Making good on a pledge issued two months ago, the trustee unwinding the Chapter 11 estate of defunct Washington, D.C.–based litigation shop Howrey has launched the first round of lawsuits aimed at clawing back both money former Howrey partners were paid by the firm before it dissolved and revenue earned from assignments they brought to the firms where they landed after its collapse.
Dorsey & Whitney, Kilpatrick Townsend & Stockton, Ropes & Gray, and Shearman & Sterling are among the six firms targeted in the initial batch of so-called unfinished business suits brought by Howrey trustee Allan Diamond. In the suits, filed Monday in federal bankruptcy court in San Francisco, Diamond also asserts claims against a total of seven former Howrey partners scattered among five of those firms in an effort to reclaim millions of dollars he says they were unjustly paid.
Diamond, of Texas firm Diamond McCarthy, says the six firms sued Monday are among 71 successor firms he is pursuing in hopes of recovering a total of approximately $200 million. The vast majority of those 71 firms are in settlement talks with the estate, he adds. "These six just happen to be the first six that don’t look like we’ll get anywhere [with]," he says, while noting that he expects to file several more suits next week.
The half-dozen suits—which come roughly two years after Howrey dissolved—offer perhaps the most detailed narrative yet of the circumstances that led to the firm’s collapse. Or, as the Diamond McCarthy lawyers put it, how "Howrey goes from boom to bankruptcy in less than three years." (The American Lawyer published its own analysis of the firm’s implosion in June 2011.)
The estate blames Howrey’s fall on three main causes: a sharp decline in demand for its services following the onset of the 2008 economic downturn; an increasing reliance on risky contingency work to counteract that decline; and delinquent clients racking up millions of dollars in unpaid bills.
As the firm struggled, Howrey’s profits tumbled. According to the filings, average profits per partner came in 35 percent below expectations in 2009, at $646,000, for those considered "Level II" partners, meaning they had capital invested in the firm and were paid from the firm’s profits. (Diamond declined to comment on the source of his figure.) The American Lawyer had reported average partner profits that year of $845,000 for those defined as equity partners, meaning they receive no more than half their compensation on a fixed-income basis. In 2010 average profits fell to $550,000, according to both the filings and The American Lawyer‘s numbers for that year.
Short on cash and with its overhead rising, the firm began borrowing heavily from Citibank, its primary lender. "Starting in the spring of 2009, Howrey began a cycle of defaulting and then restructuring the Citibank debt that would continue until the firm’s dissolution," the filings state. By May 2009, the firm had borrowed $23 million more than its Citibank agreement allowed, and by November 2010 the outstanding debt had climbed to $55.6 million.
In what was by then a desperate attempt to stave off collapse, Howrey refinanced its debt with Citi again the following month—to little effect. The firm had become insolvent by June 2010, according to Diamond’s calculations, despite having paid partners a total of more than $45 million in the year’s second quarter. The suits filed Monday further contend that though broke, the firm went on to pay partners another $58 million over the course of the next nine months. (Read the Howrey estate’s complete take on how the firm collapsed here [PDF]).
Monday’s filings shows that more than $80.7 million invested in contingency fee cases in Howrey’s final years yielded scant returns during the firm’s lifetime—though the estate does stands to benefit from a handful of those cases, including through recently settled litigation over price-fixing in the milk industry. Diamond says two settlements related to that litigation are set to yield a total of $103 million in attorneys fees, with a large portion of that sum expected to go to Howrey. "That’ll be the thing that turns this estate totally around," he says, while acknowledging that an agreement must still be reached with Baker & Hostetler, the firm that carried on the work on the cases.
Beyond detailing the events that he says caused the firm’s demise, Diamond takes issue in the suits with Howrey’s attempt to insert a so-called Jewel waiver into the then-55-year-old firm’s partnership agreement on the eve of its March 4, 2011, dissolution vote. In the filings, Diamond says the partners approved the Jewel waiver, which he calls "a textbook fraudulent transfer," "solely for their own personal benefit, and in direct violation of their duties to Howrey and its creditors." (Incidentally, the judge overseeing both the Howrey and Heller Ehrman bankruptcies ruled Monday that Heller’s attempt to pass a Jewel waiver before its 2008 fall cannot be used to protect four firms currently fighting unfinished business suits against that estate, according to sibling publication The Recorder).
The suits don’t estimate a dollar amount for the unfinished business claims, but do include detailed accountings of the money paid to the individual partners whose earnings the estate hopes to claw back. Washington, D.C., trial lawyer Billy Martin—who is being sued along with Dorsey & Whitney, the firm he joined immediately after leaving Howrey—made $576,259 between the alleged insolvency date and March 1, 2011. Reached Tuesday, Martin, who launched his own firm in 2012, said he had not yet seen the complaint.
John Ralls, a construction lawyer in San Mateo, California, who is being sued at a two-partner shop he founded after leaving Howrey, made $56,250. Intellectual property lawyer James Batchelder, now at Ropes & Gray in Silicon Valley, is being sued for the return of $1.13 million. A trio of antitrust lawyers in Brussels who lateraled to Shearman & Sterling, Stephen Mavroghenis, Trevor Soames, and Geert Goeteyn, are being asked to return $2.04 million between them. Finally, Los Angeles patent lawyer Ben Davidson, who launched his own firm, received $5,000 in June 2010 that the trustee hopes to recover. None of the lawyers returned requests for comment.
Of the firms being targeted, spokesmen for Ropes and Kilpatrick—which is being sued over work taken by one of Howrey’s Taipei-based partners—had no comment. A Dorsey spokesman said the suit appears to be a typical unfinished business case arising from a dissolving firm.
A handful of creditors pushed Howrey into involuntary Chapter 7 bankruptcy in San Francisco in April 2011. Two months later the bankruptcy was converted to a Chapter 11 proceeding, and Diamond was appointed trustee in October 2011. Since then, he has worked to maximize the firm’s remaining assets. The estate has yet to present a liquidation plan to the court. Dewey & LeBoeuf, which went bankrupt last May, recently received approval of its liquidation plan.