Sedgwick’s decision to wind down operations after nearly 85 years in business is already leading to speculation about where the firm’s remaining partners will restart their practices.
Two sources have told The American Lawyer that Clyde & Co, an insurance-focused firm based in the U.K., will hire a number of Sedgwick lawyers and staffers after the firm dissolves at year’s end. Those discussions, which came after merger talks broke down a month ago between Clyde & Co and Sedgwick, are ongoing, one source said.
Another source said that some of Sedgwick’s staff in Kansas City, Missouri, where the Am Law 200 firm opened a back office in 2014, have already been told they will not have a job at the end of the year. (Morgan, Lewis & Bockius let go of many former Bingham McCutchen back office staffers working out of the latter’s operations center in Lexington, Kentucky, following a mass acquisition deal in late 2014.)
Sedgwick’s dissolution could be the start of a long and costly ordeal for the firm’s former partners, as well as for Clyde & Co and any other firm that potentially adds a large number of Sedgwick partners.
Any mass hire of Sedgwick lawyers would at this point be done in a structure similar to Blank Rome’s February 2016 addition of 100 lawyers from Dickstein Shapiro, industry sources said.
In that deal’s structure, Blank Rome avoided assuming the failing firm’s debts, while absorbing the accounts receivable of some of Dickstein Shapiro’s top billers. That deal has so far avoided being publicly contested by former Dickstein Shapiro partners who may still use the courts to regain lost capital, said one legal industry source familiar with the deal.
“So far [Blank Rome] has pulled it off. I think only time will tell if they ultimately pull it off, and I don’t think they will,” the source said. “But that’s what another firm will try to do [with Sedgwick].”
While any mass hire of Sedgwick lawyers will likely be smaller than the size of Blank Rome’s mass acquisition, one potential complication for the firm is the number of rainmakers who have already left the firm in the past year that are owed capital. Adding to that complication is a capital contribution policy at the firm that required more money from the highest-paid partners, as described to The American Lawyer by a source familiar with Sedgwick’s finances.
Sedgwick required equity partners to contribute capital equal to 50 percent to 55 percent of their highest annual compensation. New partners were given two years to pay their total capital requirement, and partners who earned a boost in compensation in any year were required to up their capital account in the same year, the source said. For departing partners, the firm paid out capital contributions over 36 months.
It is unclear if Sedgwick has been making those payments. But either way, the firm’s obligation has been rapidly growing. Sedgwick’s head count has been slashed by 39 percent from 12 months ago, according to data compiled by ALM Legal Intelligence. The firm has lost 49 partners in that time, although it is unlikely that all were equity partners.
One purported benefit for a law firm of requiring a large capital account is that it can encourage partners to stay at the firm and also to fight to save it during a downturn. But there is also a significant downside.
“A lot of people are going to lose a lot of money,” said one legal industry source.
If Sedgwick is unable to avoid a formal bankruptcy filing, departed partners who have received capital payments or salary in the past 18 months could be the target of a bankruptcy trustee.
In the case of now-defunct Dewey & LeBoeuf, a group of dozens of partners eventually agreed to pay a total of $71 million in capital and salary to settle claims with a bankruptcy trustee. Some partners opted out of that settlement, and at least three former partners eventually filed for bankruptcy as a result of debts incurred by the firm’s demise.
One former equity partner at Sedgwick who left the firm earlier this year but declined to be named described his time at Sedgwick as “expensive.”
“I’m just trying to put that whole experience out of my mind,” the former partner said.