World’s largest law firm files for bankruptcy

3 Harvard law school graduates founded the firm in 1909, and in 2007 it came to be known as Dewey and LeBoeuf.  On February 27, 2013, a New York Federal Bankruptcy Judge formally dissolved the firm, putting an end to 103 years of business.  The well   known Dewey and LeBoeuf has ceased to exist.  It is dead.

There are two important things to learn from the Dewey & LeBoeuf bankruptcy filing.

First, if 1,200 of the world’s smartest and highest paid lawyers (many of whom were bankruptcy, restructuring and workout experts!) cannot figure out how to avoid bankruptcy, then you should not denigrate yourself emotionally for being unable to avoid bankruptcy filing.

Second, you should not repay friends and relatives right before you file for bankruptcy – more on this later in the article – and this is perhaps the most important practical teaching from Dewey and LeBoeuf.

Dewey and LeBoeuf reported 2011 gross revenue of $935 million for its approximate 1,200 lawyers.  The firm had a large bankruptcy and restructurings department with bankruptcy/restructuring experience dating back to the 1920s, yet the firm could not seem to save itself, despite its all-star lineup of Ivy League law school graduate partners and associates.

Even worse, a number of firm team leaders are now under criminal investigation for allegedly hiding the troubled finances of the firm.  Steven H. Davis, the firm’s former chairman and Stephen DiCarmine, the firm’s former executive director, both face criminal probes and Mr. Davis has retained a defense lawyer, says the NY Times.

Sadly, the Dewey lawyers could not seem to work together to save their law firm – when the going looked rough in 2011 and early 2012, some 200 of the 300 equity partners jumped ship to other law firms.  Perhaps even worse, one important law firm member, Martin J. Bienenstock (the former head of Dewey’s bankruptcy practice)  was accused by two former partners Elizabeth B. Sandza and Andrew J. Fawbush of devising a scheme and plan to pay himself $6 million from Dewey funds in 2010 while the rank-and-file partners saw their 2010 pay deferred and then ultimately “clawed back” by the bankruptcy court for repayment to creditors.

What does “clawed back” mean?  Well, in this context it might mean that Sandza and Fawbush (and other partners) had to refund their 2010 paychecks back to the law firm for whom they worked upon the filing of the bankruptcy, meaning much of their 2010 work may end up having been done for free and perhaps was ultimately not compensated.

How did Sandza and Fawbush end up having to refund some or all of their 2010 paychecks/compensation, along with a number of other partners?

While the news accounts I can readily find are sparse and I rely mostly on one NY Times article referenced below, here is my hunch:  When Sandza and Fawbush agreed to defer some of their 2010 pay to be received later than when it was normally due to them, their ultimate receipt of pay fell into a “preference period” pre-bankruptcy, wherein in the year or so leading up to the bankruptcy, funds they received as compensation were deemed returnable to the bankruptcy court for distribution to creditors as what is known as a “preference” or “preferential transfer”.  The concept might be that Sandza and Fawbush as equity partners and thus are presumed to have known what was going on with the law firm’s finances yet took pay out anyway in a time period that was too close to the bankruptcy, presumably knowing that the pay should have gone to reimburse and pay law firm creditors instead of going to pay Sandza and Fawbush their partnership share.

Why would Sandza and Fawbush be upset with Bienenstock – as Bienenstock seems not to have had his 2010 pay “clawed back” into the bankruptcy?  (Beinenstock, according to the New York Times, may have been paid earlier than were Sandza and Fawbush, who saw their 2010 compensation payments deferred)   Well, one can only speculate that if Bienenstock  saw the trouble on the horizon he might have pushed for being paid sooner than others because he knew that if he didn’t get paid quickly and ahead of others that his $6 million payment could fall into the “preference period” prior to the eventual May 2012 bankruptcy filing.  Since he was an expert on bankruptcy issues, perhaps Sandza and Fawbush believe that Bienenstock might have taken advantage of that expertise to push for his $6 million in pay sooner so that it would not fall into the suspected “preference period” and be subject to a “clawback” into the bankruptcy court for distribution to creditors.

Why blog about the failed mega-law firm Dewey & LeBoeuf?  How are Sandza, Fawbush and Bienenstock relevant to a consumer mom and pop bankruptcy filing?  Good questions – there are two answers:

First, I meet with so many people who are down on themselves for having to file for bankruptcy, even though they had perfectly good reasons for falling into financial hardship.  These reasons include job loss, illness, falling home values, large family size and crazy home loans with “exploding arm” sudden interest rate increases.  So I ask this important question:  If one of the biggest law firms in the world  which was chock-full of Harvard and other Ivy League law school graduates could not figure out how to pay the bills and stay solvent, then how on earth are my well-meaning clients supposed to do much better?  Remember, these brainiac lawyers went through a bankruptcy filing and went on to live their lives and care for their families – why should my clients not grant themselves the same emotional luxury?  Think about it:  Dewey and LeBoeuf had a 103 year track record and were EXPERTS at keeping businesses out of bankruptcy and helping businesses who ran into financial trouble – yet these 1,200 experts could not muster a plan of action to save themselves, despite enjoying some of the highest pay and billings in the entire legal world.  The world was their oyster – and they still couldn’t figure out how to make ends meet.

Second, the “preference” and “claw back” issues.  There is a lesson here for everyone considering a bankruptcy filing.  If you are facing trouble and think you may need to file for bankruptcy relief, then DO NOT, I repeat DO NOT repay friends and relative or transfer assets or property to friends or relatives right before the bankruptcy filing until after you have secured competent legal advice from a knowledgeable bankruptcy lawyer and asked the question about how much you should pay back or what you should transfer to mom.  For if you repay mom that $10,000 right before the bankruptcy, then mom might find herself being sued by the bankruptcy court trustee in your bankruptcy case with a demand to pay into the bankruptcy court some or all of the $10,000.  Better to just wait until after the bankruptcy is over and then voluntarily repay mother that $10,000.  Plenty of people mess this one up – don’t you be one of them.

Now, there may be some times that you would want to pay mother right before bankruptcy or transfer something to a friend or relative, but these are few and far between, so before you decide to repay mom or transfer an asset to a friend or relative, make sure you consult with a competent bankruptcy lawyer before making the repayment if you think that you could potentially be facing a bankruptcy filing in the future – even the distant future.

How about repaying other creditors other than friends or family right before a bankruptcy?  This blog post is already too long, so I will just say that before you make any such payments you should first consult with competent, experienced and qualified bankruptcy counsel to make sure you do not run afoul – and end up like Sandza and Fawbush.  Sandza and Fawbush would essentially argue that Bienenstock knew what he was doing and that he executed it well – The result:  Bienenstock will probably get to keep his $6 million, Sandza and Fawbush get nothing.    Knowledge is king, my friend!

As a footnote, the NY Times reports that, all in all, about 450 Dewey partners and former partners will end up returning about $450 million to the law firm in return for insulating themselves from future lawsuits connected to Dewey’s demise.

Many thanks to Peter Lattman of the New York Times, who provided information contained herein, including details on the Sandza, Fawbush & Bienenstock dispute in his article “With a Judge’s Decision, Dewey is Officially Dissolved”, NY Times, page B5, February 28, 2013.

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