Dewey's Downfall Took Weeks; Clean-Up Looms for Years
By Linda Sandler and Sophia Pearson-May 24, 2012 12:00 AM ET
Dewey & LeBoeuf LLP, a law firm with 103 years of history, collapsed in a matter of weeks. Cleaning up the debris may take years.
A trickle of partner defections in March turned into a torrent, with at least 250 of Dewey’s 304 partners having now found new jobs. All five senior partners named to a new chairman’s office in March have left, and the firm faces a criminal probe. The staff at the firm’s Manhattan offices has been gone for more than a week. Joff Mitchell of Zolfo Cooper, a restructuring company, is running things.
Mitchell’s task is to wind the firm down while dunning former clients for bills they have little incentive to pay in full. That’s bad news for the firm’s creditors, including bank lenders owed at least $75 million and bondholders owed $125 million or more. Other creditors range from partners who got pay guarantees worth about $100 million to the firm’s janitors, who have sued for about $300,000 in unpaid bills.
“The Dewey debacle has all the orderly progression of the Great Chicago Fire,” said Ed Reeser, a former managing partner for the Los Angeles office of Sonnenschein Nath & Rosenthal LLP, who’s now a consultant. Including a bankruptcy, he said, “I wouldn’t be surprised if the wind-down took a minimum of six to seven years. It could take 10.”
Dewey & LeBoeuf was the result of a 2007 merger between Dewey Ballantine, a firm dating from 1909 whose most famous partner was two-time Republican presidential candidate Thomas E. Dewey, and LeBoeuf Lamb Greene & MacRae. Created to enter the club of powerhouse international law firms, Dewey collapsed amid a culture characterized by a lack of disclosure and controls where an inner circle of partners reaped most of the rewards.
“The combination of outsized debt and widely spread pay guarantees divorced from performance put the firm in a situation with almost zero margin for error,” said Bruce MacEwen, a lawyer and law-firm consultant at Adam Smith Esq. LLC in New York. “Markets have a habit of punishing firms in that posture.”
Dewey, which at the time of the merger had 1,300 lawyers, offices in 25 cities and revenue of more than $900 million, is the biggest U.S. law firm to fail, Reeser said. Other firms that have collapsed in the past, including Brobeck, Phleger & Harrison LLP in 2003 and Heller Ehrman LLP in 2008, are still unwinding their debts and obligations, Reeser said.
Lawyers Hire Lawyer
More than 50 former Dewey partners have hired lawyer Mark Zauderer of Flemming Zulack Williamson Zauderer LLP to protect their interests, he said. He’ll do such things as sue former managers or defend his clients from lawsuits to claw back pay they received, according to a person familiar with his hiring.
Since Dewey’s legal bills secure its bank loans, lenders including JPMorgan Chase & Co. (JPM) and Citigroup Inc. (C) didn’t immediately put Dewey in bankruptcy involuntarily because they saw more chance of collecting the bills outside of court, according to a person familiar with the firm’s finances. Bankers now think a bankruptcy is needed to establish the pecking order for creditors, the person said.
JPMorgan and Citigroup declined to comment on Dewey’s financial position.
Dewey might have about $227 million of receivables outstanding to pay its secured debt of $200 million or more, MacEwan said. Trouble is, such receivable are only worth about 40 cents on the dollar, or in this case about $91 million, he said.
“On a reasonable estimate, they don’t have enough to pay their hard debts,” he said. Legal bills “are never worth 100 cents on the dollar, and they take a severe haircut if a firm is failing, because clients don’t want to pay all of it.”
Dewey’s bondholders are mainly insurance companies, including London-based Aviva Plc’s U.S. subsidiary, which owned $35 million in Dewey bonds at the end of last year, said Aviva spokesman Kevin Waetke. Aviva’s holding bonds was the biggest on a list of insurance companies disclosing the investment in the U.S., according to SNL Financial LC, which provides data to financial companies. Hartford Financial Services Group Inc. owned about $20 million of Dewey bonds, SNL said. Hartford has since sold its bonds, said Thomas Hambrick, a spokesman for Hartford.
Dewey’s privately placed bonds, which trade sparsely, were quoted at 45 cents to 55 cents on the dollar earlier this month, according to a May 3 report by CRT Capital Group LLC, which buys and sells distressed debt, including Dewey’s..
Some of Dewey’s former partners were the beneficiaries of pay guarantees that totaled about $100 million a year for about 100 partners, including as much as $6 million a year for a select few, said people familiar with Dewey’s finances. Those guarantees are now worth no more than 8 cents on the dollar, if anything.
For example, Dewey’s executive director, Stephen DiCarmine, had a deal putting his salary and bonus at $2 million a year, said a person who wasn’t authorized to comment on these matters and didn’t want to be identified.
In a liquidation, partners with guaranteed pay become unsecured creditors, ranking equal to, or below trade creditors, said Stephen Lubben, a bankruptcy law professor at Seton Hall University in Newark, New Jersey.
Vendor claims against Dewey, also known as trade paper, are being quoted at 5 cents to 8 cents on the dollar, said Joseph Sarachek, managing director of claims trading at CRT. That category includes a unit of ABM Industries, which provided janitorial services at Dewey’s offices at 1301 Avenue of the Americas in New York, and sued the firm for about $300,000 in unpaid bills, according to a complaint filed in New York State Supreme Court in Manhattan.
In a bankruptcy, Dewey partners could be sued for pay taken when the firm was already insolvent, or for taking work begun at Dewey to other firms, lawyers said.
Defections at Dewey reached around 50 in early April, topping 120 in May. The five-man chairman’s office, announced on March 26, featured the heads of the firm’s most profitable groups, including Martin Bienenstock, Rich Shutran, Jeffrey Kessler and Charles Landgraf. All four have now quit. A fifth member, Steven Davis, was ousted on April 29 after Manhattan District Attorney Cyrus Vance Jr. started a probe into possible wrongdoing at Dewey, according to an internal Dewey memo obtained by Bloomberg.
Kessler went to Winston & Strawn LLP with about 20 other Dewey litigation partners; Shutran, head of the corporate group, took four partners to O’Melveny & Myers LLP; Proskauer Rose LLP took Bienenstock, who ran the restructuring group, with five colleagues, and Landgraf, known as a Washington lobbyist, joined Arnold & Porter LLP.
Dewey was doomed as soon as partners, its main assets, started walking out of the doors this year, said Chip Bowles, a bankruptcy lawyer with Bingham Greenebaum Doll LLP in Louisville, Kentucky.
“When a law firm fails, it’s like a dam bursting,” Bowles said. “It starts with a trickle of partners leaving, and what’s coming in isn’t enough to cover expenses, and the trickle speeds up,” he said. Soon, “the leaders start leaving and it bursts and floods.”