Analysis: Dewey's bankruptcy: Let the rumble begin

Thu May 31, 2012 1:54am EDT
 
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By Nate Raymond and Nick Brown

(Reuters) - As law firm Dewey & LeBoeuf embarks on the humbling process of working through bankruptcy, creditors and former partners are bracing themselves for a nasty court battle that could drag on for years.

Dewey, a storied firm with deep Wall Street connections, filed for Chapter 11 protection on Monday night. The firm had veered toward collapse over the last six months amid revelations of fat salary guarantees, risky loans and a culture of secrecy.

Some former partners have hired lawyers in anticipation of clawback suits by the estate. Law firms that offered positions to former partners could also get embroiled in fights over rights to client fees. Creditors ranging from banks to temp services have started jockeying for position to maximize limited payouts.

Some contentiousness was on display at a bankruptcy hearing in Manhattan on Tuesday. Lenders were especially aggressive, asking the judge to approve a lien on certain litigation proceeds in exchange for letting Dewey fund its bankruptcy with money owed to the lenders. Judge Martin Glenn denied that request as unreasonable, at least in the interim, saying he would prefer to wait to make his decision until an official committee of unsecured creditors was in place.

There also appeared to be communications issues during the hearing. Albert Togut, Dewey's bankruptcy attorney, announced that the firm was "close" to a settlement framework. But he was contradicted by Mark Zauderer, an attorney representing a group of ex-Dewey lawyers, who said settlement talks were only preliminary.

WHEN ASSETS WALK AWAY

In a typical Chapter 11, a corporation uses its existing assets to continue generating revenue to fund a reorganization. The theme park Six Flags, for example, continued to sell tickets while in Chapter 11 in 2009. The company also had tangible assets -- the theme-park rides themselves, real estate, merchandise -- which could have been sold off to raise money for creditors had it been necessary.

Dewey has different kinds of assets: Its lawyers and their books of business, or clients. Once the lawyers walked away -- by now nearly all of its 300 partners have left the firm - the company had little means to produce revenue.   Continued...

 
A sign marking the Dewey & LeBoeuf LLP headquarters on 6th avenue is seen in New York May 29, 2012. REUTERS/Shannon Stapleton