Professional Practice And Law Firm Bankruptcy
Professional Partnership Bankruptcies Trustee
When a debtor is a professional partnership such as a law firm, the legal issues surrounding its dissolution are unique and can be very challenging. The Togut Firm has played a leading role in the Chapter 11 bankruptcies of major law firms and other professional partnerships, including the historic cases of Finley Kumble and Dewey & LeBoeuf.
Our lawyers have decades of experience in resolving the challenges presented by the bankruptcies of professional partnerships. In the early 1990s, our firm served as counsel to the Official Committee of Unsecured Creditors of Finley Kumble (the granddaddy of all law firm cases and, at the time, the fourth-largest law firm in the United States). Our senior partner, Albert Togut, served as principal adviser to the committee and then as post-confirmation trustee in the Chapter 11 case. Mr. Togut has more than 40 years of experience as a trustee. In becoming trustee, he replaced Francis Musselman, who was the managing partner of Milbank Tweed. Since then, the Togut Firm has served in the same capacity in several Chapter 11 cases involving prominent New York law practices, including Shea & Gould, Bower & Gardner, and Berger Steingut. In each of these cases, the firm was counsel to the Official Committee of Unsecured Creditors and was focused on creditor interests. In each of the cases, Mr. Togut continued to serve as post-confirmation trustee.
Thus, in the Finley Kumble, Shea & Gould, and Bower & Gardner cases, we were also counsel to the post-confirmation trustee under Chapter 11 liquidating plans, with primary responsibility for maximizing the value of the debtor law firms’ assets by obtaining agreements for partner contributions to settlements with creditors under Chapter 11 plans that were successfully confirmed. Most of these claims involved the recovery of avoidable preference payments.
In each of the cases, administration expenses were astronomical and had a significant negative impact on creditor recoveries. In each of them, without any help from the partners, accounts receivable recoveries averaged a gross of 20% and, after high administration expenses, yielded a paltry return. After failing to realize a meaningful recovery from accounts receivables collections, the trustee chased after partners for a contribution to cover the shortfall. Every partner was, by definition, a lawyer, and that meant they could litigate forever without any meaningful cost. Meanwhile, the estate had to bear expenses for its lawyers that reduced creditor recoveries.
When Mr. Togut was asked to take on the Dewey & LeBoeuf case, in which, for the first time, he represented the law firm, a condition of his hiring was that the law firm let him attempt a novel approach that was theoretical but untested. But Mr. Togut was confident that it would work and persuaded two sets of secured creditors (the original set sold their claims) that the new approach would succeed. What Mr. Togut did was persuade the secured creditors to accept a lesser amount on their claims to induce the partners to assist in the liquidation and help collect the firm’s most valuable asset, its accounts receivables. With the active cooperation and help from the partners, receivables recoveries were much higher. The case lasted a little over a year and resulted in a greater return for creditors, a lesser payment by partners, and a much faster confirmation that resulted in higher net recoveries. With the benefit of hindsight, it is clear that, aside from the radically different approach Mr. Togut advocated, what made the case work was his prestige and extensive experience with law firm insolvencies. He was able to persuade everyone because they respected him and his experience.
After the Dewey case was completed, Mr. Togut was asked to advise the partners of Patton Boggs, which was in danger of financial difficulty. Mr. Togut made a condition of that retention that, within only a few days, there be an all-hands partners meeting in Washington so that Mr. Togut could walk the partners through what faced them, particularly if they failed to stick together to work through the problem as a group. In the starkest terms, he explained what was “on the dark side of the moon” if they acted like the partners of every other firm that had financial difficulties. It was not a pretty picture. The partners appreciated what they were being told and respected Mr. Togut’s vast experience with law firms. The partners heeded Mr. Togut’s advice, and the result was a successful merger with Squire Sanders to form Squire Patton Boggs. It was a highly favorable outcome. Bankruptcy, and all of its negative impact on partners, was avoided.
Maximizing Value And Minimizing Expenses In Professional Practice Bankruptcy
Our attorneys’ ability to identify, protect, and even create value for the debtor’s estate can make a significant difference to unsecured creditors and administrative claimants in professional practice Chapter 11 cases.