Suit Details Ex-Dewey Leaders' Lucrative Pay Pacts

, The Am Law Daily

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An explosive suit filed Wednesday in the Dewey & LeBoeuf bankruptcy criticizes employment contracts awarded to the firm's former executive director and ex–chief financial officer as "unreasonable, if not arbitrary and capricious," while insisting that the defunct firm's estate does not owe either man anything and that the pair should return a total of $21.8 million in pay they received since 2008.

The Thanksgiving eve filing contains a wealth of previously undisclosed details about the generous contracts executive director Stephen DiCarmine and CFO Joel Sanders secured in August 2007, months before their then-employer, LeBoeuf, Lamb, Greene & MacRae, completed its ill-fated merger with fellow New York law firm Dewey Ballantine. (Dewey's advisers have a history of making key filings in tandem with major holidays. The firm's initial bankruptcy filing came on Memorial Day last year and its Chapter 11 plan was filed on the night before Thanksgiving in 2012.)

As described in Wednesday's adversary complaint, the near-identical six-year contracts, which covered the period from 2008 through 2013, provided that each man would collect compensation in four forms: base salary ($950,000 a year for DiCarmine; $900,000 for Sanders); an annual bonus ($200,000 apiece); a discretionary bonus (to be determined by Dewey chairman Steven Davis); and an annual deposit to irrevocable grantor trusts redeemable every three years ($200,000 apiece).

The discretionary bonuses turned out to be hefty, according to the complaint. DiCarmine and Sanders got more than $1 million each in such bonuses in 2008 and 2009, and $900,000 apiece more in both 2010 and 2011. In 2012 they received discretionary bonuses of $1.1 million each on top of the salaries they drew prior to being fired just before the firm filed for Chapter 11 protection that May.

The suit also notes that in 2010 DiCarmine and Sanders obtained letters of credit worth $1.9 million designed to protect them against a possible failure by the firm to pay them in line with their contracts. That they took such a step, Dewey's advisers argue, indicates the men knew the firm's financial condition was shaky.

In total, the complaint says, the six-year contracts were worth $15.9 million, not including the discretionary bonuses—"an astronomically generous arrangement for law firm administrators, and far in excess of the reasonably equivalent value of the services contracted for or provided."

The suit claims Davis—with whom the Dewey estate has already reached a settlement—should not have executed the contracts because he was not yet officially Dewey & LeBoeuf's chairman and because of a conflict of interest created by a provision in the pacts that awarded DiCarmine and Sanders lump sum payments if Davis was replaced as the firm's top leader.

Davis and others at Dewey also made no effort to determine whether the contracts made financial sense, the trust argues, and "were so one-sided that DiCarmine and Sanders were not even required to work to receive millions of dollars." The contracts also ensured that neither could be fired unless the firm established that they had committed fraud or a criminal act.

"If DiCarmine and Sanders were terminated for any reason other than cause—including, for example, a complete and total abdication of their job responsibilities—the employment contracts purport to require the debtor to pay immediately all remaining payments due under the full term of the employment contracts plus a penalty of two times the highest annual compensation," according to the complaint.

In bringing the suit, Dewey's advisers hope to recover a combined total of nearly $22 million from DiCarmine and Sanders and to block proofs of claim the pair have filed against the estate in which they seek a combined $21.9 million. The two say they they are owed that sum under the terms of their contracts because of Davis's ouster prior to the firm's collapse as well as the circumstances surrounding their own firings. (DiCarmine also seeks damages for what he claims was a hostile workplace.)

Both have also "demanded to be indemnified by the debtor from all lawsuits filed against them" in connection with their work for Dewey before it went bankrupt. The Dewey trust argues that the bankruptcy code bars such indemnification.

The complaint goes on to describe how, in the bankruptcy trust's view, DiCarmine, Sanders and Davis managed Dewey "with little or no oversight." As one example, the complaint says DiCarmine and Sanders transferred personal loans worth $1.2 million apiece—taken out to finance an unspecified "joint business venture"—to Dewey, then repaid the firm at interest rates below those attached to the original loans.

The suit also says that on Feb. 1, 2012, months before Dewey filed for bankruptcy, Sanders obtained a letter from Davis that purported to indemnify the CFO for any representations made to the firm's lenders under the terms of its credit arrangements.

Lawyers representing DiCarmine and Sanders say their clients plan to fight the suit vigorously. Since Dewey's collapse, Sanders has moved to Florida to become CFO at the law firm Greenspoon Marder, and DiCarmine is pursuing a career in fashion design.

"No one worked harder for Dewey and LeBoeuf than Stephen DiCarmine, and we will fight vigorously in court any effort to blame or punish him for the firm's collapse," said Bryan Cave partner Austin Campriello in an email. As The Am Law Daily previously reported, Campriello, a white-collar criminal defense lawyer, recently took over as DiCarmine's counsel. His hiring could be a sign that DiCarmine is concerned about the possibility of being targeted in an ongoing criminal investigation into Dewey's collapse launched by the Manhattan district attorney's office. No charges have been brought by the agency, and Davis, said to be the focus of the probe, has denied any wrongdoing.

Sanders' lawyer, Hughes Hubbard & Reed partner Ned Bassen, gave several reasons in an email as to why he and his client believe the suit is "wholly without merit."

"Factually, Mr. Sanders worked extremely hard to effectuate one of the largest law firm mergers in history and earned/deserved every penny he was paid," Bassen said via email. "The correct comparison is not what CFOs of law firms without extraordinary circumstance, e.g., a huge merger, are compensated as alleged in the adversary complaint but, rather, what CFOs dealing with these extraordinary circumstances are paid."

Bassen also said he objects to the complaint's claim that Dewey was insolvent as of January 2009, a date that also figures prominently in a recent suit brought by the estate against former Dewey partner William Marcoux. An earlier settlement reached with hundreds of former Dewey partners only sought to reclaim money from 2011 and 2012, saying Jan. 1, 2011, was the earliest insolvency date they could prove.

The next hearing in the Dewey bankruptcy is scheduled for Tuesday.

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