By Joseph Ax and Sakthi Prasad
NEW YORK/BANGALORE (Reuters) - The crippled law firm
Dewey & Leboeuf LLP filed for chapter 11 bankruptcy protection
Monday night and will seek approval to liquidate its business after
failing to find a merger partner, marking the biggest collapse of a law
firm in U.S. history.
Once one of the largest law firms in the U.S., Dewey
has been hit by the loss of the vast majority of its roughly 300
partners to other firms amid concerns about compensation and a heavy
debt load.
Dewey had warned employees earlier this month of the
possibility the firm may shut down, and a person familiar with the
matter had told Reuters that the firm was considering a bankruptcy
filing.
"Dewey's failure is rocking the industry in the sense
that most firms are saying to themselves, if Dewey could go down, could
we?" Kent Zimmermann, a legal consultant at the Zeughauser Group, said
in an email Monday night.
Dewey said in a filing it had decided to wind down its
business following unsuccessful negotiations with other law firms to
strike a deal. It said it would ask about 90 employees to remain on
staff to assist in the liquidation, which it expects to be completed in
the next few months.
Negative economic conditions, along with the firm's
partnership compensation arrangements, created a situation where its
cash flow was insufficient to cover capital expenses and full
compensation expectations, Dewey said.
"During the first quarter of 2012, the firm was
confronted with liquidity constraints that led to the precipitous
resignation of over 160 of the firm's 300 partners by May 11," the
New-York based firm said.
Dewey listed liabilities in the range of $100 million
to $500 million, according to the filing. It had already terminated 433
of its 533 New York employees earlier this month, according to the
state's labor department.
MONTHS OF TURBULENCE
The firm's collapse is expected to be the subject of
years of court proceedings, and a number of former partners have already
retained lawyers to represent them.
Monday's filing follows months of turbulence, as wave
after wave of partner defections shattered the high-profile firm from
within. In April, the Manhattan District Attorney's office launched a
criminal probe of former firm chairman Steven Davis. He has denied any
wrongdoing.
The result of a 2007 merger between Dewey Ballantine
and LeBoeuf, Lamb, Green & MacRae, Dewey & LeBoeuf had about
1,450 attorneys at its peak, according to The National Law Journal.
But the firm was eventually undone by a combination of
the economic downturn, excessive compensation and governance problems,
according to former partners and others in the industry. In particular,
Dewey's management promised millions in packages to about 100 partners,
according to the court filing, leaving it strapped for cash when
revenues fell during the recession.
Dewey has retained Joff Mitchell of Zolfo Cooper LLC as
Chief Restructuring Officer and Albert Togut of Togut Segal & Segal
LLP as bankruptcy counsel.
"The full extent of the partner compensation arrangements is subject of continuing investigation," Mitchell said in the filing.
Dewey is one of a handful of major law firms to declare
bankruptcy since the recession that began in 2007. They include Coudert
Brothers, Heller Ehrman and Howrey.
PENSION PLANS
As of the petition date, Dewey's assets consisted of
about $13 million in cash, accounts receivable of about $255 million,
various pieces of artwork, and about $11 million invested in an
insurance consortium, among other potential claims, according to the
filing.
In the interim, Dewey said the firm will be operating
on a budget to be determined by the court. The firm has petitioned the
court for permission to continue to pay salaries, benefits and paid
time-off for current employees.
Dewey said that the 401(k) plans and qualified pension
plans of its current and former employees and partners are held in trust
and cannot be accessed by the firm's creditors.
The U.S. Pension Benefit Guaranty Corporation filed
suit this month to take control of three of the firm's pension plans,
which the agency said were underfunded by $80 million.
The London and Paris offices of the firm are operated
through a separately incorporated UK entity, which was placed into
administration on Monday.
Administration is a UK legal process under court
supervision, broadly similar to chapter 11. The UK partnership is
following broadly the same approach as that of Dewey in the United
States, the firm said.
The firm had two dozen offices worldwide, including in
Washington, Los Angeles and London. Some of the firm's biggest clients
included General Motors Corp, eBay, Novartis, Ambac and Berkshire
Hathaway Reinsurance Division.
The case is Dewey & LeBoeuf LLP, Case No. 12-12321, U.S. Bankruptcy Court, Southern District of New York (Manhattan).
(Reporting by Sakthi Prasad in Bangalore and by Joseph Ax and Nate Raymond in New York; Editing by Chris Gallagher)
