In the end, it turns out, bankruptcy was unavoidable.
While most people were squeezing the last bit of fun out of the holiday weekend Monday, those overseeing what remains of Dewey & LeBoeuf were pushing the rapidly vanishing law firm one step closer to oblivion via a Chapter 11 filing submitted in federal bankruptcy court in Manhattan. The move ended weeks of speculation as to when and how Dewey—buried beneath hundreds of millions of dollars of debt and with virtually all of its partners scattered to other firms since the start of the year—would enter its final phase.
Created less than five years ago through the combination of old-line New York firms Dewey Ballantine and LeBoeuf, Lamb, Greene & MacRae, Dewey said in documents submitted in conjunction with the Chapter 11 filling that the so-called Great Recession was a major factor in its demise.
At the same time, the firm acknowledged that its grand ambitions for growth and the lucrative compensation guarantees it doled out to high-profile lateral hires in an effort to achieve those ambitions were also to blame. (Monday’s filings state that Dewey entered into 100 contracts to guarantee compensation to partners, both lateral and legacy. “The full extent of the partner compensation arrangements is subject to continuing investigation,” the firm states in one of the documents submitted to the court.)
For weeks, Dewey’s few remaining leaders had insisted that a bankruptcy filing was a last resort, and that they were doing all they could to avoid such a maneuver. A glance at the firm’s grim balance sheet illuminates what a daunting task they faced—and that they knew as of May 2 that closing the firm, in or out of bankruptcy, was inevitable.
In raw terms, the firm’s Chapter 11 filing lists assets of roughly $193.2 million against liabilities of $245.4 million—a deficit of more than $52 million, as of April 30. (Elsewhere in the filings, the liabilities are listed as more than $315 million.) Dewey’s secured debt obligations total approximately $225 million, with J.P. Morgan Chase—which Dewey says is owed roughly $76 million—identified as the firm’s primary secured creditor. Recorder sibling publication The Am Law Daily reported last week that three other banks that, along with J.P. Morgan Chase, extended Dewey a $100 million line of credit—Citi Private Bank, Bank of America, and HSBC—had sold off their portions of that debt. J.P. Morgan Chase is listed on the bankruptcy filing as “administrative agent and collateral agent for banks party to the credit agreement.”
Other secured creditors include the holders of some $150 million in bonds Dewey sold in 2010 as the gap between its revenue and its compensation-driven expenses widened. Monday’s filing states that J.P. Morgan Chase is acting as collateral agent for the holders of those bonds as well.
(Three other secured creditors are listed on the filing: Winthrop Resources Corporation, which is owed nearly $36 million; U.S. Bancorp Equipment Finance Inc., which is owed about $8 million; and SunTrust, which is owed $3.5 million. Dewey does not dispute any of those debts.)
Other liabilities include roughly $50 million in “secured personal property lessors,” $40 million in accounts payable, pension, and deferred compensation claims (most likely connected to the compensation guarantees that helped sink the firm), and a variety of rent, equipment fees, and “claims of former employees and partners under the DL partnership agreement.”
On the plus side of the ledger, Dewey lists about $13 million in cash, outstanding accounts receivables totaling $255 million, “work in progress,” and artwork whose value is unspecified. Other assets listed include “potential estate claims and causes of action against partners and other third parties.”
(The firm states in Monday’s filings that Dewey has historically collected roughly 95 percent of its accounts receivable and converted around 84 percent of work in progress into accounts receivables. It concedes, however, that it might not equal those rates in its current circumstances.)
The Chapter 11 petition—prepared by bankruptcy lawyer Albert Togut of Togut, Segal & Segal—says Dewey expects to pay off its unsecured creditors, a group that includes banks, vendors, and other law firms.
An attached list of the firm’s 20 largest unsecured creditors is led by the Pension Benefit Guaranty Corporation, which has sued Dewey for $80 million to cover the obligations of its underfunded pension plans. Other unsecured creditors include the landlord of Dewey’s 1301 Avenue of the Americas headquarters office (which is owed $3,778,350), Thomson Reuters ($2,362,869, for library services), and Bank of America ($2,142,000, for what the filing lists simply as “credit card”).
Also appearing on the list: Shook, Hardy & Bacon, which Dewey says is owed $473,696 for “services.” Recorder sibling publication The Am Law Daily reported on May 18 that Shook would likely appear on a list of creditors in the event of a bankruptcy filing given the amount of work its lawyers put in serving as defense counsel in a malpractice suit brought against Dewey in Missouri in connection with its representation of a now-defunct life insurer.
Another notable law firm–related unsecured debt: $416,667 for a “severance arrangement” owed to Emily Saffitz, a former Dewey litigation associate now at Thompson & Knight in New York.
In a press release sent to journalists and—according to one who received it—former Dewey partners late Monday night, the filing was made “to preserve assets and wind down its business in the most orderly and efficient way possible.”
The release notes that 90 employees will stay on to help with that process and states that much of that activity is expected to be finished within “the next few months.” The firm petitioned the bankruptcy court to allow those overseeing the effort—led by Joff Mitchell of Zolfo Cooper, who is serving as Dewey’s chief restructuring officer—to use available cash to keep paying salaries and benefits for those employees. (Some retirement plans for former employees, the firm notes, are held in trust and cannot be accessed by the firm’s creditors.)
Mitchell took over the restructuring reins from William Brandt at Development Specialists Inc., who told Recorder sibling publication The Am Law Daily last week that he had been asked to step aside at the request of Dewey’s new secured creditors. Dewey’s longtime internal general counsel, Janis Meyer, its recently appointed executive partner, Stephen Horvath III, and its director of finance, Francis Canellas, are among those still at the firm who will help guide it through the bankruptcy process.
The press release notes that many of Dewey’s foreign offices are excluded from the firm’s U.S. bankruptcy filing, and that the London and Paris operation, which are a distinct legal entity, were placed into administration, the United Kingdom’s version of Chapter 11, on Monday.
The documents filed Monday detail Dewey’s negotiations with its creditors in recent months and steps it took to minimize the damage once it knew shutting down was a foregone conclusion. Those steps included selling the firm’s ownership interest in its Warsaw office to Greenberg Traurig for $6 million and fetching more than $4 million for its stake in its Russia and Kazakhstan offices from Morgan, Lewis & Bockius. (In both instances, the firm states that a portion of those proceeds will go to the pension agency.)
If previous law firm bankruptcies are any guide, the fight over Dewey’s assets could well drag on for years—with a decision issued last Thursday in Manhattan federal court in connection with the Coudert Brothers bankruptcy likely to complicated matters further.
In that case, which could have major implications for the scores of Dewey partners who have fled to other firms since the start of the year, U.S. District Court Judge Colleen McMahon ruled that proceeds from work started at Coudert and taken elsewhere should belong to the Coudert estate. The decision was the first of its kind in New York; case law in California over such so-called unfinished business, or clawback, claims have offered the most effective method for bankrupt law firm estates to recover some cash.
The Dewey press release says that client work continues to be met “mainly by former Dewey & LeBoeuf law partners who have moved on to other firms in recent months.” Time will tell if those partners themselves become the subject of litigation.
Sara Randazzo is a reporter with The Am Law Daily, a Recorder affiliate.