Dewey Trustee Sues Ex-Partner Marcoux for $4.2 Million
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.
By pegging the start of 2009 as the effective date of Dewey's insolvency, the complaint claims the firm was unable to pay its bills a full two years before the Jan. 1, 2011 date used to calculate the amounts former partners owed under the so-called partner contribution plan that Marcoux and others chose not to sign on to. That means Marcoux and any other former partners targeted by Jacobs are potentially liable for much more now than they would have been if they had participated in that plan.
Hinting that other suits may indeed by in the works, the complaint says, "Despite the Debtor's insolvency and inability to pay creditors, it nevertheless transferred tens, if not hundreds, of millions of dollars as 'distributions' to its partners." (It was unclear Monday what led the estate to revise the insolvency date.)
When Marcoux, a former Dewey equity partner and executive committee member, left the firm, he became one of the first major defectors in what would eventually become a flood of departures in the months prior to Dewey's May 28, 2012 Chapter 11 filing. The suit against him offers one of the first official accounts of the events that ultimately resulted in the largest law firm bankruptcy in U.S. history.
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." (Read the entire narrative of the firm's collapse here.)
The suit includes six claims against Marcoux, including avoidance and recovery of distributions as constructively fraudulent transfers, breach of contract, and unjust enrichment for tax payments.
Jacobs declined to comment when contacted Monday, as did his attorney, Allan Diamond of Texas firm Diamond McCarthy. Marcoux said by email Monday that he was in meetings and offered no additional comment.
Marcoux filed a proof of claim in Dewey's bankruptcy asserting that, instead of owing the estate anything, the estate actually owes him nearly $4 million. Marcoux backs up his claim for $3.4 million in what he says is unpaid compensation and $592,000 in capital with an email sent in December 2011 from a partner relations specialist to Dewey's executive director, Stephen DiCarmine, that details Marcoux's target compensation and expected bonuses in 2009, 2010 and 2011. Jacobs objects to Marcoux's proof of claim in the Friday action, saying it should be disallowed or, if deemed even partially valid, given a subordinate status to claims from general creditors.
Separately, the Dewey estate is also continuing its efforts to collect money the firm paid out in the 90 days prior to seeking Chapter 11 protection. Known as preference actions, such suits aim to ensure that no creditors get preferential treatment. Any money collected will eventually go into the pool being paid to unsecured creditors.
In the latest preference action, filed Thursday, Dewey seeks $100,000 from the Woodrow Wilson International Center's Kennan Institute—a non-partisan organization focused on issues affecting Russia—for a table Dewey bought at an event the Washington, D.C.–based institute hosted. (A Kennan Institute spokesman was not immediately available for comment Monday.)
The Dewey estate has so far filed nearly $10 million in preference actions.