Question #14.A. in the year-end news quiz published by The Wall Street Journal on December 28, 2012: “True or False: Before law firm Dewey & LeBoeuf LLP filed for bankruptcy in May, it was sued by a janitorial services company saying it was owed $299,000. Answer: True.”
This small item brought to mind reports of a January 2012 partnership meeting during which, according to Reuters, then-Dewey chairman Steven Davis told those on hand that the firm had $250 million in profits in 2011, but that more than half of that sum was already committed to pension obligations and IOUs to partners for shortfalls in prior years’ earnings. Together, partners would have to devise an action plan. “You have to own this problem,” Davis allegedly said at the time.
Who Owns the Problem Now?
One simplistic narrative suggests that Davis himself should bear most of the blame for everything that went wrong with the firm. But in Dewey docket filing #654, his attorneys recently cautioned against such a rush to judgment.
Davis’s lawyers assert, for example, that during the 12-month period immediately preceding the firm’s bankruptcy filing, “fifty-one partners received a higher distribution than Mr. Davis,” who, his attorneys say, got $1 million. Is that the behavior of a self-aggrandizing villain?
No Names, Please
While the firm’s July 26, 2012 “Statement of Financial Affairs” (docket filing #294) identifies Dewey partners only by employee number, it offers some insight into the actions of those 51 highly paid partners. The amounts that some received as the firm imploded contrast sharply with Davis’s January admonition that they should “own the problem.”
For example, Dewey partner 06780 received more than $6 million in draws and distributions between May 31, 2011 and May 21, 2012. Starting in January 2012 alone, that partner received the following:
1/3/12: $391,667,67 – Partner Distribution
1/3/12: $25,000.00 – Partner Draw
1/11/12: $250,000.00 – Partner Distribution
2/3/12: $25,000.00 – Partner Draw
3/1/12: $25,000.00 – Partner Draw
3/14/12: $391,666.67 – Partner Distribution
4/4/12: $264,166.67 – Partner Distribution
4/4/12: $25,000.00 – Partner Draw
5/21/12: $264,166.67 – Partner Distribution
5/21/12: $25,000.00 – Partner Draw
The May 21 payments totaling $289,000 occurred shortly after the firm’s cleaning service had filed its complaint seeking approximately that amount for services rendered through April 30. A week later, Dewey filed for bankruptcy.
Dewey Partner 06512 received distributions of $2.8 million in January 2012 alone, a sum that accounts for more than one-third of the more than $6.5 million in draws and distributions that this partner received between May 31, 2011 and May 21, 2012.
Dewey Partner 86059, meanwhile, received $3.4 million in draws and distributions between May 30, 2011 and May 8, 2012, including more than $1 million after January 30, 2012.
Overall, 25 top Dewey partners received $21 million during the final five months of the firm’s existence. During the last seven months of 2011, the same group of 25 had already received another $49 million.
Stated another way, of the $234 million distributed to all partners during the 12 months preceding the firm’s bankruptcy, the top 25 (out of 300) received more than $70 million. Someday, we might learn how much this select group also received from the proceeds of the firm’s $150 million bond offering in April 2010.
Complementing the “Davis-as-sole-villain” narrative, another current theme to emerge from the bankruptcy proceedings is that the recently approved partner compensation plan proves that former partners are, in fact, “owning the problem.” That may be true for most of the more than 400 who will return a combined $71 million to the Dewey estate. But consider another set of facts.
In May, just after resigning from the firm, former Dewey partner Martin Bienenstock gave a wide-ranging interview to the Journal. Reporters Jennifer Smith and Ashby Jones asked Bienenstock whether “it was safe to say that the firm used credit lines to pay partners, at least in part.”
Bienenstock answered: “Look, money is fungible. The $250 million in profits [for 2011] were real profits. Instead of using it to pay partners, a lot of it went to pay other things, like capital that other partners were due, and pension payments to retired LeBoeuf lawyers.”
In the same interview, Bienenstock said that at the end of December 2011 the firm had drawn down $30 million of its $100 million revolving bank credit line. As the firm disintegrated during the first five months of 2012, it tapped another $45 million.
You may be wondering whether any former Dewey partner’s contribution under the tentative “clawback” settlement plan may be, at least in part, simply returning money that the firm borrowed and then distributed to that partner as the firm collapsed. Perhaps one answer is Bienenstock’s retort that “money is fungible.”
Another answer is that any time a bankrupt entity’s liabilities exceed its assets, somebody has to make up the shortfall. Those victims wind up “owning the problem,” too. In addition to partners who lost their capital and didn’t receive their fair share of distributions in 2011 and 2012, unsecured creditors became involuntary lenders who will never be repaid in full.
Which takes us back to Dewey’s cleaning service. Even with their outstanding April invoice of $299,000, ABM Janitorial Services apparently kept working into May. According to Dewey’s July 26, 2012, “Schedule of Creditors Holding Unsecured Nonpriority Claims,” ABM’s claim had grown to $346,000 by May 28.
How much will ABM recover? Dewey & LeBoeuf’s December 31, 2012 “Amended Confirmation Plan Disclosure Statement” predicts that general unsecured debtors will get between a nickel and 15 cents on the dollar.
Steven J. Harper is an adjunct professor at Northwestern University and author of the forthcoming book, The Lawyer Bubble: A Profession in Crisis (Basic Books, April 2, 2013). He retired as a partner at Kirkland & Ellis after 30 years in private practice. His blog about the legal profession, The Belly of the Beast, can be found at http://thebellyofthebeast.wordpress.com/. A version of the column above was first published on The Belly of the Beast.