing tail insurance, which covers the firm for malpractice suits filed after dissolution and after the firm’s current policy expires. It’s one of the top issues confronting committees that handle firm dissolutions, said Blane Prescott, a consultant with Hildebrandt International. Cost is an issue, he said, since a tail policy typically costs two to three times the normal annual premium. Prescott said other issues facing a firm in dissolution are how client files will be handled and who will oversee the dissolution. “There definitely will be a fight over client files,” he said. “It happens with every dissolution.” He added that such disputes are settled by the clients, who determine who get their files. As for the firm’s dissolution, Brobeck hired Latham & Watkins partner Peter Gilhuly to oversee the matter. It’s unclear who at Brobeck is playing a role in the firm’s final days. Gilhuly did not return phone calls for comment. Meanwhile, Brobeck partners have been frenetically hammering out deals with firms eager to pick up talent. Morgan, Lewis is hiring the vast majority of partners. Some consultants believe the firm came out ahead in the wake of a failed merger with Brobeck since it gained a long-sought presence in Northern California. But some competitors question Morgan’s indiscriminate acquisition — it made offers to virtually all partners in Brobeck’s California offices — and its financial accommodations to incoming partners. “I personally think Morgan, Lewis is better off,” Zeughauser said. “The likelihood that the firm took people it didn’t want is much less. They are better able to negotiate the terms of debt — and are not obligated to Citibank at all.” And while Morgan, Lewis didn’t get work in progress and accounts receivables that a merger provides, Zeughauser said, that money would have gone to the banks anyway. While Morgan, Lewis is able to avoid the debt and real estate burdens that Brobeck was saddled with, some competitors question its payout to incoming partners. “They bought the partnership overhead of Brobeck while other firms are picking out high-value performers,” a senior partner at a competing firm said. “That’s Brobeckian in its risk.” Milone acknowledged that “there were a lot of good pieces of Brobeck” that Morgan, Lewis isn’t getting, particularly the litigation practice in Austin — which went to Akin, Gump, Strauss, Hauer & Feld — and the intellectual property group in San Diego that’s set to join Paul, Hastings, Janofsky & Walker. But Milone is optimistic about Morgan, Lewis’ future with the Brobeck team it did acquire. “We were happy to do [the merger] if it could have been done,” Milone said. “We are where we are now because we couldn’t do the deal. . . . We’re happy with what we have.”

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