The leadership team overseeing the bankrupt remnants of Dewey & LeBoeuf laid out a proposed settlement plan to former firm partners Wednesday under which those partners are being asked to pay the Chapter 11 estate between $25,000 and $3 million each for a combined total of $103.6 million.
In presenting the so-called partner contribution plan to the roughly 150 people packed into a midtown Manhattan hotel conference room, Dewey leaders urged those assembled—former partners and lawyers representing former partners, with some participating by phone—to either agree to the settlement terms by July 24 or face the threat of litigation seeking even larger sums if a trustee takes command of the bankruptcy.
Those managing the Dewey bankruptcy acknowledged Wednesday that their proposal is unlikely to be popular. At the same time they clearly hope the plan—which, if successful, would be the first of its kind in a law firm bankruptcy—will allow them to speed through the Chapter 11 process without having a trustee take the reins. In a typical law firm bankruptcy, former law firm partners wind up entangled in litigation for years after the firm’s demise.
“You’re all going to look at this and not like what you see,” Dewey’s chief restructuring officer, Joff Mitchell of Zolfo Cooper, said in introducing the plan.
Mitchell was also up front about one factor that may prevent some partners from signing on: “This settlement is not about assigning blame for what happened.” That sentiment may not play well with some former partners who believe Dewey’s former leaders bear more responsibility for the firm’s collapse and should therefore have to pay more. (For a detailed look at what led to Dewey’s demise, see “House of Cards” from The American Lawyer‘s July/August issue.)
The proposed $103.6 million settlement figure breaks down into three categories. Roughly $77 million is meant to claw back a portion of the $445 million in compensation payments partners received during 2011 and 2012, according to Mitchell. The estate is also seeking the return of $8.2 million in unpaid capital contributions and $18.6 million in outstanding tax advances.
The plan divides the 709 partners—371 who retired or left Dewey before 2012; 338 partners still at the firm as of January 1—into five compensation tiers, with each assigned its own repayment rate: those who made up to $400,000 in 2011 and 2012 are being asked to pay the estate a sum equal to 10 percent of their earnings; those who collected between $400,000 and $800,000 owe 15 percent; anyone getting between $800,000 and $2 million owes 20 percent; those who were paid between $2 million and $3 million owe 25 percent; and those who made more than $3 million owe 30 percent.
For partners in every tier, anything earned in excess of draws in 2012—an amount pegged at $18 million across the partnership—owe 20 percent of that money as well. Anyone who decides to sign on to the plan after July 24 would face a penalty of 25 percent.
According to a chart shown at the meeting, a majority of former partners—378—fall into the lowest compensation category. At the top end, 22 partners earned between $2 million and $3 million, and 21 earned in excess of $3 million.
Mitchell said that only two partners are being asked to make maximum contribution of $3 million, meaning they earned at least $10 million during the designated time period.
The settlement will only succeed, Mitchell noted, if a minimum of $50 million is raised. And in a line of fine print that drew some murmurs from the crowd, even those who earned less than $250,000 must chip in a minimum of $25,000 if they wish to receive the release from liability.
Settlements of so-called Jewel v. Boxer claims, brought against former partners for unfinished business they take with them to their new firms, will be discussed in the coming weeks, Mitchell said, separate from the settlement outlined Wednesday. Potential claims in that category total approximately $60 million, Mitchell said.
Money from both the proposed settlement and Jewel claims will go toward paying down some $300–$500 million in unsecured debt and $225 million in secured debt, Mitchell said Wednesday. He also noted that the firm has $250 million in uncollected accounts receivable.
Notably, former Dewey chairman Steven Davis is not included in the settlement. And the two former Dewey partners still working on the wind-down, Stephen Horvath III and Janis Meyer, will receive a release if the settlement is approved. Instead of paying into the settlement, however, they have been paid a collective $58,000 a week since the bankruptcy began, according to our past reports.
Both Mitchell and lead Dewey bankruptcy counsel Al Togut pushed the plan aggressively Wednesday. “There are a bunch of salivating contingency lawyers out there who would be happy to take on this matter if we fail to reach a settlement,” Mitchell said at one point in a reference to the possibility that a trustee would take control of matters if the case is converted to a Chapter 7 proceeding. That could happen by the end of the month, when the cash collateral the estate has been using to fund operations runs out.
Before the 3 p.m. meeting began, the conference room had the air of a somber class reunion. “The gang’s all here,” one partner remarked while walking in. “Where are the free drinks?” joked another. Chuckling at the basement-level ballroom where the meeting took place, one partner said to a colleague, “They wanted to mitigate the impact of the explosion.”
The crowd remained largely silent throughout Mitchell’s hour-long presentation, a version of which he said he gave to partners in Europe earlier in the day. The silence was broken, however, when Mitchell suggested that any partners unable to pay the total settlement amount up front could participate in a loan program that would have the money due over the next three years, with an interest rate of 9 percent. The proposal most likely sparked a sense of déjà vu among the large number of partners who took out loans to cover their capital contributions, loans that have left some of those partners in dire financial straits.
Facing a wave of disbelieving laughter, Mitchell could only reply: “That wasn’t meant to be a joke.”