Wednesday evening, an ad hocgroup of retired partners of LeBoeuf, Lamb, Leiby & MacRae filed a motion, accompanied by a 32 page memorandum of law, in which they asked bankruptcy judge Martin Glenn to appoint a trustee pursuant to 11 U.S.C. § 1104(a) or, alternatively, to appoint an examiner pursuant to § 1104(c) of the Bankruptcy Code. The motion asserts that appointment of a trustee is warranted either on the grounds that: (1) “cause” exists due to gross mismanagement by the pre-petition management of Dewey & LeBoeuf, LLP, as well as continuing mismanagement by the Debtor’s management post-petition, or (2) the appointment of a trustee is beneficial to all parties in interest. The supporting memorandum of law summarizes the retired partners’ assertion as to why the “cause” standard for appointment of a trustee is met in the Dewey & LeBoeuf bankruptcy case:
Here, the appointment of a trustee is mandated because “cause” exists within the meaning of § 1104(a)(1). Most glaring is the Debtor’s pre-petition mismanagement, and the fact that members of that Management, particularly Meyer and Horvath, continued to ineffectively manage the Debtor as the Wind-Down Committee, both in the weeks preceding the Petition Date, and in the post-petition period. Furthermore, as is apparent from the PCP, Meyer’s and Horvath’s significant actual conflicts of interest make them incapable of impartially and effectively managing the Debtor and performing their fiduciary duties. Finally, given the serious allegations in this case, including an ongoing criminal investigation, and the cloak of secrecy that existed prior to the bankruptcy filing and which continues to this date, this case cries out for an independent person to conduct a full and impartial investigation and to take control over the disposition of insider claims. Only a Court-appointed trustee can efficiently and effectively undertake such a task under these unprecedented circumstances.
In the alternative, the motion seeks an examiner with the authority to “investigate, report on, and pursue or settle avoidance claims under §§ 544, 547, 548 and 550 and any other claims arising out of the conduct of the Debtor, including former Chairman Steven H. Davis, former Executive Director Stephen DiCarmine, former Chief Financial Officer, Joel Sanders and other partners of the Debtor who were members of its management committees or otherwise had influence over the affairs of the Debtor.” More specifically, the ad hoc committee of retired LeBoeuf, Lamb partners identifies eight specific areas that should be independently investigated:
- Financial issues relating to the Merger;
- Incurrence of debt in the years preceding the commencement of the Bankruptcy Case, including debt used to make payment of guarantees to incoming partners;
- With respect to the above, whether the Debtor and both pre-petition Management and post-petition management complied with their fiduciary duties to the Debtor and its creditors;
- Any potential causes of action that the Debtor’s estate may have arising out of any of the foregoing or any related actions, including any pre-petition distributions made while the Debtor was insolvent and causes of action against Management or other insiders;
- Whether a basis exists for equitable subordination of any claims against or interests in the Debtor, including, without limitation, claims or interests held by pre-petition Management, post-petition management, or other insiders;
- Whether a revised PCP or another alternative for a global settlement should be proposed, with the examiner having the sole authority to make any such proposal;
- Whether, and on what terms, any potential causes of action against Management, other insiders and/or former partners should be settled or pursued; and
- Whether the mismanagement of the Debtor or breaches of fiduciary duties by any partners or officers of the Debtor necessitate the appointment of a trustee to oversee the Debtor’s estate
The accompanying memorandum of law sets forth a litany of factual allegations, which the ad hoc committee of partners assert justify the the “extraordinary remedy” of appointing a trustee. Among the most significant allegations contained in the memorandum (which is embedded below) are the following (all quoted directly):
- “This Motion is predicated on the unassailable fact that prior to the commencement of this case, the Debtor was managed for the disproportionate benefit of certain insider partners (and non-partner Firm managers such as DiCarmine and Sanders); and after the commencement of the case, the Debtor continues to be managed in a way that benefits many of those same insiders.”
- “A trustee, or alternatively an examiner is required, because the Debtor continues to be mismanaged, its assets are eroding, and an independent investigation and pursuit of insider claims is required to make certain that the estate is not directed for the protection of insiders and that its assets are maximized for the benefit of creditors.”
- “[T]he Debtor’s financial affairs remain shrouded in darkness. The Debtor has not provided the Court with fundamental disclosures required by applicable law. While the assets of the estate continue to erode, the Debtor, without disclosure of critical facts, spent the first two months of this case propounding an uninformed and ‘desperate’ proposal [referred to above and in below quotes as the "PCP"].”
- “In late 2009 and early 2010, the Firm unilaterally ceased paying retirees under the LeBoeuf, Lamb, Leiby & MacRae Partners’ Retirement Plan, effective as of November 15, 1990. These actions were contrary to the terms of the plan and were taken apparently with the intention to reduce payments indefinitely, again contrary to the plan’s express provisions. The cessation of monthly payments to the 1990 LeBoeuf Retirees continued through April 30, 2010, when the Firm recommenced full monthly payments to retirees, and began paying arrearages due. Payments due under the LeBoeuf 1990 Retirement Plan on December 31, 2010 were not paid until January 2011.13 In April 2012, the 1990 LeBoeuf Retirees learned from the Firm, without any significant accompanying information, that pension payments would henceforth cease.”
- “Despite financial infirmities from at least 2010, the Firm made large distributions to those with guaranteed compensation packages. Thus, it appears that insiders with information about the Firm’s true financial condition, received distributions in late 2010, while compensation was denied to the 1990 LeBoeuf Retirees at that same time and deferred into early 2011. Later, insiders also took very large payments from the Firm just prior to the Petition Date.”
- “It was not until July 26, 2012, that the Debtor filed its SOFA. These documents establish, among other things, three significant issues [identified in an exhibit (a copy of which is also embedded below)].”
- “Because the SOFA only details payments made to partners in the one-year period prior to the Petition Date, it is impossible to ascertain the exact amount of distributions to partners from May 28, 2010 through the Petition Date (the “Two-Year Avoidance Period”). In light of the distributions described in Exhibit D, which exceed $250 million, distributions during the Two-Year Avoidance Period must have been substantial.”
- “The PCP requires a ‘premium’ contribution from those who served on the Dewey Executive Committee, but does not otherwise address numerous potential tort claims against partners who formally or informally managed or controlled the Firm. As noted, Meyer and Horvath were part of the pre-petition Management of the Debtor and remain in control of the Debtor as its current management. No disclosure has been made as to transfers made to either since the PCP Start Date and both may be liable for tort claims. Yet, it appears that Meyer and Horvath will pay nothing under the PCP, and will benefit from the Proposed PCP Injunction.”
- “Current management has not disclosed any evaluation or even identification either of the estate’s tort claims or of independent claims of creditors that the Proposed PCP Injunction will release or discharge. Nor does the PCP appear to consider the value of such claims, other than additional payment of up to the 20% Dewey Executive Committee premium. In particular, the Debtor admits that in proposing the PCP with its Proposed PCP Injunction, it has not done any analysis of (a) tort claims that may exist against Management, including breach of fiduciary duty, negligence, recklessness, arbitrary and capricious conduct, or malpractice, or (b) fraudulent transfer claims that may exist (including those related to insider employment contracts under § 548(a)(1)(B)(ii)(IV)) or partnership distributions under § 548(b) during the Two-Year Avoidance Period, including but not limited to those partners who had guaranteed compensation packages.”
- “The Debtor uses the PCP Start Date as a proxy date for insolvency, yet the Debtor admits that it has not done any insolvency analysis that would support such Date.”
- “The Debtor admits that it has done no analysis of the value of claims that may exist arising before the PCP Start Date which would be released under the Proposed PCP Injunction.”
- “Debtor’s management continues to state in Debtor’s Meetings that, subsequent to any approval of the PCP, creditors can pursue estate and personal litigation against alleged wrongdoers, but, when pressed on this issue, it has admitted that, other than Davis, there will be no partners who mismanaged the Firm out of existence left to sue if all alleged wrongdoers participate in the PCP.”
- “The Debtor does not appear to have considered the effect of the PCP on coverage under existing insurance policies. There is a risk that releasing members of Management from liability as proposed in the PCP, may jeopardize access to a $50 million ‘D&O’ insurance policy, as well as to any insurance policy covering the possible legal malpractice claims.”
- “The United States Department of Labor is investigating Debtor’s post-petition management with respect to a previously unannounced administrative fee that post-petition management assessed on participants in the Dewey & LeBoeuf 401(k) Savings Plan. Specifically, during June and July of 2012, without notice to 401k Plan participants and contrary to the terms of the 40lk Plan, participants, including retired and other former partners, were prevented from withdrawing benefits from their accounts. In July 2012, while the accounts remained unavailable for distribution, the Debtor imposed a 1% administrative fee, which was deducted from each account.”
- “Although the details surrounding the freezing of the 401k Plan accounts and the Debtor’s use of the aggregated fees collected remain undisclosed, it is abundantly clear that Debtor’s management did not inform 401k Plan participants of the fee prior to its imposition, an act which potentially violates the Employee Retirement Insurance Security Act of 1974, as amended.”
Embedded below is a copy of the motion for appointment of a trustee or examiner.
Embedded below is a copy of the supporting memorandum of law.
Embedded below is a copy of the exhibit detailing the ad hoc committee’s issues with the Statement of Financial Affairs filed by the firm.