(Photo by Duncan Rawlinson)
Correction, 6/23/14, 12:37 p.m. EDT: A previous version of this story misquoted the dollar figure from a court document describing Dewey & LeBoeuf’s indebtedness to Barclays Bank by April 15, 2007. The correct figure is $725,000. We regret the error.
More than two years have passed since Dewey & LeBoeuf’s spectacular collapse, but the storms surrounding the largest law firm bankruptcy in history show no sign of abating.
In New York, a lengthy trial looms in the criminal case brought by the Manhattan district attorney, who has accused three former Dewey leaders and one low-level staffer of engineering a massive fraud that helped sink the firm. Once those proceedings conclude, the U.S. Securities and Exchange Commission is set to move forward with a parallel civil case against the same Dewey executives and two other high-ranking employees. At the same time, the trustee overseeing the defunct firm’s estate continues to file suit in bankruptcy court against the parties he claims are legally obligated to help pay off Dewey’s still-sizable debts. Among the targets: a batch of former partners hit with so-called clawback actions seeking the repayment of everything they earned from the firm beginning in 2009.
Across the Atlantic, meanwhile, a series of lesser-known suits filed by U.K.-based Barclays over loans the bank made to Dewey partners, ostensibly to cover the attorneys’ capital contributions, rumbles on largely outside the spotlight’s glare. Which is curious, given that, according to court filings, interviews with several former partners and internal documents obtained by The Am Law Daily, the litigation sheds new light on the perilous state of Dewey’s finances as early as 2009 and raises troubling questions about what Dewey leaders did or didn’t do to prop up the faltering firm.
Barclays tried to force the repayment of the loans without the messiness of a trial, but the suits will now proceed, after a U.K. High Court judge rejected the bank’s summary judgment motion and ruled that the explosive claims asserted by former Dewey partners targeted by the bank—that Barclays conspired with Dewey executives to dupe them into taking on the loans in question, and that rather than repaying the loans as promised, the firm leaders used the money to shore up the firm’s shaky finances—are credible enough to at least warrant a further hearing.
Charles Landgraf, a legislative and public policy partner at Arnold & Porter who served as a member of Dewey’s five-strong office of the chairman group in the firm’s waning days; Londel McMillan, an entertainment attorney and co-owner of hip hop magazine The Source; and Eli Farrah, a Winston & Strawn energy partner, are among as many as 50 former Dewey partners that Barclays is chasing for repayment of more than $15 million in outstanding loans it made before the firm’s collapse in 2012.
Last month, the trio combined their proceedings against the bank, which are now scheduled to go to trial next year. (Restructuring partner Maria Dantas, now at Drinker Biddle & Reath, has also been sued by Barclays for $212,000. Her case has not been joined with those of Landgraf, McMillan and Farrah. All four either declined to comment on the litigation or did not respond to The Am Law Daily’s request for comment.)
Responding to a request for comment for this article, a Barclays spokesman said in a statement: “Barclays maintains full confidence in its claims against the Dewey partners and will continue to robustly pursue the significant debts due. The vast majority of partners have repaid the sums owed.”
Partner Payments Get Pushed Back
The Barclays loans date to March 2006, when Dewey Ballantine—which merged with LeBoeuf, Lamb, Greene & MacRae the following year—changed its system for financing partner capital. Dewey had previously made regular deductions from partners’ distributions to fund capital contributions. But in 2006, Dewey’s leaders told partners they would be “externalizing” the firm’s capital, meaning that partners had to make their contributions up front.
In order to help partners meet this significant new financial demand, which in some cases exceeded $500,000, the firm arranged a loan facility with Barclays. Dewey also agreed to use the interest accrued on partners’ capital accounts to pay the interest owed to Barclays, meaning the loans were effectively interest-free from the partners’ perspective. (Many Am Law 100 and Global 100 law firms have such capital loan arrangements with banks.)
The terms of the financing dictated that when a partner left the firm, the outstanding loan balance immediately became due and payable. To ensure that those payments were made, a system was put in place by which, rather than having his or her capital repaid on a monthly basis, as set out in Dewey’s partnership agreement, the money would initially go to paying off the loan. Once the loan was repaid in full, any remaining capital would be returned to the partner.
That, at least, is how things were supposed to work. And according to two former partners who had taken on capital loans from Barclays before leaving Dewey, the firm did make the scheduled monthly repayments at first. That began to change in 2009, however, when “it became clear that the combined firm wasn’t doing well.” (Dewey’s revenue declined 15.3 percent in 2009, according to figures revised by The American Lawyer in the wake of the firm’s implosion.)
In September 2009, as Dewey’s leaders had begun to step up the allegedly fraudulent accounting practices at the heart of the pending criminal case against them, former finance director Francis Canellas issued a memo to partners stating that the firm was changing its capital distributions—and therefore its repayment of the Barclays loans—from a monthly to quarterly basis.
(Canellas pleaded guilty to second-degree grand larceny in the criminal case, according to documents unsealed March [PDF], and has agreed to testify as a witness against former chairman Steven Davis, executive director Stephen DiCarmine, former chief financial officer Joel Sanders and ex-client relations manager Zachary Warren. Davis, DiCarmine, Sanders and Warren have all pleaded not guilty to charges against them. Lawyers for DiCarmine declined to comment. Davis, Sanders and D’Alessandro could not be reached for comment.)
When the first quarterly payments came due in February 2010, Dewey in fact paid just one-quarter of the amount owed to the bank, according to two former partners who had capital remaining in the firm at the time. Partners were told that the shortfall would be made up with the next quarterly payments, in April.
When that payment came due, however, Canellas issued a letter to former partners requesting that they either attend or dial-in to a meeting to be held in the firm’s New York headquarters later that month. At that meeting, which was chaired by DiCarmine, according to two former partners present at the time, the struggling firm asked that it be allowed to defer the capital repayments for up to five years so that it could pay its current partners.
“We were told that the firm couldn’t afford to make these payments, and that if we stuck it to them and made them pay us what we were owed, the whole house of cards would come falling down,” says one of those present at the meeting, who spoke on the condition of anonymity. “It was clear we had no choice—if we didn’t agree to the deferral, the firm would go bust and we’d risk losing everything.”
Loan Payments Pledged, But Never Made
As a compromise, Dewey’s leaders proposed that they issue the former partners with promissory notes, which they said would offer greater protection over the capital should anything go wrong. A first draft of these notes were sent out by Dewey’s chief operating officer, Dennis D’Alessandro, in late June, but two former partners say the figures were inaccurate, and so a second draft was issued in August. The notes outlined a payment schedule whereby the firm would defer 70 percent of the repayment in the first year (ending April 2011) and 50 percent in the second year. The plan stated that full repayments would be made in the third year, with the deferred amounts repaid in full by 2015. ( D’Alessandro himself has been sued by the Dewey trustee over the nearly $9.3 million he earned from 2008 until his retirement on June 30, 2011 [PDF].)
In 2011, one former partner says, Dewey issued a series of statements to ex-partners showing that the firm was using their capital to repay the Barclays loan, as planned. However, a partner tells The Am Law Daily that when he and others contacted Barclays in September of that year to verify that the funds had been received by the bank, the lawyers were told that no payments had been made by Dewey that year, and that only partial payments had been made in 2010.
“The firm was providing us with accounting information that simply wasn’t true,” says one former partner. “It was clearly fraud and absolutely outrageous.”
(One former partner says they were contacted by the Manhattan district attorney’s office in relation to the circumstances surrounding the Barclays loans, and that they supplied government investigators with various emails and documents. The Barclays loans do not figure into the criminal indictment, however. A spokeswoman for the D.A.’s office declined to comment.)
When partners, who by this stage were furious, contacted Dewey to demand an explanation, they received an email on February 8, 2012, from firm general counsel Janis Meyer. In the email, a copy of which The Am Law Daily has reviewed, Meyer stated that while Dewey had continued to make deductions from partners’ capital accounts on a quarterly basis, it had decided to repay Barclays only at the end of each year. Partners had not been informed of this change, Meyer said, because the accounting form issued by the firm only had space for 15 characters of text.
“The firm deducted these amounts on a quarterly basis but planned to make the loan repayments to Barclays on your behalf after the end of the year. I recognize that the statements that you were sent did not include this information, but we were limited to 15 characters on the form,” Meyer said in the email, adding that the firm would pay any interest resulting from any delayed payments. (Meyer did not respond to requests for comment.)
“The argument was that they couldn’t tell us because there wasn’t enough space on the statement—it would be funny if it wasn’t so serious,” says one former partner. “Besides, the letter was sent in February 2012, so the end of the year had already passed and they still hadn’t made any payments for the previous year.”
Former Firm Leader Fights Barclays’ Demands
When Dewey finally sought bankruptcy protection in May 2012, the Barclays loans immediately became due and payable in full. Barclays issued letters to the partners demanding payment. Barclays’ global relationship director for multinational corporate banking, Andrew Johnman, who was managing the process, then called partners to offer them payment plans at what one former partner claims was a “crazy” interest rate of 9 percent. (A source with knowledge of the situation claims that the bank in fact offered partners one-, two- and three-year term loans at “around 5 percent” interest. Johnman did not respond to requests for comment. A Barclays spokeswoman declined to comment.)
McMillan—whose clients have included Prince, Michael Jackson and Stevie Wonder— sued the bank in New York federal court last February to challenge what he described as “a fraudulent scheme orchestrated and arranged” by Barclays and Dewey management. McMillan’s complaint [PDF] came two months after the bank initiated legal action against McMillan in England to recover what it says is the $540,000 loan he took out in 2010 to cover his Dewey capital contribution requirement, and seven months after Barclays first pressed him to repay the loan in a demand letter. He subsequently amended his complaint to add several of the defunct firm’s onetime leaders as defendants, including Davis. (Separately, McMillan faces a $1.77 million claim, part of a series of complaints filed by the firm’s estate last December seeking the recovery of millions of dollars in compensation paid to nine partners from Jan. 1, 2009, until the day they left Dewey, as well as tax payments made on their behalf. The suits, which offer a detailed look at what led to Dewey’s collapse, mirrored a complaint brought the previous month, this time by Citibank, against former partner WIlliam Marcoux, now at DLA Piper. Disputes over another Citibank loan ended in May after a New York federal district court judge dismissed dueling lawsuits that the bank and former Dewey partner Steven Otillar had filed against each other over Otillar’s alleged $209,670 debt.)
“Dewey & LeBoeuf owes me and many of my former partners millions of dollars,” McMillan told The Am Law Daily in February. “The notion that I owe any debt is unconscionable and without merit.”
When McMillan launched his counterclaim, he was both a partner of, and being represented by, Meister Seelig & Fein. The Am Law Daily has learned that he left the firm at the end of the year, and that Meister Seelig is no longer representing him. On May 28, McMillan amended his filing to substitute Meister Seelig and is now representing himself [PDF]. Meister Seelig managing partner Mark Seelig confirmed that McMillan is no longer with the firm and that the firm is no longer involved in the case, but declined further comment.
Landgraf’s $486,000 loan agreement was not actually signed until May 2010, according to court documents obtained by The Am Law Daily [PDF], meaning it came after the point that the firm had told former partners it couldn’t afford to repay their capital. Barclays claims that Landgraf was informed via letters sent in May, June and December of 2012 of his obligation to repay the full loan amount, which stood at $495,000, including interest.
In a strongly worded defense and counterclaim, filed with the U.K. High Court last May [PDF] [Barclays response PDF], Landgraf’s attorneys dismiss parts of Barclays’ claim as “so vague and unparticularlised as to be embarrassing,” and claim that he was “consistently and repeatedly” told by Davis, DiCarmine and Sanders that “the primary burden of repaying the capital and interest of any loans … was that of the firm and not of its individual partners.”
Bryan Cave, which is representing DiCarmine, said in a statement to The Am Law Daily: “Barclays bank frequently worked with Dewey & LeBoeuf, as well as with many other law firms, to make loans available to partners to assist them in making their capital contributions. Repayment of these loans was the sole responsibility of the partner taking the loan. Any assertion made by Charles Landgraf that Dewey & LeBoeuf was somehow responsible for repaying his loan is patently false.”
Landgraf’s defense goes on to state that, as his loan application form indicated that he was an established partner that had been at the firm for 31 years, Barclays “knew (or ought reasonably to have known)” that he had already made a capital contribution to the firm.
Landgraf further claims that, by April 15, 2007, the firm’s indebtedness to the bank stood at over $725,000, and that Barclays’ then relationship director, Iain Worsley, initially gave the firm until Dec. 31, 2007, to address the shortfall in the partners’ capital accounts, before extending the time limit “indefinitely.” At no time between May 13, 2010, and May 28, 2012 (when Dewey filed for bankruptcy), did the bank enforce “or form any intention to enforce” the firm’s obligations in respect of the loan, Landgraf claims.
London Judge: Case Should Be Heard
Barclays had applied for a summary judgment against Landgraf, but had its application rejected by the High Court in February. In rejecting the motion, Mr Justice Popplewell held that the wording of the loan documents “seems clearly to favour” the bank’s claim. But he went on to add that “it is not fanciful to think that, with the benefit of disclosure, the position at trial may well be that Mr Landgraf can show that all concerned, including the bank, knew that the true purpose of the loan was to provide the firm with the liquidity which it required to meet its day-to-day liabilities, not to enable him to make a capital contribution to the firm under the provisions of the partnership agreement.” It was also found that “it is at least arguable” that Barclays knew that at least one of the default events triggering repayment of the loan had already been met at the time the parties entered into the agreement, and that this was “capable of supporting the submission that the terms of the contractual documents were to some extent a sham.”
(McMillan and Landgraf, who are facing claims of $550,000 [PDF] and $496,000, respectively, have been represented by commercial disputes partner Andrew Dunn at U.K. firm Candey and barrister John Brisby QC of 4 Stone Buildings. Farrah has retained Graham Huntley at London disputes boutique Signature Litigation and barrister Daniel Saoul of 4 New Square [claim PDF] [defense PDF]. Barclays is being represented by Richard Clayton, a banking and financial services litigation partner at Bristol-based TLT, and barrister Guy Philipps QC of Fountain Court. Signature, Candey, and TLT did not respond to requests for comment.)
Landgraf’s, McMillan’s and Farrah’s cases have now been joined, having proposed the move during a case management conference last month, with Barclays agreeing to the change “within days,” according to one source with knowledge of the situation. The three trials—Landgraf’s was scheduled to commence in December, followed by McMillan and Farrah’s in 2015—have been vacated and replaced by a joint action to be heard in the Commercial Court next year. It is yet to be decided which lawyers will represent the parties in the combined case.
“Here you have cases with common factual matters and witnesses that are relevant to each case, so it was obvious the issue of joinder needed to be raised,” says one source with knowledge of the proceedings, speaking on the condition of anonymity. “What’s interesting is why the bank, which knew of the commonality of these cases, did not itself have regards to assist the court to manage these cases effectively and avoid duplicating effort and money. This was the consequence of a rather transparent attempt to divide and conquer, which has now failed as a result of the willingness of the defendants to come together.”
Whether other ex-Dewey partners might join the litigation surrounding the loans remains unclear. One interviewed by The Am Law Daily says he had considered suing Dewey over its actions, and even got as far as joining together with a group of similarly affected attorneys and hiring New York litigator Gregory Joseph of Gregory P Joseph Law Offices (now Joseph Hage Aaronson), but the group ultimately decided against filing a suit. The partner instead took out a personal loan to repay a six-figure sum to Barclays.
“I couldn’t stomach the pain or expense of litigating—I had already spent years dealing with this nonsense,” the former partner says. “Barclays [was] supposed to be a fiduciary of our loans, but to our detriment, [it] never notified us that things were running afoul and never pursued Dewey to collect what should have been paid, but I just needed to move on.”