The liquidating trustee of defunct law firm Dewey & LeBoeuf is arguing his clawback suit against two former firm leaders should not be stayed while they face criminal charges because there is little overlap between the criminal and bankruptcy cases—and because every delay diminishes recovery for creditors.
“The trustee’s urgency in pursuing these claims is heightened by the real risk that [Joel Sanders and Stephen DiCarmine's] assets will dry up while they scramble to defend themselves against the criminal charges and other potential lawsuits,” trustee Alan Jacobs said in papers filed July 4 in Southern District Bankruptcy Court.
Jacobs is seeking more than $21.8 million from Sanders, the firm’s former CFO, and DiCarmine, former executive director, in Jacobs v. DiCarmine, 13-01765. Jacobs claims that the former executives’ employment contracts awarded them exorbitant compensation that required nothing in return.
Meanwhile, Sanders and DiCarmine are also facing criminal charges that they defrauded and stole from the firm’s lenders, investors and others. They have pleaded not guilty.
Last month, Jacobs amended his complaint to add new claims for “actual intent” fraudulent transfers that incorporate details from the criminal indictment; an SEC complaint against former firm leaders, which is now stayed; and the guilty pleas of seven former accounting employees.
Sanders and DiCarmine moved for a stay of the entire clawback suit until their criminal case is resolved. They claim that unless the bankruptcy suit is stayed, they will have to argue the criminal case within the bankruptcy court.
“This is sheer exaggeration,” Jacobs said, adding they are conflating the fraud alleged by the trustee with the fraud at issue in the criminal case.
For actual intent fraudulent transfers, Jacobs said, fraud can be proved indirectly by referring to certain badges of fraud, such as lack of arms length negotiations.
Jacobs said that while the criminal conviction would buttress his claims that Sanders and DiCarmine awarded themselves discretionary bonuses through self-dealing, it is not necessary to his case.
Jacobs also said DiCarmine and Sanders cannot guarantee their criminal trial will begin in January 2015, as envisioned by Manhattan Supreme Court Justice Robert Stolz, leading to a trial ending July 2015 if it lasts four to six months.
“That estimate does not include time for delays, mistrials, appeals, retrials, etc., any of which is possible,” Jacobs said. “The request for a stay is, in effect, a request for an indefinite suspension of this case.”
Meanwhile, Sanders and DiCarmine’s concern about being distracted by parallel proceedings in bankruptcy and criminal courts “rings hollow because each is represented by law firms with hundreds of lawyers,” the trustee said.
Hughes Hubbard & Reed represents Sanders, while Bryan Cave represents DiCarmine.
“Even at routine status hearings, DiCarmine and Sanders are each represented by at least two, and sometimes more, attorneys. Each. Surely those law firms can handle two cases at once,” Jacobs said.
Jacobs also noted that Bankruptcy Judge Martin Glenn has said he would not require the two to be deposed for now, thus protecting their Fifth Amendment rights.
The trustee said there are about 30 pending clawback cases relating to fraudulent transfers to former Dewey partners and insiders, and these cases should be tried together.
In moving to dismiss the suit, Sanders and DiCarmine argued that Jacobs’ claims against them are barred by a settlement last year between XL Specialty Insurance and former Dewey chair Steven Davis, who has also been indicted. The settlement contemplates a partial release of claims against “insureds” under a policy written by XL for Dewey. Sanders and DiCarmine qualify as insureds.
But the trustee said the settlement excludes Chapter 5 avoidance actions and claims not covered by the policy. “These carve outs show that the defendants are flat wrong when they argue that the settlement immunizes their past conduct,” Jacobs said (See Opposition to Motion to Strike).
He said the settlement did not release facts, and that “[i]t certainly does not bar the trustee from marshalling evidence in support of non-released claims.”
Sanders and DiCarmine have also argued that certain statements by Dewey representatives—that insolvency was difficulty to prove in 2011 and earlier—were inconsistent with the trustee’s allegations that Dewey was insolvent by at least January 2009.
But Jacobs said there was no contradiction. The estate “candidly—and repeatedly—told the court that its view of insolvency was preliminary, there was not one answer and further investigation might support a different result,” he said.
Jacobs, poking fun at Sanders and DiCarmine’s arguments, said they suggest the law firm was solvent “based on the same financial statements the insiders are under indictment for having manipulated (!!).”
DiCarmine’s attorney, Bryan Cave partner Austin Campriello, declined to comment. Hughes Hubbard partner Ned Bassen, who represents Sanders, said in an email that “[t]he trustee’s counsel’s arguments are contrary to fact and law and wasteful of the trustee’s limited assets.”
Diamond McCarthy partners Christopher Murray and Allan Diamond represent Jacobs.