With just a day left for former Dewey & LeBoeuf partners to sign on to a proposed $90.4 million settlement deal aimed at helping repay Dewey creditors, the bankrupt firm’s advisers said Wednesday that only about one in four of the affected attorneys had agreed to participate. Despite the sluggish response, those advisers expressed confidence that enough former partners would step forward by Thursday’s deadline to ensure that the so-called partner contribution plan wins bankruptcy court approval.
The update came during a Wednesday afternoon meeting at the U.S. trustee’s office in lower Manhattan held to apprise unsecured creditors on the status of the Dewey bankruptcy. Over the course of the hourlong session, Brian Masumoto—an attorney with the U.S. trustee’s office responsible for monitoring the less-than-three-month-old Chapter 11 case—quizzed the firm’s advisers about the Dewey estate’s current financial condition, as well as what they think might happen if the partner contribution plan does not succeed.
Joff Mitchell of Zolfo Cooper, who is serving as Dewey’s chief restructuring officer, answered many of the questions. Mitchell was accompanied by Stephen Horvath, a former Dewey partner now serving on the dissolution team, and lead Dewey bankruptcy lawyer Al Togut of Togut, Segal & Segal, who arrived a few minutes after the meeting began. (“Yeah, I’m wet,” said Togut, his jacket and shirt drenched by a sudden downpour, when asked to state his name for the record.)
Masumoto started the meeting by asking about the status of the partner contribution plan, or PCP, which calls for 672 former firm partners to return between $5,000 and $3.5 million apiece in excess compensation received in 2011 and 2012, as well as additional money related to tax advances and unpaid capital contributions. The deadline for partners to commit to the plan has been delayed several times, with the most recent extension coming Tuesday afternoon. And while former partners now have until 5 p.m. EDT Thursday to decide whether to participate in the settlement, Togut indicated Wednesday that stragglers may still be able to sign on after that.
In exchange for their participation, former partners will receive a release from Dewey-related liability. The full extent of the release, however, won’t be known until a judge signs off on the deal, Togut said: “The more partners we get, the greater likelihood for getting a broad injunction and release.”
Without identifying anyone by name, Togut said during the meeting that “notable people believed to be part of the reason why this law firm failed … are expressly excluded from PCP participation. Claims against them will continue to exist, are not going to be dropped, and will be pursued.”
The proposed plan excludes Dewey’s longtime former chairman Steven Davis, who is currently the subject of an investigation by the Manhattan district attorney’s office. Davis has denied any wrongdoing.
In addition to Davis, former non-partner executives at the firm are also not a part of the PCP. (In a separate development, Davis’s lawyers at Hughes Hubbard & Reed filed papers with the bankruptcy court Tuesday objecting to an earlier assertion made in a Dewey motion that Davis had a contract with the firm. Davis, the filing says, had no contract with the firm beyond the Dewey partnership agreement.)
Masumoto appeared somewhat chagrined that the deadline for former partners to sign on to the partner contribution plan had been pushed back until Thursday. He pressed the firm’s advisers to predict what might happen to the case if the proposed deal fails, particularly in light of a motion made last week by an informal committee of retired partners from Dewey predecessor firm LeBoeuf, Lamb, Greene & MacRae seeking to force the case into the hands of a trustee or neutral examiner.
Togut and Mitchell both stressed that while the estate has only lined up agreements with about 160 former partners so far, conversations with other former partners and their counsel indicate that the threshold figure of $50 million that the estate hopes to achieve is within reach. Both acknowledged, however, that they won’t be certain of anything until Thursday. “Just appreciate, things have been moving very very quickly this week,” Togut said.
Togut noted that there is a hearing is scheduled for September 20 during which Manhattan bankruptcy court Judge Martin Glenn will consider the LeBouef Lamb partners’ motion asking that a trustee be installed, and that the Dewey advisers expect to present the partner contribution plan to Glenn for his approval well in advance of that.
Dewey’s advisers also provided Masumoto with an accounting of the firm’s current assets, which, outside of any potential recoveries from former partners, include $260 million in accounts receivable as of the end of July; additional claims against former partners seeking the recovery of money from unfinished business brought with them to their new firms, pegged at between $60 million and $70 million; nominal sums related to the firm’s artwork and remaining furniture; and the return of several million dollars worth of investments in a Caribbean-based insurance consortium.
During the discussion of the firm’s assets, Masumoto inquired about a $50 million management liability policy. Mitchell replied, “I’m not sure I would describe it as an asset, but as a possible source of recovery.” Mitchell said that the policy, the subject of a recent Reuters article, functions much like directors and officers insurance.
Dewey’s secured creditors, a group composed of JP Morgan Chase and various hedge funds, continue to hold much of the power in the bankruptcy. Togut said an agreement reached Tuesday with that group and two official unsecured creditors’ committees will allow Dewey to use the lenders’ cash collateral to fund its day-to-day operations until the end of September. (In a call with former partners last week, Mitchell said that secured creditors have $260 million in claims, and unsecured creditors have at least an additional $300 million.)
As of the end of July, the firm had $20 million in cash, Mitchell told Masumoto. He also updated the room as to the amount secured lenders were paid in July ($26 million), the estate’s total operating expenses that month ($4.3 million), and money received in the form of previously unpaid bills ($21 million). July also saw the firm make one final payment to its malpractice insurance policy, which Togut said had a premium of between $8 million and $9 million a year.
Only a handful of creditors’ counsel from the roughly 30-person audience asked questions at the conclusion of the presentation, most of which involved requests for more specific information on payments made to partners, whether or not records were kept of salary guarantees to partners, the relationship between the firm’s foreign entities and the U.S. operations, and how to recover money from any existing insurance policies.
The questioners included Annette Jarvis, a Denver-based partner at Dorsey & Whitney who represents the retired partners seeking to convert the bankruptcy to a trustee-run case. At one point, Jarvis turned to Horvath and demanded to know how much he was paid by the firm in the five months leading up its bankruptcy.
His answer: $1 million.
Proposed Settlement with Dewey Partners on Hold, July 19, 2012