Facing opposition from creditors and the U.S. trustee’s office, Dewey & LeBoeuf’s bankruptcy advisers stated in a late Tuesday court filing that they have abandoned their plan to pay a $165,000 bonus to the firm’s former finance director, who is performing the same job for the defunct law firm’s estate.
In a September 13 filing, Dewey’s advisers had asked the court to approve the payment of bonuses totaling $220,000 to three estate staffers, including finance director Frank Canellas. The filing described the trio as critical to the Chapter 11 case’s ongoing operations and said they would be likely to abandon the estate absent financial incentives. Scott Ratner, an attorney representing Dewey, said in a Tuesday filing that the estate is withdrawing the bonus motion only as it relates to Canellas.
Tracy Hope Davis, the U.S. trustee overseeing the Dewey case, specifically objected to the bonus proposed for Canellas in a September 27 filing. Hope Davis noted in the filing that if Canellas were to receive the extra $165,000, his total 2012 compensation of $665,000 would top the $615,000 he earned in 2011, when the firm was still fully functioning. Dewey filed for bankruptcy protection May 28.
Hope Davis also argued that Canellas should be prohibited from receiving a bonus because of his status as a Dewey bankruptcy “insider.” To prove her point—and to counter the extensive efforts made by Dewey advisers to show that Canellas had no actual authority in the bankruptcy proceedings—Hope Davis cited a filing submitted by the same advisers listing Canellas as one of four members of “senior management.” May and June operating reports also explicitly list Canellas as an “insider,” though as of the estate’s July operating report he was no longer listed in that category. (Dewey had stated in filings that Canellas was identified as an insider and senior manager “out of an abundance of caution.”)
In her filing, the trustee also highlighted—as further proof of what she called Canellas’s insider status—a letter of credit issued to him prior to the firm’s demise, which until its expiration at the end of 2011 guaranteed that he would receive a $435,000 payment if certain circumstances changed at Dewey.
“In the absence of evidence of similar beneficial treatment to others employed by the Debtor, the circumstances of his employment reveal that he was and continues to be a person in control of the Debtor and thus should be characterized as an insider,” Hope Davis’s filing states.
Hope Davis concluded that in order to prove that the bonus was warranted, the estate’s advisers would have to offer evidence that Canellas had a “bona fide” job offer that would pay him at least the same salary to work elsewhere, or that his services were “essential to the survival of the business.”
An official committee of former partners, represented by David Friedman of Kasowitz Benson Torres & Friedman, also filed objections last week to the bonus proposed for Canellas. Like Hope Davis, the former partners argued that the payment was not part of the “ordinary course of business” involved in operating a bankrupt law firm.
“How, in bankruptcy, can the Debtor justify the payment of such an excessive bonus to a member of its upper management when it has been widely pointed out that excessive compensation to the Firm’s upper management significantly contributed [to] the Firm’s collapse in the first place?” the former partners’ filing asks.
Neither objecting party raised concerns about payments proposed for two other employees: director of billing Lourdes Rodriguez, who is scheduled to receive $50,000 under the plan, and collections manager Lisa Sucoff, who would get $5,000. U.S. Bankruptcy Judge Martin Glenn is to consider those bonuses at a hearing scheduled for Thursday.
The bonuses proposed for Canellas, Rodriguez, and Sucoff represented the Dewey estate’s second attempt to reward its employees with extra compensation. In late July, Glenn approved a plan that would pay what at the time were the 48 employees working on winding down the firm’s operations up to $450,000 in combined bonuses to be drawn from the estate’s operating budget. Another $250,000 in contingency-based bonuses was approved for employees working on collections, with those funds to be taken from fees earned by collections agent On-Site Associates. The initial bonus plan contained a clause, which Glenn questioned in court, that would have allowed the estate to pay up to $230,000 in “ordinary course” bonuses to unspecified recipients. Dewey dropped that provision after consulting with the trustee’s office and filed the more specific request naming Canellas, Rodriguez, and Sucoff, according to court filings.
Glenn has yet to rule on what is perhaps the most critical element of the Dewey bankruptcy; a proposed settlement plan that would bring in $71.5 million from former partners who signed on in exchange for a release from Dewey-related liability. Glenn heard extensive arguments for and against the plan in late September and offered no timetable for when he would issue his decision.