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In a controversial new twist in the saga of Testa Hurwitz & Thibeault, eight former partners of the law firm are trying to force the partnership, which is already liquidating its assets, to file for Chapter 11 bankruptcy. The petition for involuntary bankruptcy was filed on Feb. 17 against Testa Hurwitz in the Eastern Division of Massachusetts by former partners Thomas A. Beaudoin, David S. Davenport, Leslie E. Davis, Eric A. Deutsch, Gordon H. Hayes Jr., John M. Hession, Edwin L. Miller Jr. and Richard S. Sanders. All left Boston-based Testa between 2001 and October 2004, before a raft of defections in November and December 2004 pushed the firm, known for its venture capital work, into disbanding on Jan. 14. The firm is currently calling in payments from those who owe it money and paying its creditors. It is not paying any severance to its employees. Although the lawyers did not file any affidavits with the court, sources say the case concerns the remainders of the partners’ capital accounts, or the money they invested in the firm upon joining. When the partners left, they were issued promissory notes for what was left in these accounts, to be paid over time. The eight partners are owed a total of $2 million by the firm, including interest. The amount of contractual damages the ex-partners are seeking ranges from $19,186 at the low end to $504,220 at the high end, according to the petition. The ex-partners filed the petition to reduce Testa’s obligations on its real estate lease on its office in Boston. Testa has to pay the landlord for the duration of the lease, which amounts to $20 million to $25 million, according to sources. But in bankruptcy court, the landlord could ask for a maximum of one-year’s rent, which would be roughly 15 percent of the total amount. The former partners believe they should be paid before the landlords. “The former partners have general creditor status just like the landlords,” said one bankruptcy expert. “They’re afraid they’re going to get screwed if they don’t do this.” The bankruptcy expert, who asked not to be named, said the ex-partners’ chances of forcing Testa into bankruptcy were slim, because involuntary Chapter 11 petitions are rare and rarely successful. Most Chapter 11 involuntary bankruptcy petitions are converted into Chapter 7s. A source familiar with the ex-partners said they did not seek to push the firm into Chapter 7 protection because that would entail a trustee, which would take control of the firm out of the hands of the current partners. The ex-partners are not seeking such an extreme result. But their move is a controversial one. Many experts said the invasive filings and years-long litigation of bankruptcy court would not likely be a good answer to Testa’s problems. “Bankruptcy rarely leads to a great outcome,” said Randy Lewis, a law firm consultant with Denver, Colo.-based Resolution Management Partners Inc. The bankruptcy petition has caused an explosion of ill will between former partners of the firm. “They’re pulling two rugs out from under themselves,” groused one Testa partner who likened the petition to “lobbing a grenade in the middle of a crowded theater,” because it may cause other creditors to panic and reduce the firm’s available capital to pay its debts. Testa, which had approximately 50 partners when it disbanded, plans to oppose the motion. “We have no comment on the motion itself, other than to wonder why the plaintiffs feel this would improve their position when it could harm the orderly process that has been under way for four weeks,” said Testa spokesman Steve Barrett. One of the bases on which Testa plans to oppose the petition is that the firms’ partners sign an agreement upon leaving that they will enter all disputes into arbitration. The eight partners did not seek arbitration before filing the petition, Testa insiders said. A source familiar with the eight partners said they did not seek arbitration because this was not a personal dispute, but a matter of bankruptcy law. Testa insiders also said that the ex-partners would be paid before trade creditors. Testa has also previously said that, if all of its creditors pay their bills, the firm should have enough money on hand to meet all its obligations. But one bankruptcy lawyer was skeptical. “It’s well and good to say everyone’s going to get paid,” he said. John J. Monaghan, a Boston-based attorney with Holland & Knight, who is representing the eight partners, declined to comment except to say that the former partners prefer the liquidation to occur in the “open air of bankruptcy court.” “The partners believe they are going to be taken advantage of in a consensual process, or at least they’ll do as badly as everyone else,” said a New York bankruptcy lawyer. Because the former partners are owed promissory notes — which, of course, are debt — they would presumably have a higher standing in bankruptcy court than the current partners, who own only equity. The former partners would likely only qualify as unsecured creditors in court, according to one bankruptcy lawyer. Other firms have filed for bankruptcy after dissolving. Chicago’s Altheimer & Gray fell apart in June 2003 and entered bankruptcy that October. Last month the firm filed a liquidation plan with U.S. Bankruptcy Judge Carol Doyle in the Northern District of Illinois calling for former partners to pay $15.1 million toward the firm’s remaining debt, the Chicago Sun-Times reported earlier this month. Despite opposition from a group of ten Altheimer partners, Doyle approved the plan Feb. 10. Under the plan, nine Altheimer lawyers, including the firm’s executive committee, will pay $6.8 million, or 45 percent of the total amount. The remaining $8.3 million would be split among the firm’s 50 other former equity partners. Copyright �2005 TDD, LLC. All rights reserved.

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