As we reported over the weekend, it’s looking like Dewey & LeBoeuf will soon find itself in bankruptcy (perhaps voluntarily, perhaps not). The specter of bankruptcy raises a question for the many former partners of Dewey: dude, where’s my
car capital contribution?
Let’s find out — and get the latest dispatches on the Dewey death spiral, including news of a new home for former vice chair Ralph Ferrara….
In the Wall Street Journal (sub. req.), Jennifer Smith has an interesting story on what happens to partner capital when a firm goes under. She introduces the piece with the tale of Andrew Ness, a current Jones Day partner who hasn’t had the best of luck with his capital contributions — or, for that matter, his choices in firms. Check out where he has been:
Early on, the small boutique firm where Mr. Ness was first made partner dissolved, taking his money with it. Later Mr. Ness joined Thelen LLP and then Howrey LLP, two now-defunct firms that entered bankruptcy in 2009 and 2011, respectively.
Yikes. It seems like Andy Ness is trying to compete with Henry Bunsow for the “Angel of Death” title. It’s a good thing he’s at Jones Day; JD might not be the sexiest firm, but it certainly is stable and well-run (unlike so many other firms, it didn’t resort to mass layoffs during the recession).
“I did not see a dime of capital returned and don’t expect to see a dime,” Mr. Ness said.
To be sure, partners at big law firms are typically in a better position — and have a more ample financial cushion — than the legions of secretaries and associate attorneys who lose their jobs when such firms fail.
But partners who flee failing law firms such as Dewey & LeBoeuf LLP, which is heavily indebted and winding down its affairs after a rocky five-month run of partner exits, face a dilemma most job seekers don’t. When those lawyers land a new gig, they have to pony up money to join the partnership, often without any guarantee that they will recoup their capital stakes from the previous firm.
Can you say “first world problems”? Or “rich people problems”? If you enjoy a seven-figure or even high six-figure income as a law firm partner, having to kick in some fraction of your compensation, amounting to a few hundred grand, shouldn’t be that big a deal.
And if your firm’s capital contribution squeezes you financially, perhaps you need to live a less extravagant lifestyle? In this day and age, any Biglaw partner worth his or her salt should have a lot of cash or cash equivalents on hand, in case a move is necessary.
For folks not familiar with law firm finances, the WSJ piece contains a short primer:
Like large medical practices or accounting firms, big law firms are jointly owned by partners. Each has a stake in the business: They invest money into the firm to help it operate, and take in a share of the profit.
Depending on the firm, capital requirements might range from 20% to as much as 60% of what a partner expects to earn in a given year. A young partner could be on the hook for $100,000 to $200,000.
The partner capital, along with money borrowed through a revolving credit facility (if the firm has one), is used to run the firm. Over the course of the year, as the firm earns and collects fees from its clients, it pays down the revolver and distributes profits to its partners. As the year winds down, partners start getting increasingly delicious distributions, checks for six- or seven-figure sums. It’s pretty sweet.
Of course, the bigger a partner’s share of the profits, the more she generally has to put up as capital:
[A] seasoned lateral hire from another law firm who pulls in $1 million to $2 million a year might be asked to put in as much as half of what he or she expects to earn in a year. Often, the money is due upfront.
To smooth the path, many firms offer loan programs that allow partners to borrow money at attractive rates while they wait for their old firms to pay back their capital. Repayment can take anywhere from one to five years, depending on a firm’s partnership agreement.
So what’s going on with the Dewey partnership? It’s not looking good:
Dewey & LeBoeuf has yet to pay return capital owed to dozens of partners who left Dewey Ballantine LLP before it merged with LeBoeuf, Lamb, Greene & MacCrae LLP in 2007, according to those former partners. Those who took out loans from Barclays Bank PLC’s corporate-banking division say Dewey began skipping bank payments in 2008 and 2010, citing a lack of funds, then set up a new payment schedule that further delayed the return of capital.
In 2011, Dewey sent those partners quarterly statements indicating that money was being deducted from the firm’s capital account and paid back to the bank. But a former partner who contacted Barclays earlier this year was told that no payments on the loan principal had been made in 2011. In a February email shared with an online group of former partners, Dewey’s general counsel, Janis Meyer, said the mix-up was because the statements didn’t provide enough room to explain the situation, and promised to pay interest on the missed payments.
An offer from Dewey of repayment with interest is like a proposal from your gay lover in North Carolina: it’s a nice gesture, but it ain’t gonna happen. If you believe that it is, well, you probably also think that Steve DiCarmine’s tan is natural.
In other Dewey news, we have some significant partner moves to report….