In In re Dewey & LeBoeuf LLP, the U.S. Bankruptcy Court for the Sothern District of New York approved a settlement plan as part of Dewey & LeBoeuf’s Chapter 11 proceedings, under which former partners will pay approximately $71 million in settlement payments. The Court also rejected a motion from an ad hoc committee of retired partners that the Court appoint an examiner to review the settlement agreement. The settlement marks the bankruptcy as the first in which a major law firm avoids the historical need for years of litigation and exorbitant administrative expenses.
While Dewey & LeBoeuf engaged in the “winding down” mode of Chapter 11 bankruptcy proceedings, several officers devised Partnership Contribution Plans (“PCPs”) to return value to the bankruptcy estate while limiting future litigation costs. Under the PCPs, participating partners would contribute an amount proportionate to their liability of exposure to loss in exchange for release from claims brought by the estate. However, the PCPs do not protect participating partners from third parties or non-participating partners. Three senior partners were excluded from participation in the PCP because the estate alleges that they played a more integral role in the downfall of the firm and plans to pursue claims against the three individuals.
Under Bankruptcy Rule 9019(a), the court may approve a settlement agreement. While the court must determine whether the settlement is fair, equitable, and in the best interests of the estate, settlements are generally favored because they “limit costly litigation and expedite the administration of the bankruptcy estate.” In examining the agreements presented by the officers, the Court applied the seven interrelated factors prescribed by the Second Circuit in Iridium to the PCPs. These seven factors include (1) the balance between the potential success of litigation compared to the settlement; (2) the likelihood of prolonged litigation; (3) the interests of the creditors; (4) whether other interested parties support the settlement; (5) the competency of counsel advising the settlement; (6) the nature of the releases obtained by officers and directors; and (7) the extent to which the settlement is the product of arm’s length bargaining. The Court weighed all the relevant factors and determined that the PCPs were the result of arms-length bargaining, they would provide for quicker distribution to creditors at a lower risk, the agreements was supported by most constituencies, and the benefits from the PCPs outweighed the possibility of increased recovery after years of litigation. The Court concluded that the factors weighed strongly in favor of the PCPs.
On the ad hoc committee’s motion to appoint an examiner for the settlement, the Court noted that the committee filed the motion with the intent to “scuttle” any proposed PCP. Section 1104(c) of the Bankruptcy Code provides that the court appoint an examiner if the debtor owes in excess of $5 million in fixed, liquidated, unsecured debts. The Court determined that the committee failed to meet the burden of proving an excess of $5 million in fixed, liquidated, unsecured debts.
The Court concluded that, even if the committee had met the burden of proof, the appointment of an examiner would be unnecessary because the PCPs were “well above” the lowest point of reasonableness. The PCPs were fair and equitable and the Iridium factors weighed strongly in favor of the settlement. Further, the Court noted several times that litigation in other bankruptcy proceedings often lasts for several years and praised the PCPs for avoiding prolonged dispute and costly administrative issues.