The Dewey nightmare continues for non-settling partners.

Many former partners of now-defunct Dewey & LeBoeuf signed up to join the “Partner Contribution Plan” that was hatched during the law firm’s bankruptcy case. The gist of the Plan: pay a certain sum (which varied from partner to partner) into the pot, and win a release from any future Dewey-related liability.

The main appeal of the Plan was finality, a way of putting the entire Dewey debacle in the rearview mirror. And that appeal was strong: more than 400 ex-partners agreed to the Plan, which freed them up to focus on their post-Dewey lives at new firms.

But a minority of former partners refused to sign on. A lawsuit filed last week against one ex-partner reveals what lies in store for them….

Here’s a report from Sara Randazzo of Am Law Daily (sub. req.):

In what could be the first in a series of suits against former Dewey & LeBoeuf partners, the liquidation trustee overseeing the bankrupt Dewey estate sued William Marcoux late last week in an effort to recover $4.2 million in compensation and other benefits he received after the firm had allegedly become insolvent. Marcoux is one of several dozen former Dewey partners who opted not to join a $70 million settlement finalized by the defunct firm’s estate a year ago that would have insulated him against such litigation.

Trustee Alan Jacobs, who took on the role of liquidating the firm’s assets in March, said in the complaint that he is seeking the return of $3.6 million in partner distributions made to Marcoux between Jan. 1, 2009 — when he says the firm was already insolvent — and Feb. 2012, when he left the firm to join DLA Piper, as well as $128,000 in unpaid capital contributions and $816,000 in tax payments Dewey made on Marcoux’s behalf.

The key thing to note here is the date: January 1, 2009. The cutoff date was more favorable for those partners who joined the Plan: January 1, 2011. In setting the amounts they had to pay into the Plan, only payments made to them after the start of 2011 were considered.

What’s the argument in favor of the 2009 date as the effective date of Dewey’s insolvency? From Am Law:

According to the complaint, the problems started almost immediately after the firm’s creation through the merger of Dewey Ballantine and LeBoeuf, Lamb, Greene & MacRae in 2007. The merged entity’s revenue decreased “by a staggering $146 million” from 2008 to 2009, and dropped by another $49 million the following year, the complaint says. Meanwhile, revenue increased by $22 million from 2010 to 2011, though, according to the suit, it soon became apparent that “it was simply too late.”

By early 2010, the suit says, Dewey “had drawn down tens of millions of dollars on lines of credit from at least five different banks” but, in need of additional funds, floated a $150 million bond offering in April of that year. As time passed and “cash flow grew more and more constricted,” the suit says, “management prioritized cash distributions to partners at the expense of creditors.”

The complaint paints an ugly picture. Focus on paragraphs 22 through 37, which nicely summarize the creation and collapse of Dewey. It seems that firm leaders responded to the post-merger, recession-related plummet in revenue by overdistributing money — not profits, but money, much of it borrowed — in a program of “partner appeasement.”

Much of that money came from banks and Dewey’s ill-fated bond offering, but some came from partner capital contributions. Moral of the story: when it comes to law firm capital, What You See Is Not What You Get.

The case in favor of Dewey becoming insolvent sometime in 2009 or 2010 seems strong. So why did the Plan pick January 1, 2011, as the magic date? I’d be interested in seeing partner distributions made in 2010, especially late in 2010. It’s possible that powerful partners who saw the writing on the wall for Dewey (1) arranged to receive substantial sums in 2010 on the front end, and then (2) advocated in favor of the 2011 Plan date on the back end, effectively insulating their 2010 distributions from clawback.

This is, of course, just idle speculation. And it won’t affect any of the partners who signed on to the Partner Contribution Plan. The Dewey Chapter 11 plan, with the PCP as a crucial feature, got confirmed many months ago. The former partners who joined it are entitled to finality and the benefit of their bargain — a very good bargain, as we can see with the benefit of hindsight.

But partners who are duking it out in court with trustee Alan Jacobs and his counsel, Allan Diamond of Diamond McCarthy, might want to look into these issues. They could be relevant to establishing the true date of Dewey’s insolvency.

Dewey know what might emerge from this litigation? We’ll keep you posted.

Dewey Trustee Sues Ex-Partner Marcoux for $4.2 Million [Am Law Daily (sub. req.) via Morning Docket]
Dewey Trustee Hits Former Partner With $4M Clawback Suit [Law360 (sub. req.)]
Law Firm Capital: What You See Is Not What You Get [JDSupra]

Earlier: Dewey Know Who Signed On To The Partnership Contribution Plan?


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