New York law firm Dewey & LeBoeuf filed for Chapter 11 bankruptcy protection this week, capping a tumultuous five-month period that saw the once-prestigious corporate law firm unravel quickly as top partners, including several in Washington, fled to new firms.
The downward spiral began in earnest in January, but the problems that led to its downfall — aggressive growth at a time when the demand for legal services was declining — were months in the making.
The squeeze was hardly unique to Dewey. Howrey, the 55-year-old Washington law firm, dissolved 14 months ago and was pushed into bankruptcy by a group of unsecured creditors. Now, analysts wonder whether other large law firms will follow suit.
At its height, Dewey & LeBoeuf, formed in 2007 by one of the largest law firm mergers in history between Dewey Ballantine and LeBoeuf, Lamb, Greene & MacRae, had more than 1,300 lawyers in 26 international offices and reported more than $900 million in annual revenue. But in the first two months of 2012, cracks in the firm’s partnership began to show. In January and February, 17 partners left Dewey for other firms, setting off a domino effect of partner departures — 22 in March, 40 in April and 125 in May.
Partner exits are especially dangerous at law firms because they represent a firm’s primary assets, given that they typically take clients with them if they join a competing firm.
“It’s a sad day,” said Charles Landgraf, former head of public policy at Dewey who is now at Arnold & Porter. “It was eventually inevitable when the practice groups left that something like this was going to occur.”
The Chapter 11 petition, filed in U.S. Bankruptcy Court in the Southern District of New York on Monday night, lists assets of $13 million in cash and $255 million in accounts receivable and ongoing legal work, and $315 million in liabilities — $225 million of which is owed to banks.
Dewey’s largest unsecured creditor is the Pension Benefit Guaranty Corp., the federal agency tasked with protecting pension benefits in private-sector benefit plans. Earlier this month, PBGC sued the firm and sought to take over $80 million in underfunded pension plans for 1,776 Dewey employees and retirees. Dewey had about 150 employees as of Monday, and will reduce that to 90 by Friday, according to the filing.
The partner exodus was prompted by a compensation system that made multi-million-dollar pay guarantees to star lawyers in order to hire them away from other firms, according to former Dewey partners. In 2011, the firm brought in a record 37 top partners but lower-than-expected profits, and unusually high debt left the firm $100 million short in meeting its pay commitments, according to the bankruptcy filing. In its final weeks, Dewey leaders scrambled to meet with other firms to discuss a possible merger, but those talks fell through.
In Washington, Dewey’s second-largest U.S. office after its New York headquarters, the firm had about 100 lawyers as recently as January. Many have since landed jobs at other law firms, including former D.C. managing partner Abraham “Hap” Shashy, who left for King & Spalding in February, and Landgraf, the only D.C.-based member of Dewey’s “office of the chairman,” the five-partner group formed in March to replace the sole leadership of former chairman Steven Davis. In April, Davis was forced out amid allegations that he misled lenders about the financial state of the firm. Davis, through his lawyer, has denied the allegations, which are being investigated by the Manhattan District Attorney’s Office.
Other Dewey attorneys in Washington have joined Winston & Strawn, SNR Denton, Willkie Farr & Gallagher, DLA Piper and several other firms.