In re Dewey & Leboeuf LLP, 12–12321 (MG).

• Decision Date: 09 October 2012
• Docket Number: No. 12–12321 (MG).,12–12321 (MG).
• Citation: 478 B.R. 627
• Parties: In re DEWEY & LeBOEUF LLP, Debtor.
• Court: U.S. Bankruptcy Court — Southern District of New York

478 B.R. 627

57 Bankr.Ct.Dec. 29

In re DEWEY & LeBOEUF LLP, Debtor.

No. 12–12321 (MG).

United States Bankruptcy Court, S.D. New York.

Oct. 9, 2012.

Togut, Segal & Segal LLP, By: Albert Togut, Esq., Scott E. Ratner, Esq., Steven S. Flores, Esq., New York, NY, for Debtor.

Dorsey & Whitney LLP, By: Eric Lopez Schnabel, Esq., Annette Jarvis, Esq., New York, NY, for Ad Hoc Committee of Retired Partners of LeBoeuf, Lamb, Leiby & MacRae.

Brown Rudnick LLP, By: Edward Weisfelner, Esq., Howard S. Steel, Esq., New York, NY, for Official Committee of Unsecured Creditors.

Curtis, Mallet–Prevost, Colt & Mosle LLP, By: Gabriel Hertzberg, Esq., New York, NY, for 1301 Properties Owner LP.

Sullivan & Worcester LLP, By: Pamela Smith Holleman, Esq., Franklin B. Velie, Esq., Jonathan G. Kortmansky, Esq., Boston, MA, for UniCredit Bank AG.

Klee, Tuchin, Bogdanoff & Stern LLP, By: David M. Stern, Esq., Lee R. Bogdanoff, Esq., Thomas E. Patterson, Esq., Martin R. Barash, Esq., Los Angeles, CA, for Group of Thirty–Seven Former Partners.

Kasowitz, Benson, Torres & Friedman LLP, By: David M. Friedman, Esq., Adam L. Shiff, Esq., Jeffrey R. Gleit, Esq., New York, NY, for Official Committee of Former Partners.

Kramer, Levin, Naftalis & Frankel, LLP, By: Kenneth H. Eckstein, Esq., Robert T. Schmidt, Esq., Daniel M. Eggermann, Esq., Matthew C. Ziegler, Esq., New York, NY, for JPMorgan Chase Bank, N.A. as Collateral Agent.

Lowenstein Sandler PC, By: Michael S. Etkin, Esq., New York, NY, for Kenneth A. Freeling.

Hughes Hubbard & Reed LLP, By: Ned H. Bassen, Esq., Kathryn A. Coleman, Esq., New York, NY, for Steven H. Davis, Stephen DiCarmine, and Joel Sanders.

Blank Rome LLP, By: Andrew B. Eckstein, Esq., New York, NY, Co–Counsel to Informal Group of Certain Former Partners of Dewey & LeBoeuf LLP.

Flemming Zulack Williamson & Zauderer LLP, By: Mark C. Zauderer, Esq., New York, NY, Co–Counsel to Informal Group of Certain Former Partners of Dewey & LeBoeuf LLP.

MEMORANDUM OPINION AND ORDER GRANTING DEBTOR'S MOTION FOR AN ORDER APPROVING PARTNER CONTRIBUTION SETTLEMENT AGREEMENTS AND MUTUAL RELEASES FOR PARTICIPATING PARTNERS AND DENYING AD HOC COMMITTEE OF RETIRED PARTNERS OF LEBOEUF, LAMB, LEIBY & MACRAE'S MOTION TO APPOINT AN EXAMINER

MARTIN GLENN, Bankruptcy Judge.

There are two pending interrelated motions that the Court will consider together. The first is the Debtor's motion for approval of partner contribution settlement agreements and mutual releases (“PCP Plans” or “PCPs”) for participating partners. (“9019 Motion,” ECF Doc. # 399.) Four statements in support of the 9019 Motion were filed by JPMorgan Chase Bank, N.A., as the Administrative Agent for the secured lenders (“Secured Lenders”), the Official Committee of Unsecured Creditors (“Unsecured Creditors Committee”), the Informal Group of Certain Former Partners (“IGCFP”), and the Informal Group of Thirty–Seven Former Partners (“IGTSFP”). (ECF Doc. 468, 441, 443 and 469, respectively.) Two objections to the 9019 Motion were filed by the Ad Hoc Committee of Retired Partners of LeBoeuf, Lamb, Leiby & MacRae (“Ad Hoc Committee”) and the Official Committee of Former Partners (“FPC”). (ECF Doc. 439 and 464, respectively.) Six limited objections to the 9019 Motion were filed by UniCredit Bank AG (“UniCredit”), Kenneth A. Freeling (Freeling), 1301 Properties Owner LP (“1301 Properties”), Steven H. Davis (“Davis”), Stephen DiCarmine (“DiCarmine”), and Joel Sanders (“Sanders”). (ECF Doc. 436, 440, 463 and 516, 450, 451 and 452, respectively.) In response to the 9019 objections, Debtor filed an omnibus reply to support its motion. (“9019 Reply,” ECF Doc. # 482.)

The second motion is the Ad Hoc Committee's motion for the appointment of an examiner pursuant to section 1104(c) of the Bankruptcy Code. (“Examiner Motion,” ECF Doc. # 329.) The FPC filed a statement in support of the Examiner Motion. (ECF Doc. # 348.) The Debtor, Secured Lenders, and Unsecured Creditors Committee each filed objections. (ECF Doc. 393, 403 and 392, respectively.)

In support of the 9019 Motion, the Debtor filed four declarations by Jonathan A. Mitchell (“Mitchell,” “Chief Restructuring Officer Mitchell,” or “CRO Mitchell”), David Pauker of Goldin Associates LLC (“Pauker,” “Goldin,” or “Financial Analyst”), Paul Gendler (“Gendler”), and Scott E. Ratner. (ECF Doc. 400 and 483, 401, 442, 402 and 484, respectively.) In opposition to the Examiner Motion, the Debtor filed five declarations by Stephen J. Horvath (“Horvath”), Janis M. Meyer (“Meyer”), Mitchell, Pauker, and Gendler. (ECF Doc. 394, 395, 397, 398 and 442, respectively.) In opposition to the 9019 Motion and in support of the Examiner Motion, the FPC submitted three exhibits (FPC–1 through FPC–3), and the Ad Hoc Committee submitted thirty-six exhibits (AHC–1 through AHC–36), and a separate list of 18 admissions. Both motions present contested matters; therefore, the Court held an evidentiary hearing on September 20–21, 2012. Gendler, Mitchell and Pauker testified during the hearing. All parties agreed that the issues raised by the two motions substantially overlap so a single evidentiary record was created for both motions.¹

I. BACKGROUND

Before the commencement of this case on May 28, 2012 (“Petition Date”), the Debtor operated as a prestigious, New York City-based, law firm that traced its roots to the 2007 merger of Dewey Ballantine LLP—originally founded in 1909 as Root, Clark & Bird—and LeBoeuf, Lamb, Green & MacCrae LLP—originally founded in 1929. In recent years, more than 1,400 lawyers worked at the firm in numerous domestic and foreign offices. The Debtor's public decline and collapse was front-page news in legal and general publications for many months.

The firm is currently operating in a chapter 11 “wind-down” mode, essentially seeking to recover as much as possible of its outstanding and substantial accounts receivable, as well as seeking the return of a substantial amount of money either paid to or otherwise due from former partners. Throughout this case, the ability of the Debtor to remain in chapter 11 and avoid a chapter 7 conversion has been critically in question. As of the Petition Date, the Debtor has been managed by Chief Restructuring Officer Mitchell and Wind–Down Committee members Horvath and Meyer. Mitchell 9019 Decl. ¶ 7. In an effort to return value to the estate, Mitchell and the Wind–Down Committee—in consultation with Debtor's counsel Togut, Segal & Segal (“Togut”) and Debtor's financial analyst Pauker—devised the Partnership Contribution Plans (“PCPs”). Id. ¶ 9. From the outset of the case, the Debtor contemplated the PCPs. The Debtor believed them to be pivotal to the Debtor's success under chapter 11 because the PCPs would obviate the need for years of litigation and curb exorbitant administration expenses—as has historically been the case in law firm bankruptcies. 9019 Mot. ¶ 2.

A. The Partner Contribution Plans

The PCPs are a series of settlements with Debtor's former partners to maximize return of capital while minimizing future litigation costs. Generally, the partners who participate in the settlement (“Participating Partners”) contribute an amount (“Partner Contribution Amount”), calculated on a sliding scale based on Participating Partners' liability exposure, in exchange for a general release from claims brought by the estate. To develop the PCP proposals, the Debtor investigated, reviewed and analyzed potential claims that could be asserted against former partners. Former partners' potential liability arose from receipt of an over-distribution of funds, fraudulent conveyance, preference payments, tax advance reimbursements, unpaid capital contributions, tort claims arising from potential mismanagement, and unfinished business or “Jewel” doctrine claims. September 21, 2012 Hr'g. Tr. at 66:12–19; Pauker Examiner Decl. ¶ 13.

Partner Contribution Amounts were reached via the uniform application of a progressive payment table. Pauker 9019 Decl. ¶ 14. Partners with higher earnings were required to contribute a greater percentage. Id. Partners who received payments in excess of their draws during 2012 were subject to an additional 20% payment premium, and members of the firm's executive committee were subject to a payment premium of up to 20% based on their length of committee service—with a maximum payment per partner set at $3.5 million. Id. ¶ 14 at 6 n. 5. However, Participating Partners were eligible to receive a credit of up to 5% of their Partner Contribution Amounts if they helped to collect outstanding account receivables or if the aggregate Partner Contribution Amount exceeded $70 million. Id.

In exchange for payment of settlement amount, each Participating Partner receives a broad release of any right or interest of the Debtor or its estate. 9019 Mot. ¶ 15. However, the PCPs do not resolve unfinished business claims or “Jewel” claims against some of Debtor's largest earners. Pauker 9019 Decl. ¶ 15. The Debtor is also obligated to obtain an injunction for the benefit of Participating Partners covering claims and derivative claims that could be asserted by the Debtor. 9019 Mot. ¶ 15. Participating Partners agree to release claims against other Participating Partners that are related to the Debtor, the predecessor entities, or a related entity. Id. Lastly, Participating Partners covenant that they will not file any claims, aside from proofs of claim, against the Debtor, and agree to assign to the Debtor any direct claims against non-settling partners.²Id.

The Debtor's professionals reviewed the Debtor's financial records from 2011 to the Petition Date. Pauker 9019 Decl. ¶¶ 12, 31. Debtor determined that approximately $400 million was paid to partners during that period that could be subject to various estate causes of action. See id. ¶¶ 16, 18, 31. The Debtor's professionals also performed a preliminary insolvency analysis, analyzed the probability of success of potential partner claims and defenses, and analyzed...