Bankruptcy Law

Trustee for Howrey files first clawback claims against 6 of 71 law firms from which $200M is sought

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The bankruptcy trustee in Howrey’s Chapter 11 case has filed clawback litigation against six of the 71 successor law firms to which former partners took unfinished business after the collapse of the Washington, D.C.-based litigation shop near the beginning of 2011.

Although most are in settlement talks with trustee Allan Diamond of Diamond McCarthy concerning the total $200 million or so at issue, he tells the Am Law Daily that he has filed suit against six law firms with which he doesn’t expect to be able to settle and expects to bring several more suits next week.

The defendant law firms, so far, include Dorsey & Whitney; Kilpatrick Townsend & Stockton; Ropes & Gray; and Shearman & Sterling. The litigation was filed Monday in federal court in San Francisco, and the article links to a representative complaint (PDF) against Shearman & Sterling.

Diamond has also sued seven former Howrey partners, seeking to recapture millions of dollars he contends they were unjustly paid. More than 750 lawyers worked at the firm in its heyday.

The federal complaints offer a detailed account of how, as Diamond McCarthy puts it in the Shearman & Sterling complaint, “Howrey goes from boom to bankruptcy in less than three years,” the legal publication notes.

They blame a precipitous decline in work after the 2008 recession, delinquent clients who didn’t pay millions of dollars in legal bills and risky contingency work that Howrey took on in a bid to counteract the sudden financial shortfall.

In 2009, the filings say, Howrey partners with capital invested in the firm earned an average profit of $646,000—which was 35 percent below the level expected. An American Lawyer survey for 2009, which apparently may have defined the equity partner group differently, said average profit per partner for 2009 was $845,000.

The following year, both the Am Law survey and Diamond filings say, average profit per partner fell to $550,000.

Diamond says Howrey was insolvent in June 2010 yet continued to pay partners another $58 million over the next nine months, borrowing heavily from Citibank to do so.

As the Shearman & Sterling complaint puts it:

“These three structural economic problems were exacerbated by an increasing number of partner departures. After Howrey’s management revealed that Howrey missed budget projections by approximately 35 percent in 2009, Howrey began to lose partners and, when partners left, so did cash—in the form of lost revenue, lost clients, and return of capital. Instead of reducing partner distributions to reflect Howrey’s true financial condition, Howrey paid the Former Howrey Partners over $45 million in distributions in the Second Quarter of 2010 and more than $58 million over the next three quarters. Combined with the structural economic problems plaguing Howrey’s business, these excessive partner distributions were made at a time that Howrey was insolvent or had unreasonably small capital. With increased borrowing used to fuel the firm and pay the partners, Howrey was on the road to financial collapse.”

Defendant law firms and former Howrey partners contacted by the Am Law Daily either declined to comment or had little to say.

Additional and related coverage: “One Year Later, Lawyers in Howrey Diaspora Say They are Happy with New Careers” “Unfinished Business Doctrine Plagues Law Firms Acquiring Partners from Collapsed Firms/” “Judge axes ex-partners’ suit saying Citibank misled them about Howrey finances when making loans”

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