Clawback Controversy Now Clouding Dewey Bankruptcy

, The Am Law Daily

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Dewey building

The fight over the validity of so-called unfinished business claims in law firm bankruptcies has heated up in courts on both coasts this week.

On Wednesday, a group of 28 firms filed an objection in New York federal bankruptcy court calling on the judge overseeing Dewey & LeBoeuf's Chapter 11 proceeding to squash the now-defunct firm's planned investigation into such claims it hopes to pursue to recover money from work taken by former parters to their new employers. Meanwhile, a similar standoff was playing out in a San Francisco courtroom on the same day, with six firms arguing that the trustee overseeing the Howrey bankruptcy should be barred from pursuing unfinished business claims.

In the Dewey case, the firm's liquidation trust, represented by Allan Diamond of Texas firm Diamond McCarthy, asked U.S. Bankruptcy Judge Martin Glenn in July for authority to issue subpoenas to 36 law firms and one accounting firm that hired former Dewey partners. Diamond wants those firms to produce documents and make partners available for depositions "so that the trust may better understand the value of certain estate assets." Specifically, Diamond is seeking information "concerning the transfer of Dewey & LeBoeuf LLP clients and client matters to the firms and the compensation that has been or will be paid to the firms" for work done for former Dewey clients.

Law firm bankruptcy trustees routinely attempt to raise money for creditors through the so-called unfinished business doctrine. The theory is based on a 1980s California case called Jewel v. Boxer that argues that legal assignments are the property of the defunct entity and that any money earned in connection with those assignments belong to that entity's estate.

In the objection filed Wednesday, a coalition of firms—led by Willkie Farr & Gallagher and including Arnold & Porter; Greenberg Traurig; Hogan Lovells; Latham & Watkins; Proskauer Rose; Weil, Gotshal & Manges; and Winston & Strawn—insist that Dewey's subpoena request is "premature and inappropriate." (For a full list of the firms involved, see the filing here.)

The objecting firms point to two cases pending before the U.S. Court of Appeals for the Second Circuit related to the Thelen and Coudert Brothers bankruptcies that stem from conflicting district court opinions as to whether unfinished business claims are valid in New York. In May 2012 Coudert won a key ruling from U.S. District Judge Colleen McMahon, who determined that the firm's estate does have a property interest in so-called unfinished business matters. Four months later, U.S. District Judge William Pauley issued a decision related to the Thelen bankruptcy in which he found that the unfinished business doctrine does not cover pending hourly fee matters tied to a bankrupt law firm.

Lawyers for Thelen, which appealed Pauley's ruling, argued for the validity of unfinished business claims before a three-judge panel October 7. Four days later, the court decided to adjourn arguments in the Coudert Brothers appeal until a decision is issued in the Thelen case.

In light of those developments, "it is premature to conduct invasive prelitigation discovery with respect to such claims, as they may not even be recognized under New York law (or any other law that may apply)," the Dewey objectors say.

Even if the appellate ruling winds up favoring the bankruptcy estates, the 28 firms battling Dewey argue that unfinished business claims shouldn't apply to that firm's partners because, unlike the Jewel and Coudert examples, the partners all left before an official dissolution took place. Dewey filed for Chapter 11 bankruptcy protection May 28, 2012, without ever calling for a dissolution vote.

Diamond, who is also the Chapter 11 trustee in the Howrey bankruptcy, is a strong proponent of the validity of unfinished business claims. While half a dozen firms, including Pillsbury Winthrop Shaw Pittman and Jones Day, are fighting the Howrey estate, another five agreed this week to settle such claims in the Howrey case and to contribute a total of $2.28 million. Diamond declined to comment Thursday on the Dewey objection.

John Longmire, a bankruptcy and restructuring partner at Willkie, said Thursday that his firm is coordinating the joint defense of the 28 firms and that the group hopes the court will either refuse to grant Dewey's subpoena request or at least stay a decision until the Second Circuit ruling.

In other Dewey bankruptcy–related developments, Dewey's former chief financial officer, Joel Sanders, and former executive director, Stephen DiCarmine, continued to insist in Wednesday filings that the cash-strapped estate owes them money.

DiCarmine, now a fashion student at Parsons The New School for Design, claims he is owed more than $11 million stemming from his employment agreement with the firm, as well as for "indemnification for damages he has incurred as a result of his employment at Dewey, damages arising from the hostile work environment Mr. DiCarmine faced at Dewey, and continued advancement of funds from Dewey’s management liability insurance policies" (DiCarmine has been using the policies to defend himself against a handful of lawsuits filed in the wake of Dewey's collapse). In the filings, DiCarmine argues that he was terminated without cause May 11, 2012, and that under his agreement, the firm is therefore required to pay him double his highest annual compensation figure: the $2.4 million he earned in 2009.

DiCarmine further argues that he "was the victim of and subjected to a hostile work environment at Dewey, including vicious written (emails) and oral communications that personally vilified and attacked me and others." The arguments come in response to Dewey seeking to terminate proofs of claim that DiCarmine and Sanders filed in the case.

Sanders, now the CFO at Florida firm Greenspoon Marder, is seeking more than $10 million, most of it money he says he is owed under a similar employment agreement. Echoing a line in DiCarmine's filing, Sanders notes that he "voluntarily terminated" a $1.9 million "irrevocable standby letter of credit that Dewey provided to me in or about January 2010. … Had I not terminated that letter of credit at Dewey’s request, I would have been able to draw the entire $1,900,000 to compensate me for Dewey’s above-mentioned defaults under the employment agreement."

Ned Bassen, a partner at Hughes Hubbard & Reed who represents the two former Dewey leaders, said via email that his clients "are still seeking the money because they are entitled to it."

The next hearing in the bankruptcy is scheduled for December 3.

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