Update, 9/21/2012, 8:25 a.m. EDT: The third and fourth paragraphs of this story have been revised to incorporate information about a late Thursday court filing submitted by Dewey & LeBoeuf’s bankruptcy advisers that includes a detailed breakdown of which former firm partners have agreed to contribute to a proposed settlement with the estate and how much each has offered to pay.
The future course that failed law firm Dewey & LeBoeuf’s bankruptcy proceedings will follow could be decided as early as Friday, when the judge overseeing the Chapter 11 case is scheduled to continue hearing arguments as to why he should either approve a proposed $72 million settlement with former partners or reject it and install a neutral examiner to manage the matter.
At a three-hour hearing Thursday held before a standing-room-only crowd, two groups of retired Dewey partners that aim to upend the settlement argued that in its haste to finalize the plan, the Dewey estate failed to pursue the maximum amount of money that could be recovered from former partners and focused its attention too narrowly in determining who to blame for the firm’s downfall.
In its current iteration, the proposed settlement—which would claw back compensation given to partners in 2011 and 2012, as well as tax advances and other payments—provides a waiver of Dewey-related liability to those who have agreed to participate, meaning the firm cannot sue them in the future and that they cannot bring claims against the estate over Dewey-related grievances. Longtime Dewey chairman Steven Davis was not allowed to participate in the settlement, and Dewey’s advisers have said the estate is considering bringing claims against him and two top firm managers who reported to him: former executive director Stephen DiCarmine and former chief financial officer Joel Sanders.
In a court filing submitted late Thursday night, the Dewey estate responded to one of the objections that has been raised about the proposed settlement: that information about which partners have agreed to participate and how much they have agreed to pay the estate has not been made public. The filing includes an itemized, alphabetized schedule breaking down the plan by partner [PDF]. Among the prominent former partners whose names appear on the list (along with the sums they have agreed to repay): Berge Setrakian ($3.5 million); Ralph Ferrara (roughly $3.7 million); Morton Pierce ($1.02 million); Richard Climan (about $1.1 million); Alexander Dye (nearly $1.7 million); John Schwolsky (also about $1.7 million); Jeffrey Kessler (roughly $2 million); Martin Bienenstock (about $643,000); Richard Shutran (roughly $665,000); and Charles Landgraf (about $202,000). Other partners have agreed to contribute much smaller amounts, with some obligated to pay only the $5,000 minimum.
In making the disclosure, the estate reversed the position it took in a court filing submitted just a day earlier. In that filing, the estate’s chief restructuring officer, Joff Mitchell, said he was willing to make the information public within five business days of the court approving the plan. The information had been kept confidential to that point, Mitchell said, because “based on requests made by many former partners and/or their counsel, the Debtor determined to keep the identity of Participating Partners and their respective Partner Contribution Amounts ‘confidential.’ Former partners expressed the concern that they did not want their willingness to settle claims against them by the Debtor made public unless and until the PCPs were approved by the Court.”
If the settlement fails to win the court’s approval, Dewey’s lead bankruptcy lawyer, Albert Togut, and Mitchell have said publicly they fear that secured lenders owed some $250 million will lose patience and cut off their funding—a development that would likely force the conversion of the bankruptcy from a Chapter 11 case to a trustee-run Chapter 7 proceeding. Togut has also repeatedly told former partners that if that happens, they would likely have to pay back much more that the sums current being asked of them.
David Friedman, a lawyer for an official committee of former partners, said Thursday that Togut’s continued assertion that this was the cheapest deal possible may have led many retirees to sign on to the settlement out of fear rather than because it was in their best interest. At one point during the hearing, U.S. bankruptcy court judge Martin Glenn cut that line of questioning off midstream while Friedman pressed Mitchell on the subject.
Mitchell took his turn on the witness stand after Paul Gender, who testified in connection with his role as chairman of Dewey’s three-member official unsecured creditors committee. Gender, an executive vice president of equipment lessor Winthrop Resources Corporation, says the firm’s estate owes his company $43 million.
Friedman led much of the questioning Thursday, pressing both Gender and Mitchell on exactly how much work they had done to investigate potential claims against Dewey executive committee members; whether they had calculated the precise date at which Dewey was clearly insolvent or undercapitalized; to what extent they assessed the ability of partners to pay the settlement amounts; and, in the case of Gender, what influences had led the unsecured creditors committee to lend its support to the proposed settlement. Dorsey & Whitney partner Annette Jarvis, who represents an ad hoc committee of retired partners, also had an opportunity to question the witnesses.
Glenn’s bench was piled with several massive binders stuffed with Dewey-related documents throughout the hearing, though only a few of those documents were directly referenced. Among those cited was a previously unseen email sent by Bienenstock, now the chair of Proskauer Rose’s business solutions, governance, restructuring and bankruptcy group.
The email, which Friedman tried to present as proof that the Dewey estate is too cozy with former partners who stand to benefit from a quick settlement deal, was addressed to Mitchell; Togut; Janis Meyer, a former Dewey partner who sits on the wind down committee; David Pauker, an executive at Goldin Associates who helped draw up the so-called partner contribution plan; and Schulte Roth & Zabel partner Michael Cook, who represents Bienenstock. It was sent on July 12, the day after the contribution plan was officially presented to former firm partners.
“While DL owes me over $5.5 million … I will nevertheless accept the offer even though I believe I have zero liability and can prove it,” Bienenstock states in the email.
Elsewhere in the email, Bienenstock addresses whether the partner settlement should wait until an official Chapter 11 plan, which will guide the way the bankruptcy pays off creditors and completes its liquidation, is filed. As of Thursday, the Dewey estate has until December 31 to file its plan. “I have zero patience to await a chapter 11 plan and all its opportunities for shenanigans and delay,” Bienenstock wrote in the email. “I doubt the lenders will fund chapter 11 too much longer. But, even if they do, I hope you will promptly move for approval of the settlement while [Dewey & LeBoeuf] controls the estate’s causes of action. This is the only way it can work and the only way it can be done soon. It doesn’t matter if [Ed] Weisfelner’s clients [the unsecured creditors committee] objects. You can prove with examples like mine that the settlement is more than reasonable. To put that off in the hopes of embedding it in a plan is nonsense.”
In the email, Bienenstock also disputes the idea that Dewey will have any chance of recovering money related to matters former partners have taken to their new firms. Before launching into his reasoning, he writes: “Finally, please get real about the unfinished business claims.”
Reached Thursday via email, Bienenstock said “I sent the email and stand behind it.”
Others with questions at Thursday’s hearing included Ned Bassen, a Hughes Hubbard & Reed partner who represents Davis, DiCarmine, and Sanders. Bassen twice raised the point that even though the Dewey estate’s advisers seem eager to pin the entire fall of Dewey on his clients, they have not met with any of them even though all three have requested meetings.
Davis, DiCarmine, and Sanders have all sought in court filings to protect their ability to defend against any claims that may be brought against them. As part of that effort, they hope to begin tapping into funds they say should be available to them under a $50 million insurance policy Dewey had with XL Specialty Insurance Company.
Davis has not worked since Dewey went bankrupt, Bassen says. DiCarmine, meanwhile, has begun taking graduate classes at Parsons The New School for Design, and Sanders, as The Am Law Daily previously reported, is moving to Florida to take a new job as chief financial officer at Fort Lauderdale–based Greenspoon Marder.
Glenn interjected only a few times Thursday, primarily when urging attorneys to get to the point or move on to a new question. He offered no inclination as to which way he might rule on the settlement or the request to appoint an examiner.
Asked after the hearing how he thought it had gone, Mitchell said: “I have no idea where it stands. I was in the same room as you.”
When the proceedings resume Friday morning, the questioning of Mitchell is scheduled to wrap up and Pauker of Goldin Associates is to take the stand.