As the Dewey & LeBoeuf bankruptcy winds its way through the courts, the firm’s trustee is expected to follow a playbook used by other bankrupt firms: pursuing unfinished business claims against the firms that took Dewey partners (and, presumably, ongoing Dewey work). A look at the most prominent law firm bankruptcies over the last decade shows that many firms chose to settle, rather than contest, these claims.
“In these cases the writing’s kind of on the wall, and if the number is small enough, it’s not worth fighting about,” says one partner who handles risk management issues at a firm that has reached a settlement with a bankrupt firm from whom it picked up partners.
But since the Dewey bankruptcy sits in New York, there might be reason for firms to put up a fight. A pair of federal judges in Manhattan came to opposite conclusions about whether hourly matters are eligible targets for unfinished business claims under New York law. In May, Judge Colleen McMahon found that hourly matters were appropriate targets in the Coudert bankruptcy, while in September her colleague Judge William Pauley III found that they were not in the Thelen bankruptcy. Firms that picked up large chunks of Dewey partners are undoubtedly keeping a close eye on what the U.S. Court of Appeals for the Second Circuit makes of those decisions.
Regardless of the controversy in the New York courts, there are plenty of prior settlements that firms can look at to get an idea of what kind of liability they might face. A search of the public bankruptcy dockets shows that the estates of Brobeck, Phleger & Harrison; Coudert Brothers; Heller Ehrman; Thelen; and Howrey have reached settlements with firms that picked up their former partners totaling nearly $35.5 million. More than 40 different firms have written checks to settle claims with these bankrupt firms. On top of that total, the trustee in the Brobeck bankruptcy reached settlements for “a substantial, confidential amount” with Orrick, Herrington & Sutcliffe and Dorsey & Whitney, and the Heller estate agreed to split the potential proceeds from a contingency case with Orrick. (Click here for a detailed breakdown of the individual settlements.)
UC Davis law professor Robert Hillman, an expert in partnership law and lawyer mobility, is surprised by the total tally of settlements. Of particular note, says Hillman, are the two large settlements in the Brobeck bankruptcy: Morgan, Lewis & Bockius, which brought on about 60 Brobeck partners, agreed in September 2004 to pay $10.2 million to settle all the Brobeck estate’s claims; and Clifford Chance, which brought on 17 Brobeck partners including former chair Tower Snow Jr., agreed to pay $5.5 million in December 2004 to settle all claims arising from Brobeck’s collapse.
Hillman notes, however, that it’s difficult to compare the settlements from bankruptcy-to-bankruptcy and from trustee-to-trustee because of the difference in size of the bankrupt firms and the differing circumstances surrounding their collapses.
Fox Rothschild partner Yann Geron, the trustee in the Thelen bankruptcy, has gotten approval from the bankruptcy judge overseeing the case to expedite unfinished business claims that are worth less than $1 million. Geron and his special counsel can settle smaller claims without having to give notice to all creditors or having to bring each individual proposed settlement before the court. As of September, Geron had collected nearly $2 million from 22 firms through the expedited process. He says that the claims are based on an estimate of the amount of profit that settling firms have made from the unfinished business matters that former Thelen partners brought with them. According to Geron’s numbers, the $1,926,749 recovered represents about 68 percent of the more than $2.8 million claims asserted by the estate. Hillman says the process is likely to be used in other law firm dissolutions going forward. “On the substance, it makes perfect sense to streamline the settlement of small claims,” he says.
Settling for tens of thousands of dollars is always easier—and faster—than taking a firm to court and trying to get it to fork over millions. Los Angeles solo Edwin Reeser III, the former office managing partner of Sonnenschein Nath & Rosenthal’s Los Angeles office who has written extensively about unfinished business issues, says the decision an acquiring firm makes to settle claims is “a simple economic question of what do I get, and how much do I want to pay for it?” Says Reeser: “Firms that settle say, ‘Let me spend my time making money rather than fighting over this.’ ” Firms that hired Dewey partners, take note.