Claims Against Former Dewey Management Face Insurance Hurdles

Sara Randazzo

The Am Law Daily

11-29-2012

The judge overseeing the Dewey & LeBoeuf bankruptcy ruled Thursday that the defunct firm's unsecured creditors can try to recoup some of the millions they are owed by suing a trio of former Dewey leaders.

How much such litigation might ultimately yield remains an open question, though, because it is unclear whether a $50 million management policy taken out by Dewey will cover claims brought against former chairman Steven Davis, former executive director Stephen DiCarmine, and former chief executive officer Joel Sanders.

While the official committee of unsecured creditors appointed in the bankruptcy received approval to pursue claims against the trio on behalf of the estate following a hearing before U.S. Bankruptcy Judge Martin Glenn Thursday morning, the lead insurer connected to the policy—XL Specialty Insurance Company—has said such suits may not be covered because Dewey, as the policyholder, is essentially suing itself, an attorney for two of those former leaders said in court.

The lawyer, Hughes Hubbard & Reed partner Ned Bassen, who represents DiCarmine and Sanders, said after the hearing that he hopes to resolve the issue with XL Specialty soon by working on solutions with the unsecured creditors committee.

The committee has argued in court papers that Davis, DiCarmine, and Sanders "over-distributed the Firm's available cash to select partners; abusively relied on guarantee agreements that bore no economic rationality; and concealed the Firm's true financial condition from its partners, employees and creditors," for selfish reasons motivated by greed, Glenn noted in his order allowing the claims to move forward.

All three former leaders filed objections, mainly defending themselves against the allegations laid out in the committee's filings. At the Thursday hearing, Glenn did not address the substance of any claims, considering instead only whether the committee has standing to bring them—something he ultimately decided they did have. Glenn also refused to step into the disagreement with the insurance company, despite Bassen's concern regarding "protracted litigation over insurance coverage, which we think doesn’t help anybody."

Glenn said he could try to assess the viability of claims absent insurance coverage by requiring Davis, DiCarmine, and Sanders to disclose their personal finances to the court, but both the judge and Bassen agreed that would not be a popular course of action. (Davis's lawyer, Kirkland & Ellis partner Kevin Van Wart, said little in court Thursday. After the hearing, he said Davis will get his chance to defend himself).

Dewey's advisers filed a Chapter 11 plan last week, less than six months after going into bankruptcy, laying out how they propose to repay the firm's creditors. If approved by the end of February as the Dewey estate hopes, the current advisers will step aside and let a Chapter 11 liquidation trustee take over the case and pursue parties that still owe Dewey money. That will likely include former partners who chose not to sign onto a settlement plan that is expected to bring in $71.5 million in exchange for waivers of Dewey-related liability for those who participated. The claims against Davis, DiCarmine, and Sanders would also transfer to the trustee at that point.

In a separate Dewey development Thursday, Glenn denied a request by the unsecured creditors committee to disband a second committee given an official role in the Dewey bankruptcy, this one made up of retired Dewey partners. The group, represented by Kasowitz Benson Torres & Friedman partner David Friedman, has been one of the only vocal opponents to the partner settlement plan and other elements of Dewey's bankruptcy. The Dewey estate has argued that the group has been counterproductive and costly and is no longer necessary.

In choosing to keep the group together, Glenn said in his ruling that the former partners' committee "continues to serve an important purpose," including being able to prosecute an appeal the committee filed to oppose both Glenn's approval of the partner settlement plan and his refusal to appoint a neutral third-party examiner in the case.

Edward Weisfelner, a Brown Rudnick partner who represents the unsecured creditors and pushed to disband the second committee, said in an email that he is "extremely disappointed" by Glenn's decision, saying the committee increases the costs to the administration of the bankruptcy.

Friedman, meanwhile, said in an email that the motion to disband his committee was a waste of time and money that never should have been filed. "Now that we are past this distraction, we hope to return to the bargaining table and pursue a consensual plan," he said, adding that he does not yet have a stance on the bankruptcy plan filed last week.