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They didn’t see it coming. When the partners at Brobeck, Phleger & Harrison were summoned to an afternoon meeting on Thursday, Jan. 30, many looked forward to hearing good news about the long-rumored merger with Morgan, Lewis & Bockius. Instead, they were stunned by Chairman Richard Odom’s words: The 77-year-old San Francisco-based institution was shutting its doors. Just two years ago, Brobeck was the most profitable large firm in California, with profits per partner cresting above $1 million. Since then it’s been in an ugly tumble. From the putsch that forced former Chairman Tower Snow Jr. to step down in the fall of 2001 to Snow’s expulsion from the firm last May to the exodus of talent that followed, the firm had been racked by turmoil and beset with financial woes. Revenue dropped to $353 million in 2002, down from $447 million in 2001, and profits per partner shrank to $555,000. More than 60 partners left in the last year, hundreds of associates and staff were shed in waves of layoffs, and the firm was saddled with acres of excess office space. Its ranks had been whittled from more than 800 lawyers in the fall of 2000 to 520 in January. Still, few, if any, thought it would come to this. Most partners didn’t realize how badly Brobeck’s financial situation had deteriorated until last November, when the firm held what would be its final partner retreat at the San Mateo, Calif., Marriott. (This less-than-glamorous location, within jet-fume-whiffing distance of the San Francisco airport, was a far cry from the sparkling shores of Cancun, where the firm had held its last retreat under Snow.) That weekend, stunned partners discovered how much debt the firm owed Citibank N.A. — more than $90 million — and that they were personally liable for a big chunk of it. “It was much, much more personal liability than I had been led to believe, by a magnitude of four to five times more,” says one partner. At the retreat, Odom and managing partner Richard Parker tried to sound an optimistic note. They reassured their partners that they had a plan to restructure the debt. And even though earlier merger explorations with Washington, D.C.’s Hogan & Hartson had died, they briefed them on the current talks with Philadelphia’s Morgan Lewis. Management exhorted partners to stick together. Over the next two months, arduous negotiations with Citibank were led by Brobeck Los Angeles banking partner John Hilson and Peter Gilhuly of Latham & Watkins, who was advising Brobeck. They devised a complex transaction designed to reduce current partners’ personal liability. The firm agreed to give Citibank the portion of its 2002 income that it would normally distribute at the end of the year to partners — $26.2 million — and an additional $10 million in revolving credit was also paid off. That reduced the firm’s debt to $57 million. Partners would have to forgo all distributions until April. In exchange, that $26.2 million would be credited against current partners’ personal liability. The creative financing didn’t please everyone. In the eyes of Brobeck’s numerous ex-partners, the firm was trying to stick it to them, since only current partners saw their personal liability reduced. Former partners continued to be saddled with the same trailing liability as before. The restructuring was scheduled to close on Thursday, Jan. 23. The Sunday before, a few Austin, Texas, partners had arrived at that office to find firmwide litigation head Steven Zager moving his furniture, artwork, and possessions into a van, even though he hadn’t announced he was leaving. It was hardly the most stabilizing turn of events. Zager, a major rainmaker, explains that he needed to protect himself in case Citibank swooped in. “I have a lot of antiques and very nice things. … I sought assurances [from firm management] that my furniture and personal items were safe. I didn’t get it.” Zager had also been pressuring Brobeck management to make good on a promise that he says was made back in August to pay him a “substantial” bonus in January. “All I wanted them to do was live up to what they told me they’d do when I worked my butt off,” he says, adding, “I absolutely resent the fact that [people are saying] that I tried to hold the firm hostage.” The restructuring closed on Jan. 23, and four days later Morgan Lewis Chairman Francis Milone met with several partners in Austin, including Zager. The litigator says they had a candid conversation, and he indicated he was “leaning toward” going to Akin Gump Strauss Hauer & Feld. (Milone confirms this.) Two days later, on Jan. 29, Zager announced he was joining that firm, taking three partners and 14 other lawyers with him. That same day Morgan Lewis called the merger talks off. “There was no one precipitating event,” says Milone, who says Zager’s exit by itself didn’t crater the deal. “There were a lot of difficult hurdles. … The complexity of [Brobeck's] situation was almost unprecedented.” For one thing, he says, “it was very difficult to get a sense of what their financial performance would be going forward.” The day after Morgan Lewis backed out, Odom announced the firm’s demise in a series of meetings for partners, associates and staff. (Offices outside San Francisco were included by teleconferencing.) One partner asked Odom at one such meeting if the firm was in default. According to a different partner, the chairman was vague on that point, but said that even if the firm wasn’t in default, it couldn’t service the remaining bank debt. According to two people who heard Odom speak, the chairman said that the firm, a limited liability partnership, was not planning to file for bankruptcy protection at that time. It’s not clear what role Citibank played in those events, although it appears that the bank has been controlling all financial decisions these past few weeks. No one in Brobeck management would comment. Questions were referred to Latham’s Gilhuly, who represents the firm in its financial affairs. Officials at the bank refused to answer questions, and Gilhuly declined to say whether the bank had declared the firm in default. Odom’s abrupt announcement didn’t appear to be backed up with any planning. The chairman couldn’t tell associates and staff whether they’d be paid beyond the end of the week. He didn’t know what would happen to their health insurance. Within days, Federal Express refused to take shipments, and the firm’s coffee machines were repossessed. Expense checks bounced. One partner describes Brobeck’s last days as practically a “meltdown.” And reliable information was as scarce as an empty packing box. At press time Brobeck’s partners didn’t even know who had made the decision to dissolve. The firm’s partnership agreement states that a dissolution requires a vote of partners holding 60 percent of the firm’s equity, but a vote was never taken. It wasn’t even clear to the partners whether Brobeck’s policy committee, its top management group, had taken a vote, even though it had met that morning. When the initial shock wore off, many Brobeck partners fumed that management hadn’t followed proper procedures when they decided to kill off the firm. “I’m baffled,” says one partner. “It didn’t have to come to this. … Somebody seriously miscalculated.” Zager shrugs off any responsibility for Brobeck’s collapse. “That’s like feeling responsible when one’s relative dies of cancer,” he says. “I sat at the bedside, but I didn’t cause the cancer.” One partner says it’s not fair to blame Zager, since he was hardly the only partner talking to other firms. “He was simply the last one out the door.” The aftermath will not likely be any prettier. Even though at least 100 Brobeck lawyers will be joining Morgan Lewis after all, so many current and former partners are so angry that lawsuits seem inevitable. Says one Brobeck partner: “I have great confidence that it will be a nasty, ugly fight.” With reporting by Brenda Sandburg of American Lawyer affiliate The Recorder.

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