Although a string of law firms have filed for bankruptcy in recent years, Dewey & LeBoeuf yesterday became the largest to file for Chapter 11 and raises novel issues for creditors and the courts, bankruptcy lawyers say.

The departure of the management team along with nearly 300 Dewey partners left the firm’s general counsel Janis Meyer and executive partner Stephen Horvath to wind down operations. Dewey & LeBoeuf has retained Albert Togut, a bankruptcy partner at Togut Segal & Segal. Joff Mitchell, a senior managing director of Zoflo Cooper, said in an e-mail that he is the firm’s chief restructuring officer.

Issues that could complicate the Dewey bankruptcy include bond debt, unusual secured creditors, a criminal investigation and the firm’s large global footprint, bankruptcy lawyers told the New York Law Journal.

Editor’s Note: For the latest developments on this story, visit The American Lawyer.

A hearing is to be held before Southern District Bankuptcy Court Judge Martin Glenn to considers logistics and the firm’s use of its remaining cash.

Dewey “definitely” will face issues that other law firms in bankruptcy have not, said Allan Diamond, the Chapter 11 trustee in the Howrey bankruptcy. Diamond, the Houston based managing partner of Diamond McCarthy, said he expects to represent some parties in the bankruptcy.

He said Dewey will be the only bankrupt law firm that had issued bonds to support its finances. Dewey raised at least $125 million in a 2010 bond offering.

Rather than a more traditional scenario where the secured creditors are the banks, the Dewey bankruptcy willinvolve hundreds of millions of dollars of secured bank and bondholder debt. “That’s your first major difference,” he said.

Uncommon Creditors

According to a copy of the 2010 bond offering memorandum obtained by The New York Times, the notes rank “pari passu” or on an equal footing, with all current and future senior secured debt of the law firm.

Three of the four banks that have lent money to Dewey sold their share of the debt, according The Am Law Daily. Those three lenders—Citi Private Bank, Bank of America, and HSBC—were part of a consortium led by JPMorgan Chase that had collectively been owed roughly $75 million on a $100 million line of credit.

Also, the insurance companies that bought the bonds have sold some to hedge funds in the distressed debt market, according to media accounts, which also report that the debt was trading between 50 to 65 cents on the dollar.

If the bonds are trading at one half of their face value and bond debt and bank debt are on equal standing, Diamond said, “that tells me the collateral, which is primarily accounts receivable, is viewed by the distressed debt market as insufficient to fully retire the secured debt.”

This indicates that the secured creditors, those with bank debt and new bondholders, may not be paid back in full solely from their collateral, he said, much less unsecured creditors and any former partners.

Banks are typically the secured creditors in a law firm bankruptcy, he said. “Now, you have multiple secured parties making decisions,” Diamond said. “Given that they have equal rights in the collateral, there could be a lot of fighting between and amongst the secured creditors because they simply may not agree” on what actions to take.

A hedge fund, for example, could have a different approach than a traditional bank.

This would affect decisions requiring the approval of secured creditors, such as strategies for the sale or liquidation of assets, Diamond said.

Other Wrinkles

The Manhattan District Attorney’s office investigation of former chairman Steven Davis for alleged misconduct may add “a major wrinkle to the bankruptcy,” Diamond said.

“The interplay of criminal investigations, potential grand jury proceedings and any ultimate criminal prosecutions has the potential effect of delaying civil proceedings, changing the dynamics of witness testimonies, including rights against self-incrimination, cooperation between simultaneous bankruptcy, civil and criminal proceedings, and a myriad of other issues that otherwise would not be present in bankruptcy and civil proceedings alone,” Diamond said.

Another difference in the Dewey bankruptcy is its size. Last year, the firm generated $782 million in gross revenue, according to revised financial figures from The American Lawyer.

In its filing, the firm said that it had assets of roughly $193.2 million against liabilities of $245.4 million—a deficit of more than $52 million., as of April 30.

The firm, with more than 1,000 lawyers at one point, had 25 offices, including 16 overseas. A press release issued by the firm noted that many of Dewey’s foreign offices are excluded from the firm’s U.S. bankruptcy filing, and that the London and Paris operation, which are a distinct legal entity, were placed into administration, the United Kingdom’s version of Chapter 11, yesterday.

The Am Law Daily estimated that as of May 24, there were fewer than 20 partners remaining in Dewey’s domestic offices.

No other law firm that filed for bankruptcy in recent years—including Brobeck, Phleger & Harrison; Coudert Brothers; Heller Ehrman; Howrey; and Thelen—has been close in size and global presence to Dewey.

Claims by multiple landlords and various arrangements for partnership in overseas locations may add more layers for a bankruptcy court to sort through, said Michael Blumenthal, a bankruptcy partner at Thompson & Knight.

“When I think of the firms that have filed in the last few years, this will be the most complicated,” said Blumenthal, who represented partners in bankruptcies of Howrey and Finley, Kumble, Wagner, Underberg, Manley, Myerson & Casey.

Bankruptcy Advantages

Before yesterday’s court action, Dewey had essentially a “de facto” dissolution, Diamond said, without a formal bankruptcy filing or dissolution vote.

But bankruptcy has some advantages, such as slowing litigation against the firm, which is facing several lawsuits, including those brought by an employee over the Worker Adjustment and Retraining Notification Act, pension fund regulators, a janitorial service and its Washington, D.C., landlord.

It could also prevent creditors, such as landlords, from seizing property subject to their liens.

Bankruptcy gives rise to rights for the recovery of assets for creditors, Diamond said. For instance, a trustee can pursue so-called clawback claims against former partners and their successor firms.

For example, almost all of Thelen’s nearly 250 partners have been involved in settlement discussions over clawback claims that trustee Yann Geron pursued against the partners, Geron said.

Geron, a Fox Rothschild partner, has settled with about 150 partners so far, and he said he is hoping to settle with roughly 90 others.

Geron said he had pursued unfinished business claims against two dozen law firms that former Thelen partners joined. About half have been settled and a few law firms are facing lawsuits.

In a decision last week touching on unfinished business claims of bankrupt firm Coudert Brothers, Southern District Judge Colleen McMahon (See Profile) wrote that pending client matters of former Coudert partners were assets of the firm’s estate on the dissolution date, and the former partners are obligated to account for any profits they earned while winding up the client matters at their new firms (NYLJ, May 25). In Development Specialists v. Akin Gump Strauss Hauer & Feld, 11 civ. 5994, McMahon granted partial summary judgment against several law firms that hired Coudert lawyers.

Most law firm bankruptcies have started out as Chapter 11 cases. For most companies, Chapter 11 usually means a reorganization. But the result for law firms typically is a sale or an orderly liquidation, said Dylan Trache, a Washington, D.C., partner at Wiley Rein who represented Howrey while it was operating as a debtor in possession under Chapter 11.