Correction, 3:45 p.m. EDT: An earlier version of this story incorrectly identified the name of a former LeBoeuf, Lamb, Greene & MacRae partner who spoke at Tuesday’s hearing. His name is John Campo. We regret the error.
“I can finally confirm the worst-kept secret of the year,” bankruptcy lawyer Albert Togut said late Tuesday afternoon in a lower Manhattan federal courtroom. “I am counsel for Dewey & LeBoeuf.”
So began the initial hearing in Dewey’s Chapter 11 case—an event that came less than 24 hours after the law firm became the largest ever in the history of the United States to seek bankruptcy protection. The two-hour, standing-room-only session ended with U.S. Bankruptcy Court Judge Martin Glenn declining to approve a motion that would have allowed the Dewey estate to use cash collateral held by its primary lender, JPMorgan Chase, to fund the work of those responsible for winding down the firm’s remaining operations.
The hearing also offered a glimpse of what lies ahead in the proceedings, including Togut’s assertion that Dewey hopes to reach a settlement with former partners over what he obliquely called “contributions” those partners should return to the bankrupt firm’s estate.
Dewey’s request to use its cash collateral—the only motion of the nine Glenn considered Tuesday and did not approve—consumed much of the hearing. At issue: whether JPMorgan, as collateral agent to secured creditors owed some $225 million by the firm, could file a lien on recoveries from avoidance actions, which are claims that arise during the bankruptcy process that are typically reserved for the benefit of creditors.
(Motions approved by Glenn included those allowing the estate to pay employee wages and taxes due before the firm’s bankruptcy filing; the continued access to the bank accounts in the firm’s possession; the maintaining of existing insurance policies; the hiring of Epiq Bankruptcy Solutions as claims and noticing agent; and allowing the firm 45 days rather than the usual 14 to submit a complete schedule of assets and liabilities.)
Glenn, a former O’Melveny & Myers partner appointed to the federal bench in 2006, said that he has approved the use of avoidance actions as collateral in a similar instance only once in his five and a half years as a bankruptcy judge. (That decision, one lawyer on hand pointed out, involved MF Global, the commodities and derivatives broker that collapsed last October in one of the largest bankruptcies in U.S. history.)
Scott Ratner, a partner of Togut’s at New York bankruptcy boutique Togut, Segal & Segal, argued unsuccessfully that it was essential that those winding down Dewey’s operations be allowed to tap the cash collateral immediately. Kenneth Eckstein, a Kramer Levin Naftalis & Frankel partner representing JPMorgan, also argued that the remnants of Dewey be allowed to use the cash. Saying “the lenders are willing to fund this estate,” Eckstein noted that the bank had agreed to Dewey’s proposed $8.6 million budget for the next 21 days.
Glenn was unmoved. He told Eckstein that if he wanted greater assurance that JPMorgan’s money would be returned, “Roll your truck up and start collecting accounts receivable, Mr. Eckstein.” After rejecting the motion, the judge directed the Dewey team to propose a new arrangement to the court later this week. Glenn did concede later in the hearing that the parties should find a way to fund a $700,000 insurance policy covering Dewey’s dissolution team: executive partner Stephen Horvath III, general counsel Janis Meyer, and Joff Mitchell of Zolfo Cooper, who is serving as Dewey’s chief restructuring officer. Togut said it was urgent that the policy be purchased before the end of business Wednesday in order to provide the trio with adequate protection against liabilities that might arise during the bankruptcy process.
Togut’s initial remarks to the court, which lasted more than 20 minutes, outlined what he viewed as the events that led to Dewey’s demise. It is a story by now familiar to many in the legal and business communities, one that begins with the 2007 merger of Dewey Ballantine and LeBoeuf, Lamb, Greene & MacRae, accelerates with the so-called Great Recession’s impact on the product of that merger, and ends with the combination of declining revenues, mounting debts, and outsize compensation eroding the confidence of the firm’s roughly 300 partners to the point that they began to flee in droves.
Togut blamed “collections coming at a slower rate” for causing the firm’s recent liquidity crisis, and summed up the events of this spring as “a fatal combination [of] overall revenue loss from departing partners and the perception that the banks had lost confidence” in the firm. (Absent from Togut’s remarks was any mention of the compensation guarantees handed out to what Dewey has admitted was at least 100 partners.)
According to Togut, the month following the creation of Dewey’s five-member “office of the chairman” in late March was a “fairly stable” one, and a deal to combine the majority of what remained of Dewey with another firm—widely reported to be Greenberg Traurig—was close until a rash of negative publicity in the wake of revelations that the Manhattan district attorney’s office had opened an investigation into alleged wrongdoing by former chairman Steven Davis. (Davis has denied any wrongdoing.)
Of those who had tried to save the firm at the end, Togut said: “This is a group of people who have acted responsibly.”
With Dewey listing at least $315 million in secured debt in court filings, its bankruptcy represents the largest law firm failure in U.S. history, surpassing not just the recent collapses of such legal giants as Brobeck, Phleger & Harrison; Coudert Brothers; Howrey; Heller Ehrman; and Thelen, but even such notable flameouts as those of Finley, Kumble, Wagner, Underberg, Manley, Myerson & Casey and Shea & Gould.
Togut pointed to the Finley Kumble bankruptcy, a case on which he also worked, as the classic example of what shouldn’t happen when dissolving a law firm. Insisting to Glenn that “what we have here will be dramatically different,” he pointed to the reduction in force from about 1,300 employees to the 90 who will stay on to help with the dissolution, the closing of all offices outside New York and the shedding of most of its space in its headquarters here, and overtures to develop a “sensible approach” to a settlement in which partners would make contributions to the estate.
Mark Zauderer, a name partner at New York’s Flemming Zulack Williamson Zauderer representing a group of at least 50 former Dewey partners, said during the hearing—and afterward to The Am Law Daily—that he doesn’t know what kinds of claims the estate intends to bring against former partners, but that they would defend them vigorously and possibly bring offensive actions against the estate or individuals.
Zauderer stood on the fringe of the 20 or so lawyers in the front of the courtroom Tuesday, a group that included Tracy Hope Davis and Brian Masumoto from the U.S. trustee’s office, Bingham McCutchen partners Michael Reilly and Ronald Silverman, who represent holders of $150 million in bonds issued by Dewey in 2010, and an attorney named John Campo, who said in court that he is owed money from a separation agreement with the legacy LeBoeuf firm.
Also present: Tracy Klestadt, a name partner at New York boutique Klestadt & Winters, who is representing another group of former Dewey partners along with partner Sean Southard, and Andrew Eckstein, a Blank Rome partner working with Zauderer. (Others who have already filed notices with the court of their involvement include Wilson Elser Moskowitz Edelman & Dicker bankruptcy and creditors’ rights partners Scott Zuber and Michael Turner and financial services practice leader Daniel Flores, who are advising Banc of America Leasing & Capital; and Howard Kingsley of New York real estate law firm Rosenberg & Estis and Paul Hastings bankruptcy of counsel Harvey Strickon, who are advising the owner of Dewey’s Manhattan headquarters at the Calyon Building, 1301 Properties Owner LP.)
The crowd of onlookers, which numbered more than 50 and spilled into an overflow room upstairs, included journalists, lawyers from the firms doing work on the case, and what appeared to be a number of summer associates and legal interns, clutching notebooks and paying close attention to the proceedings.
With Dewey’s bankruptcy under way—next up: a meeting of unsecured creditors set for Wednesday—what’s left of the firm continues to disband. Its Washington, D.C.–based lobbying arm, for instance, has moved to shutter its operations by filing its last batch of termination reports, according to sibling publication The Blog of Legal Times.
And, as noted by The Am Law Daily late Monday, most of Dewey’s foreign offices are excluded from the firm’s bankruptcy filing in New York. The firm’s London and Paris offices have been placed into administration, the British version of Chapter 11. Accounting firm BDO is serving as administrator for Dewey’s U.K. LLP, which has let go of 96 lawyers and staffers and retained a core team of 12 to manage the wind down of its business, according to British publication Legal Week. Many of those former employees have found homes at such firms as Morgan, Lewis & Bockius and McDermott Will & Emery.
Legal Week reports that Rita Lowe, a London-based banking and finance partner at CMS Cameron McKenna who represented administrators on the dissolution of former British firm Halliwells, is also advising on the wind down of Dewey’s U.K. LLP.
Some of the now-defunct firm’s holdout stakeholders, meanwhile, continue to find new homes. Baker & McKenzie announced Tuesday it has brought on 16 lawyers and 15 staffers from Dewey in South Africa. The bulk of the group—led by partners Scott Brodsky and Wildu Du Plessis—joined Dewey earlier this year from leading local firm Werksmans even as Dewey’s implosion began.
Baker & Hostetler, meanwhile, has taken on Dewey environmental partner Martin Booher, who had been based in New York but will work from his new firm’s Cleveland office.
Finally, Legal Week reports that British firm Holman Fenwick Willan has hired former London-based Dewey financial regulation chief Robert Finney, who joined Dewey from SNR Denton in 2010, and corporate finance and insurance partner James Lewis.
The American Lawyer’s Dewey Departure Tracker has the breakdown on the whereabouts of the firm’s former partners.
Brian Baxter contributed reporting.