Ever since the once high-flying Dewey & LeBeouf filed for bankruptcy in late May, observers have been wondering about what type of financial arrangement the firm might work out with its former partners. Last month, we discussed the outlines of a possible settlement between D&L and its ex-partners, in which former partners would pay a certain amount of money into the Dewey bankruptcy estate in exchange for being released from future claims by Dewey’s estate, the firm’s creditors, and fellow ex-partners.
Would such a plan fly? We noted that the broad outlines sounded reasonable enough, but that much would turn on the specific contours of the proposal — especially the amounts that the partners would be asked to pay, and the methodology for determining those sums.
In the wake of a meeting held yesterday afternoon here in New York at a hotel in midtown Manhattan, we now have some additional information on that front….
Here are the key points of the proposed “clawback” deal, which was outlined for former partners and their representatives in a PowerPoint presentation by D&L’s chief restructuring officer, Joff Mitchell of Zolfo Cooper. The firm’s lead bankruptcy lawyer, Albert Togut of Togut Segal & Segal, also participated in the meeting.
1. The Dewey estate, which owes creditors about $315 million, is seeking a total of $103.6 million from more than 700 former partners. (D&L is also trying to collect $217 million in unpaid bills from its clients and about $60 million in profits from unfinished work that defecting partners took to new firms.)
2. In order for the settlement to pass muster with creditors, enough ex-partners need to consent to it — and to pay into the bankruptcy estate. Dewey claims that it needs at least $50 million in recoveries from partners in order for the plan to work.
3. How much each partner will have to pay will range from a minimum of $25,000 to a maximum of $3 million. From the American Lawyer:
The plan divides the 709 partners — 371 who retired or left Dewey before 2012; 338 partners still at the firm as of January 1 — into five compensation tiers, with each assigned its own repayment rate: those who made up to $400,000 in 2011 and 2012 are being asked to pay the estate a sum equal to 10 percent of their earnings; those who collected between $400,000 and $800,000 owe 15 percent; anyone getting between $800,000 and $2 million owes 20 percent; those who were paid between $2 million and $3 million owe 25 percent; and those who made more than $3 million owe 30 percent. For partners in every tier, anything earned in excess of draws in 2012 — an amount pegged at $18 million across the partnership—owe 20 percent of that money as well.
According to Am Law, “in a line of fine print that drew some murmurs from the crowd, even those who earned less than $250,000 must chip in a minimum of $25,000 if they wish to receive the release from liability.”
4. The firm’s former chairman, Steven Davis, is not eligible for the deal — and might get sued by the estate, according to Al Togut, D&L’s lead bankruptcy lawyer. Two other former partners — Stephen Horvath III and Janis Meyer, who are still at the firm, working on the wind-down — will receive a release if the settlement is approved, without having to pay into the estate. (In fact, Horvath and Meyer are actually being paid a total of $58,000 a week for their Dewey dissolution duty — nice work if you can get it.)
5. Partners who accept the plan, assuming enough of them do, can cough up the cash and get on with their lives. The plan might not be perfect, but it’s “rough justice” and “fair” overall, according to Joff Mitchell.
6. Partners have until July 24 to accept the deal without penalty. Partners who sign up after that date will have to pay a penalty of 25 percent.
7. Partners who don’t agree to the plan could be looking at years of litigation with Dewey or its creditors. And if not enough partners agree to the plan for it to fly, then Dewey’s Chapter 11 restructuring will probably be turned into a Chapter 7 liquidation — and the trustee could seek clawbacks from all the partners as part of that process. Things could get ugly.
Will the settlement win approval from a sufficient number of partners?