With Howrey’s Chapter 11 bankruptcy filing approaching its two-year anniversary later this week, time is running out for a trustee managing the defunct Washington, D.C.-based litigation firm’s finances to either sue or strike deals with lawyers and vendors that may have unfairly received money from the firm in its waning days.
Allan Diamond, a founding partner at Texas-based Diamond McCarthy who became Howrey’s trustee in October 2011, filed 33 suits on Friday seeking to recover a collective $3.57 million paid out by Howrey to entities including Paul Hastings; legal consulting firm the Zeughauser Group; Verizon; Thomson Reuters; oilfield services provider Baker Hughes Inc.; leadership consultants; and an expert witness firm. Those organizations and others all received payments in the 90 days before Howrey was pushed into involuntary Chapter 7 bankruptcy on April 11, 2011. (Representatives for the companies either had no comment or did not immediately return requests for comment.)
In addition, Diamond says he is also seeking the return of money paid between the firm’s involuntary bankruptcy filing and its conversion to a Chapter 11 case on June 6, 2011. He says he expects to file more suits in the next few days — just in time for a Thursday deadline under a two-year statute of limitations. According to the bankruptcy code, Diamond must either file the suits by the two-year Chapter 11 anniversary or agree to a tolling agreement with opposing parties that would delay the deadline until later this year.
Those being sued won’t have to return money to the bankruptcy estate if they can prove that the payments were made in the "ordinary course of business," Diamond says. For instance, if a company routinely billed and was paid by Howrey every 30 days, and one of those payments falls in the windows of time in question, the payment cannot be recovered. If, however, Howrey chose to pay several months of invoices all at once to a certain company in the weeks before its bankruptcy while leaving bills from other companies unpaid, that money is required to be returned to the estate because it shows preferential treatment to one creditor over another. Once Diamond and his team collect as much money as possible and pay off secured and administrative claims, unsecured creditors — including those sued Friday — can stand in line to have a portion of their debt repaid.
"The bankruptcy code is designed to make sure all creditors are treated fairly," says Diamond on why the suits, many against what he calls innocent creditors, are necessary. He adds that while it’s too early to tell how much money these unsecured creditors and others may ultimately receive, "I am confident unsecured creditors are going to get a distribution." Before getting to that point, he must repay an estimated $15 million to $20 million in administrative expenses and tens of millions due to Citibank, Howrey’s secured lender.
Diamond also continues to pursue what’s known as unfinished business claims to recover money from assignments former Howrey partners brought with them to their new firms, as well as claims against former partners for payments they received when Howrey was likely insolvent. In the past few days, Diamond has struck tolling agreements with several firms that hired Howrey lawyers to give the two sides more time to hash out potential settlements, including Greenberg Traurig; Jenner & Block; McDermott Will & Emery; and Winston & Strawn. He’s already sued at least 17 other firms.
Of the 33 suits filed on Friday, two former Howrey lawyers are on the list of defendants: Thomas Miller, a Houston lawyer who joined Winston & Strawn following the firm’s collapse who is now listed as "inactive" on the State Bar of Texas attorney registration site; and David Dekker, a litigator now at Pillsbury Winthrop Shaw Pittman. Neither Miller, who is being asked to return $161,028, nor Dekker, being pursued for $100,000, could be reached for comment Monday.
Legal consultants at the Zeughauser Group, which Diamond said in a Friday suit received $35,000 in 2011 that should be returned, worked with Howrey leaders until its final days to try to avoid dissolution. As part of that work, the Zeughauser Group attempted to move several practice areas of the firm en masse to Winston, though in the end around 40 lawyers made the move. Peter Zeughauser did not immediately return a request for comment.
The Friday suits include an action seeking $20,692 from Jan Brown & Associates, a San Francisco-based court reporting agency that was among the original creditors that pushed Howrey into bankruptcy. A representative for the agency did not immediately have a comment.
In addition to work on Howrey’s case, Diamond’s firm has been hired by Dewey & LeBoeuf’s Chapter 11 trustee, Alan Jacobs, to pursue claims against former Dewey lawyers.
Sara Randazzo is a reporter with The Am Law Daily, a Recorder affiliate.