Correction, 1/18/2013, 11:45 a.m. EST: An earlier version of this story incorrectly stated the judge overseeing Howrey's Chapter 11 bankruptcy. It is U.S. Bankruptcy Judge Dennis Montali in San Francisco. The information has been corrected in the 10th paragraph below. We regret the error.
Nearly two years after Howrey went under, the trustee overseeing the defunct firm's Chapter 11 bankruptcy is ramping up his efforts to recover tens of millions of dollars from former partners and the firms they moved to.
A total of 71 firms hired the 302 partners streaming out of Howrey in the months leading up to its March 2011 dissolution. Trustee Allan Diamond says he is seeking about $100 million in clawback claims for money paid to former partners when the firm was likely insolvent, as well as an estimated up to $100 million more for so-called unfinished business claims stemming from work those partners took with them to their new firms.
Both types of claims are a common source of recovery in law firm bankruptcies. In the Chapter 11 case of Dewey & LeBoeuf, for instance, the estate's advisers hope to collect some $70 million from former partners as part of a "rough justice" settlement currently awaiting final approval in federal bankruptcy court in New York. Unfinished business settlements with firms that Dewey partners landed at are in the works as well.
Thelen, which dissolved in 2008 and filed for Chapter 7 bankruptcy in 2009, continues to reach settlements with former partners years later. Most recently, eight former partners agreed to pay back a collective $475,000, according to Law360. On the unfinished business front, Thelen has collected at least $1.9 million from successor firms, court filings show.
Diamond says he plans to take a new approach to reach settlements in the Howrey case by presenting law firms with a bundled settlement plan that includes both the claims against individual partners and the unfinished business claims against the firm. How the firm and its partners decide to divvy up the responsibility and pay the estate is up to them, he says. Also, unlike in the Dewey case, where the estate chose to recover money paid to partners only after January 2011, Diamond says he doesn't plan to have a hard-and-fast date. Instead, he'll approach each settlement "with a rational model based upon the strength of my claim at various points in time."
Based on his discussions so far, Diamond groups the 71 firms into a few categories: About 20 to 25 firms that he's been talking to for months and hopes to settle by using an all-in-one proposal; others who want him to speak directly with partners rather than presenting the claims together; and less than 10 firms in what he calls a "go stick it in your ear" camp that refuse to cooperate.
A handful of others have complicating factors, including potential claims Diamond hopes to bring against them related to contingency fee cases or partners' one-time roles on Howrey's dissolution committee.
Diamond won't say which firms fall into which camp, but the ones with potentially the largest dollar amounts at stake are easy to spot. Baker & Hostetler; Baker Botts; Jones Day; and Winston & Strawn all took in at least 10 partners. Morgan, Lewis & Bockius; Perkins Coie; and Pillsbury Winthrop Shaw Pittman each hired a considerable number as well. (Reached Thursday, most firms either had no comment or did not immediately respond to a request for comment. A Perkins Coie spokesman said the firm plans to cooperate with the trustee and "respond to all reasonable requests.")
Talks with successor firms could have been further along by now, Diamond says, but slowed last fall when San Francisco attorney William McGrane filed a purported class action against all 302 former Howrey partners. The suit, brought November 1, uses an interpretation of the bankruptcy code to claim the attorneys are so-called Howrey "alter egos," meaning they are equally responsible for the firm's debts. Filed by McGranewho also pushed Howrey into involuntary bankruptcy in April 2011 and served for a time on the unsecured creditors committeethe plaintiff in the case is Howrey Claims LLC, a company incorporated in Georgia that on October 31 bought the $994.25 unsecured claim of court reporting agency Jan Brown & Associates.
At a two-hour hearing last week in San Francisco, U.S. Bankruptcy Judge Dennis Montali scrutinized McGrane's suit, ultimately saying from the bench, "I think the right remedy in my view is to simply dismiss the complaint." (So far, no official ruling has been filed with the court, and McGrane said via email Thursday that he plans to appeal any dismissal.)
With the adversary suit all but gone in Diamond's view, he says he's back on track with the settlement talks. His attitude, he says, is "Either we're going to cut deals, or I'm suing you." Suits, he warns, will be filed soon. "The bottom line is . . . I'm the 800-pound-gorilla that you want to settle with."
Outside of recoveries from former partners, Diamond also continues to mine contingency fee cases that followed Howrey lawyers to other firms. He's most optimistic about an antitrust class action brought several years ago by Howrey lawyersnow at Baker & Hostetleron behalf of dairy farmers in the southeastern U.S. who claim raw milk prices were fixed. As sibling publication Litigation Daily has previously reported, two defendants in the case have already settled for $145 million, including $48.3 million in attorneys fees and $7.4 million in expenses to be divided between Baker and the Howrey estate. The case against the remaining defendant, Dairy Farmers of America, heads to trial next week in Tennessee federal court. With $1.5 billion at stake, Diamond says he'll be watching closely.