Dewey & LeBoeuf’s former New York landlord has some potentially chilling news for the bankrupt firm’s former partners: They may be personally liable for $45 million related to the lease on the firm’s midtown Manhattan headquarters—and liability waivers included as a part of a recently approved $71.5 million settlement deal with Dewey’s estate won’t protect them.
The lease in question dates to 1989, a period during which major law firms were structured as general partnerships, meaning anyone hoping to become an owner of the operation would have to agree to back the firm’s debts in exchange for the opportunity to share in the profits. That was the case for Dewey, Ballantine, Bushby, Palmer & Wood—which later shortened its name to Dewey Ballantine and became Dewey & LeBoeuf through its 2007 merger with LeBoeuf, Lamb, Greene & MacRae—when it entered into a 20-year lease with Tishman Speyer Trammell Crow, the then-owner of 1301 Avenue of the Americas.
Over the years, the building’s ownership changed and Dewey’s corporate structure did too. Like most large law firms, it became a limited liability partnership. According to recent court filings, however, a clause in the 200-plus-page office lease dictating that “each of Dewey’s partners is jointly and severally liable to 1301 Properties for Dewey’s non-payment of its obligations” remained in effect until that lease was terminated on May 25. At that point, the landlord says, Dewey was already a month behind in rent payments totaling $1.6 million. Even though the lease was terminated three days before the firm filed for Chapter 11 bankruptcy protection, Paramount Group Inc. (listed in court filings as 1301 Properties Owner) says it is still owed $45.45 million on the lease, which was set to expire in 2020.
It is unclear why the so-called partnership tenant clause apparently remained in the contract, even after Dewey Ballantine’s 1997 conversion to an LLP and after the firm merged and LeBoeuf lawyers moved into the Dewey space. Interviews with real estate brokers, real estate lawyers, and partnership law specialists show that such clauses are rarely, if ever, inserted into new law firm leases and that it’s unlikely many major firm leases still include such provisions.
Mark Weiss, the New York-based vice chairman of Newmark Grubb Knight Frank, said that when firms first began converting to LLPs in the 1990s, landlords resisted, insisting that partners still be made responsible for leases signed by their firms. After the real estate market took a downward turn, Weiss said, landlords “just dropped it,” because they were desperate to fill space.
In the current real estate market, landlords typically ask firms for letters of credit or traditional cash deposits in order to secure a lease. In some cases, brokers say, deposits aren’t even necessary because law firms are considered such strong tenants.
“We’ve never ever done a personal guarantee or any sort of partner liability—we just don’t do it,” said George Fox, a senior vice president at Studley in Silicon Valley who often works with law firms. “If a landlord requires it, we don’t take that client.”
In the case of Dewey, it is unclear whether 1301 Properties has viable claims against former partners for the money it says it is owed, or whether such claims would apply only to legacy Dewey Ballantine partners. Though no action has yet been initiated against the former partners, the landlord preserved its potential claims via a Sept. 14 filing in the firm’s Chapter 11 bankruptcy. In that filing, 1301 Properties raised concerns that the partner contribution plan ultimately approved by the court under which ex–Dewey partners have agreed to repay the defunct firm’s estate $71.5 million in exchange for protection against future liability would effectively block the landlord from suing partners who signed onto the deal.
In his Oct. 9 order approving the plan—which represents a major recovery for Dewey’s creditors and a first-of-its-kind deal in the annals of large law firm bankruptcies—Southern District Bankruptcy Court Judge Martin Glenn (See Profile) addressed the landlord’s limited objection as well as two other objections, by stating, “the Debtor has acknowledged on the record that the [plan does] not release direct claims held by third parties.” (Partners who didn’t choose to settle can also bring suits against those who did.)
Howard Kingsley, a partner at Rosenberg & Estis who represents 1301 Properties, declined to comment on any potential claims against former partners. Gabriel Hertzberg, a counsel at Curtis, Mallet-Prevost, Colt & Mosle who represented the landlord in its objection to the partner contribution plan, said his client feels its claims were adequately preserved and that Curtis was brought in solely for that purpose.
Robert Hillman, a professor at UC Davis School of Law and expert on partnership law, said it doesn’t surprise him that Dewey’s lease could still contain an outdated partnership tenant clause if the firm simply continued to extend its existing 1989 contract. “The LLP conversion doesn’t automatically change existing contracts,” he says.
With or without the recovery of funds from former Dewey partners, 1301 Properties does have one source of income lined up for the firm’s former space: Chadbourne & Parke signed a 20-year lease in September to take over six floors of the space as soon as the office can be demolished and redesigned (NYLJ, Marketplace, Sept. 12).
@|Sara Randazzo, a reporter for The Am Law Daily, an affiliate of the Law Journal, can be contacted at email@example.com.