dewey memorandum of law in support of motion to appoint trustee
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7/31/2019 Dewey Memorandum of Law in Support of Motion to Appoint Trustee
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Eric Lopez Schnabel, Esq. (ES5553)Jessica D. Mikhailevich (JM1043)DORSEY & WHITNEY LLP51 W. 52nd Street New York, New York 10019
Telephone: (212) 415-9200Facsimile: (212) 953-7201
-and-
Annette Jarvis (Utah Bar No. 01649)Peggy Hunt (Utah Bar No. 06060)DORSEY & WHITNEY LLPKearns Building136 South Main Street, Suite 1000Salt Lake City, UT 84101-1655
Telephone: (801) 933-8933Facsimile: (801) 933-7373
Counsel to Ad Hoc Committee of Retired Partners of LeBoeuf, Lamb, Leiby & MacRae
UNITED STATES BANKRUPTCY COURT
FOR THE SOUTHERN DISTRICT OF NEW YORK
In re:
DEWEY & LEBOEUF LLP,
Debtor.
Chapter 11
Case No. 12-12321-mg
MEMORANDUM IN SUPPORT OF THE MOTION OF AD HOC
COMMITTEE OF RETIRED PARTNERS OF LEBOEUF, LAMB,
LEIBY & MACRAE FOR APPOINTMENT OF A TRUSTEE OR, IN THE
ALTERNATIVE, FOR THE APPOINTMENT OF AN EXAMINER PURSUANT TO
SECTIONS 1104(a) AND 1104(c) OF THE UNITED STATES BANKRUPTCY CODE
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TABLE OF CONTENTS
INTRODUCTION..................................................................................................................1
BACKGROUND....................................................................................................................3
Pre-Petition Management ......................................................................................... 3
Certain Relevant Post-Merger, Pre-Petition Events .................................................. 4
The Ad Hoc Committee.................................................................................7
The Bankruptcy Case and Post-Petition Management ...................................7
ARGUMENT....................................................................................................................... 12
A. CAUSE EXISTS TO APPOINT AN INDEPENDENT THIRD-PARTY
TO SERVE AS TRUSTEE PURSUANT TO § 1104(a)(1) ....................................12
1. Gross Mismanagement Continues................................................... 14
2. Debtor’s Current Management is Incapable of Exercisingits Fiduciary Duties......................................................................... 15
a. Conflicts of Interest of Meyer and Horvath..........................16
b. Taint of Meyer and Horvath Extends to the CRO................. 17
c. Specific Issues Creating an Appearance of
Impropriety ......................................................................... 18
i. Admitted Failure to Investigate................................ 18
ii. The PCP ..................................................................18
iii. Need for Investigation..............................................21
B. APPOINTMENT OF A TRUSTEE IS BENEFICIAL TO ALL PARTIESIN INTEREST ....................................................................................................... 22
1. The Debtor has Demonstrated That it is not Trustworthy ................22
2. The Debtor Will Not be Reorganized .............................................. 24
3. Lack of Confidence......................................................................... 24
4. Benefits Derived by Trustee Appointment OutweighAdditional Costs ............................................................................. 24
C. APPOINTMENT OF AN EXAMINER IS REQUIRED PURSUANT TO§1104(c) ................................................................................................................ 25
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CONCLUSION.................................................................................................................... 25
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TABLE OF AUTHORITIES
Page(s)
CASES
In re Adelphia Commc’ns Corp.,336 B.R. 610 (Bankr. S.D.N.Y. 2006)............................................................................12, 22
In re Ames Department Stores, Inc.,Case No. 01-42217 (Bankr. S.D.N.Y.) ................................................................................ 17
In re Bonded Mailings,20 B.R. 781 (Bankr. E.D.N.Y. 1982) .................................................................................. 12
In re Coudert Brothers, LLP ,Case No. 06-12226 (Bankr. S.D.N.Y.) [Docket No. 3]........................................................ 17
In re Deena Packaging Industries, Inc.,29 B.R. 705 (Bankr. S.D.N.Y. 1983)................................................................................... 13
In re Denrose Diamond ,49 B.R. 754 (Bankr. S.D.N.Y. 1985)................................................................................... 16
In re Enron Creditors Recovery Corp. et al.,Case No. 01-16034 (Bankr. S.D.N.Y.) ................................................................................ 17
In re Eurospark Industries, Inc.,424 B.R. 621 (Bankr. E.D.N.Y. 2010)............................................................................15, 24
In re Evans,48 B.R. 46 (Bankr. W.D. Tex. 1985)................................................................................... 22
In re Fiesta Homes of Ga., Inc.,125 B.R. 321 (S.D. Ga. 1990) ............................................................................................. 24
In re Howrey LLP ,Case No. 11-31376 (Bankr. N.D. Ca.) [Docket No. 132]..................................................... 17
In re Ionosphere Clubs, Inc.,
113 B.R. 164 (Bankr. S.D.N.Y. 1990)................................................................12, 13, 15, 22
In re Iridium Operating LLC ,478 F.3d 452 (2d Cir. 2007)................................................................................................ 18
In re L.S. Good & Co.,8 B.R. 312 (Bankr. W. Va. 1980)........................................................................................ 17
In re Marvel Entertainment Group, Inc.,140 F.3d 463 (3d Cir. 1998)...........................................................................................12, 25
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In re McCorhill Publishing, Inc.,73 B.R. 1013 (Bankr. S.D.N.Y. 1987)............................................................................13, 15
In re Microwave Prods. of Am., Inc.,102 B.R. 666 (Bankr. W.D. Tenn. 1989)............................................................................. 17
In re Oklahoma Refining Co.,838 F.2d 1133 (10th Cir. 1988)............................................................................................ 12
In re Sharon Steel Corp.,871 F.2d 1217 (3rd Cir. 1989)...................................................................................12, 22, 25
In re TransTexas Gas Corp.,597 F.3d 298 (5th Cir. 2010)............................................................................................... 20
In re U.S. Communications of Westchester, Inc.,123 B.R. 491 (Bankr. S.D.N.Y. 1991)................................................................................. 13
In re V. Savino Oil & Heating Co., Inc.,99 B.R. 518 (Bankr. E.D.N.Y. 1989) .................................................................................. 13
Loop Corp. v. United States Trustee,379 F.3d 511 (8
thCir. 2004)................................................................................................ 16
Loral Stockholders Protective Comm. v. Loral Space & Communications, Ltd. (In re Loral Space & Communications, Ltd.), No. 04 Civ. 8645RPP, 2004 WL 2979785 (S.D.N.Y. Dec. 23, 2004) .................................. 25
Morgenstern v. Revco D.S., Inc. (In re Revco D.S., Inc.),898 F.2d 498 (6th Cir. 1990)............................................................................................... 25
Smart World Techs., LLC v. Juno Online Servs., Inc. (In re Smart World Techs., LLC),
423 F.3d 166 (2d Cir. 2005)................................................................................................ 15
STATUTES
11 U.S.C. §§ 102(3).................................................................................................................. 13
11 U.S.C. § 521(a).................................................................................................................... 16
11 U.S.C. §§ 544 ........................................................................................................................ 1
11 U.S.C. § 547.......................................................................................................................... 1
11 U.S.C. § 548.......................................................................................................................... 1
11 U.S.C. § 548(a)(1)(B)(i)....................................................................................................... 20
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11 U.S.C. § 548(a)(1)(B)(ii)(IV)..........................................................................................10, 20
11 U.S.C. § 548(b).................................................................................................................... 10
11 U.S.C. § 550.......................................................................................................................... 1
11 U.S.C. § 1104(a).............................................................................................................. 1, 25
11 U.S.C. § 1104(a)(1) ..............................................................................................3, 12, 13, 22
11 U.S.C. § 1104(a)(2) ....................................................................................................3, 17, 22
11 U.S.C. § 1104(c).............................................................................................................. 1, 25
11 U.S.C. § 1104(c)(1) ......................................................................................................... 3, 25
11 U.S.C. § 1104(c)(2) ......................................................................................................... 3, 25
11 U.S.C. § 1106 ...................................................................................................................... 15
11 U.S.C. §§ 1106(a)(1) ........................................................................................................... 21
11 U.S.C. § 1106(a)(3)-(4)........................................................................................................ 22
11 U.S.C. §§ 1106(a)(5)-(8)...................................................................................................... 21
11 U.S.C. § 1107(a).......................................................................................................15, 21, 22
11 U.S.C. § 1112 (b)(4)(A)..................................................................................................16, 24
11 U.S.C. § 1125...................................................................................................................... 23
OTHER AUTHORITIES
95 Cong. 1st Sess. (1977) ......................................................................................................... 24
Employee Retirement Insurance Security Act of 1974 .............................................................. 12
Fed. R. Bankr. P. 1007.............................................................................................................. 16
Fed. R. Bankr. P. 9019...................................................................................................18, 23, 24
Fed. R. Bankr. P. 9037.............................................................................................................. 16
H.Rep. No. 95-595 ................................................................................................................... 24
U.S. Code Cong. & Admin. News. p. 5787............................................................................... 24
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The Ad Hoc Committee of Retired Partners of LeBoeuf, Lamb, Leiby & MacRae (the
“Ad Hoc Committee”), by and through its undersigned counsel, hereby submits this
memorandum (the “Memorandum”) in support of the Motion of the Ad Hoc Committee of
Retired Partners of LeBoeuf, Lamb, Leiby, & McRae for Appointment of a Trustee, or, in the
Alternative, for the Appointment of an Examiner Pursuant to Sections 1104(a) and 1104(c) of the
United States Bankruptcy Code (the “Motion”) requesting (a) the appointment of a trustee
pursuant to 11 U.S.C. § 1104(a) of title 11 of the United States Code (the “Bankruptcy Code”) on
the grounds that: (1) “cause” exists due to gross mismanagement by the pre-petition management
of Dewey & LeBoeuf, LLP (the “Debtor” or “Firm”), as well as due to continuing
mismanagement by the Debtor post-petition, or (2) “cause” exists because the appointment of a
trustee is beneficial to all parties in interest; or alternatively (b) the appointment of an examiner
pursuant to § 1104(c) of the Bankruptcy Code 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 (“Davis”), former Executive Director
Stephen DiCarmine (“DiCarmine”), former Chief Financial Officer, Joel Sanders (“Sanders”)
and other partners of the Debtor who were members of its management committees or otherwise
had influence over the affairs of the Debtor (collectively, the “Management”).
INTRODUCTION
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
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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.
The Debtor and its current management are incapable of conducting an independent
investigation. Indeed, current management is steeped in conflicts of interest, both real and
apparent, as a result of its involvement or connection with pre-petition Management as well as
receipt from the Debtor of pre-petition transfers which makes it impossible for this management
group to act as fiduciaries of the Debtor’s estate. Current management has taken actions that, in
light of obvious conflicts, appear to be devoted to protection of themselves and other insiders.
Furthermore, the 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,1 defined below as the
“PCP.” The PCP, if approved, would permit certain Firm insiders to obtain the broadest possible
release of potential liability without sufficient contribution to creditors. An independent review is
necessary because the current management of the estate is rushing to implement the PCP that
would impose significant burdens on retirees and other innocent parties and shield the partners
who took out huge compensation, including in the months preceding the firm’s collapse. No
creditors in this case are more affected than senior-citizen members of the Ad Hoc Committee,
who are without the necessary remaining years to replace the revenue they have depended on and
1 “Lavish Dewey Payouts May Turn Creditors Against $90M Deal,” attached hereto as Exhibit G-1 andavailable at : http://www.law360.com/articles/365659/lavish-dewey-payouts-may-turn-creditors-against-90m-deal (quoting Edwin Reeser, this article states the PCP is “’a creative move . . . . But the plan is also a somewhatdesperate one, as it depends on whether both the partners and the creditors, and their counsel, can be persuadedto make a deal that does not include deep due diligence, when it is quite possible that any such transaction inthis type of environment would not survive the kinds of disclosures likely to come out[.]’”).
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lost and whom the Debtor is strong-arming and intimidating into contributing fresh funds into the
PCP without any articulated legal basis for requiring them to do so.
While appointing a chapter 11 trustee is an extraordinary remedy, this case presents
compelling grounds for granting such relief. As discussed below, “cause” exists to appoint a
trustee under § 1104(a)(1) of the Bankruptcy Code because pre-petition and post-petition
mismanagement of the Debtor, encumbered by blatant conflicts of interest, make the incumbents
incapable of acting as fiduciaries and create a reality and an appearance of impropriety that will
illegitimize any consensual resolution of this case. Additionally, § 1104(a)(2) requires the
appointment of a trustee in the best interests of all parties. Appointing a trustee, untainted by any
association with pre-petition Management, who is statutorily required to investigate the affairs of
the Debtor and to pursue claims in an impartial way will ensure that the integrity of the
bankruptcy process is protected and that Debtor’s assets are maximized. Such an appointment
will prevent favored treatment of certain insiders, will require a proper accounting of their acts
and omissions, and will guarantee accurate disclosure of the Debtor’s affairs for the Court and
creditors.
In the event that a trustee is not appointed, the Ad Hoc Committee requests the
appointment of an examiner, which is mandatory, pursuant to § 1104(c)(2). There are also
independent grounds for appointing an examiner under § 1104(c)(1).
BACKGROUND
Pre-Petition Management
1. In 2007, Dewey Ballantine LLP merged with LeBoeuf, Lamb, Greene &
MacRae LLP (the “Merger”).2
2 See Declaration of Jonathan A. Mitchell Pursuant to Local Bankruptcy Rule 1007-2 and in Support of Chapter 11 Petition and First Day Motions [Docket No. 2] (the “Mitchell Declaration”) at ¶ 17.
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2. From the time of the Merger until on or about March 27, 2012, Davis acted as
“Chairman” of the Firm.3
3. Upon information and belief, during this time, the Chairman chaired an
Executive Committee comprised of approximately 30 equity partners, the precise number of
which varied from time to time (the “Dewey Executive Committee”).4
4. During all or most of this period, Janis M. Meyer (“Meyer”), an equity partner of
the Firm, served as the Firm’s General Counsel.5
Certain Relevant Post-Merger, Pre-Petition Events
5. Upon information and belief, following the Merger, the Debtor entered into
contracts with select equity partners purporting to “guarantee” compensation, in many cases
without regard to the partner’s actual performance or pecuniary benefit to the Debtor. Upon
information and belief, these guaranteed payments were significantly greater in amount when
compared to payments to other partners whose income was not similarly guaranteed, a
phenomenon that would naturally occur if overall net income of the firm was less than
projected.6
6. The Debtor experienced a steady defection of equity partners, but the pace of
defections accelerated toward the end of 2011 and into early 2012, after the revelation of the
number of guarantees that favored partners had obtained. Thereafter, between January 1, 2012
and March 30, 2012 approximately 20% of the Debtor’s equity partners resigned or left the
Firm.7
3 Id . at ¶ 61.4 Declaration of Hugh T. McCormick in Support of the Motion attached hereto as Exhibit A (the “McCormick
Declaration”) at ¶ 4.5 See Mitchell Declaration at ¶ 12.6 McCormick Declaration at ¶ 5.7 Mitchell Declaration at ¶ 59.
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7. On or about May 4, 2012, the losses in the partner ranks was such that the Firm
sent a so-called WARN (federal Worker Adjustment Retraining and Notification Act) notice to
staff, associates and other employees, including Of Counsel.8 In May 2012, the Firm told the
few remaining lawyers that it would cease operations.9 On May 28, 2012, the Firm filed its
bankruptcy petition.10
8. In late 2009 and early 2010, the Firm unilaterally ceased paying retirees (the
“1990 LeBoeuf Retirees”) under the LeBoeuf, Lamb, Leiby & MacRae Partners’ Retirement
Plan, effective as of November 15, 1990 (the “LeBoeuf 1990 Retirement Plan”). 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.11
9. 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.12
10. 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.14
11. Despite financial infirmities from at least 2010, the Firm made large distributions
8 Id. at ¶ 69.9 McCormick Declaration at ¶ 6.10 See Docket No. 1.11 Declaration of Davis Robinson in Support of the Motion attached hereto as Exhibit B (the “Robinson
Declaration”) at ¶¶ 4-10.12 See Id. at ¶¶ 5-10.13 Robinson Declaration at ¶ 11.14 Robinson Declaration at ¶ 3.
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to those with guaranteed compensation packages.15 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.16
12. On or about March 27, 2012, , the Firm announced the creation of the “Office of
the Chairman,” to replace the hitherto sole Chairman Davis.17 According to the Firm’s
announcement, the Office of the Chairman was comprised of Davis, Martin Bienenstock, Rich
Shutran, Jeffrey Kessler, Charles Landgraf, and with Stephen J. Horvath, III (“Horvath”)
serving as Executive Partner.18
13. On April 1, 2012, the Firm retained Togut, Segal & Segal LLP as bankruptcy
counsel (the “Togut Firm”), with Albert Togut (“Togut”) serving as lead counsel.19
14. On or about April 27, 2012, the Office of the Chairman informed the Firm
partnership that it had learned that the Manhattan District Attorney’s Office was investigating
allegations of wrongdoing by Davis.20
15. On or about April 29, 2012, Davis was removed from all leadership roles within
15 See generally, Statement of Financial Affairs [Docket No. 294] (“SOFA”) at pp. 118, 175, 186, 190, 214, 229,232, 233, 245, 260, 278, 295, 333, 352, and 353.
16 See SOFA at pp. 141, 154, 175, 186, 245, 262, & 316 (detailing numerous payments made to partners rangingfrom $264,166.67 to $2,000,000 in the months and even the days prior to the Petition Date); see infra ¶¶ 29-38(discussing the SOFA and pre-petition transfers in greater detail).
17 Mitchell Declaration at ¶ 61.18 See “Dewey Law Firm Adds Four Partners To Chairman’s Office” attached hereto as Exhibit G-2 and
available at : http://www.bloomberg.com/news/2012-03-27/dewey-law-firm-adds-four-partners-to-chairman-s-office-1-.html.
19 See Docket No. 98 (Employment Application); Declaration of Albert Togut [Docket No. 98-2] (the “TogutDeclaration”).
20 Mitchell Declaration at ¶ 65.
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the Firm,21 but, upon information and belief, continued to be paid by Management. Any
amounts paid to Davis after April 29. 2012 have not been disclosed to creditors.22
16. By letter dated May 1, 2012, counsel for the Ad Hoc Committee, requested
certain information from the Firm, including relating to payments intended to be made to
partners, and reminded the Firm that payments to creditors, including the 1990 LeBoeuf
Retirees (which were not being paid), took priority over payments to partners.23
17. On or about May 11, 2012, the Firm appointed a two-person Committee to
oversee its wind-down comprised of its General Counsel and equity partner Meyer and
Executive Partner Horvath (the “Wind-Down Committee”).24
The Ad Hoc Committee
18. In April 2012, the Ad Hoc Committee was formed to act for and on behalf of
members and to present claims related to the LeBoeuf 1990 Retirement Plan. The Committee
currently is comprised of 54 persons who have vested interests in the plan.25
The Bankruptcy Case and Post-Petition Management
19. On May 28, 2012 (the “Petition Date”), the Debtor filed its petition seeking relief
under chapter 11 of the Bankruptcy Code in this Court.
20. After the Petition Date, the Firm, acting through the Wind-Down Committee of
Meyer and Horvath, employed Jonathan A. Mitchell as the Debtor’s Chief Restructuring Officer
21 Id. at ¶ 66.22 The SOFA filed by the Debtor does not name the partners receiving distributions, but only identifies them by
employee number, so it is impossible to tell what was paid to whom within the final month, and indeed, the year before the bankruptcy filing.
23 Declaration of Annette W. Jarvis in Support of the Motion attached hereto as Exhibit C (the “JarvisDeclaration”) at ¶ 3.
24 See Mitchell Declaration. at ¶ 13.25 McCormick Declaration at ¶ 7; see Docket No. 39 (Verified Statement).
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(the “CRO”), which the Court approved.26 Upon information and belief, the CRO takes
direction from, and reports to, the Firm’s Wind-Down Committee.
21. It was not until July 26, 2012, that the Debtor filed its SOFA. These documents
establish, among other things, three significant issues, each of which is addressed in the
“Summary of the Debtor’s Statement of Financial Affairs” attached hereto as Exhibit D.
22. Because the SOFA only details payments made to partners in the one-year period
prior to the Petition Date,27 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.
23. Since the Petition Date, the focus of the Debtor, through the Wind-Down
Committee and the CRO, has been formulating and proposing a settlement for former insider
partners of the Firm known as the “Partner Contribution Plan”(the “PCP”). The PCP requires
contributions from non-insiders, including retiree members of the Ad Hoc Committee, based on
monies that the Debtor paid to them commencing in January 2011 (the “PCP Start Date”)
through the Petition Date.28
24. The proposed PCP seeks a return of approximately $90.4 million from more than
700 partners and former partners, including from almost 400 persons who left the Firm before
the January 2011 PCP Start Date.29
25. The PCP also proposes, among other things, to release partners and former
26 Docket Nos. 99 & 224. The CRO’s firm was paid a total of $600,000 prior to the Petition Date. See SOFA at p.27; Docket No. 99-3 (Rule 2014 Statement).
27 See SOFA at p. 11 (“SOFA 3(c) – Payments Made Within One Year To Or For The Benefit Of Creditors WhoWere Insiders.”).
28 McCormick Declaration ¶¶ 10-11..29 See id. at ¶ 11(a); see also “For Dewey: A $90 Million Bill” attached hereto as Exhibit G-4 and available at :
http://online.wsj.com/article/SB10000872396390444840104577551374135253472.html.
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partners, including most notably Management (other than Davis), from claims of the estate, and
to enjoin creditors, including 1990 LeBoeuf Retirees, from pursuing their own claims against
these partners (the “Proposed PCP Injunction”).30
26. 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.31
27. 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 Date32 and both may be liable for tort
claims.33 Yet, it appears that Meyer and Horvath will pay nothing under the PCP, and will
benefit from the Proposed PCP Injunction.34
28. Although the Two-Year Avoidance Period commenced on or about May 28,
2010, payment calculations under the PCP are limited to the 2011 PCP Start Date, and no
disclosure has been made of 2010 distributions to partners.35
29. Calculation of the amounts being requested from those asked to participate in the
30 See McCormick Declaration at ¶ 11(b).31 The PCP is a so-called “no fault” plan, so no attempt is made to distinguish among members of the Executive
Committee, some of whom may actively have participated in the mismanagement, alleged breach of fiduciaryduty and perhaps worse, and others of whom may not have taken their fiduciary duty of inquiry seriously, maynot have known all of the facts or even may have, in good faith, tried to rectify the wrongs being committedwithin the Firm.
32From the Petition Date through June 30, 2012, Meyer received $56,000.00 in salary, and Horvath received$190,000.00 in salary and $23,563.33 in expense reimbursements. See Debtor’s Monthly Operating Report[Docket No. 260] at p. 9.
33 For instance, Meyer was the General Counsel of the Firm during the period in time as to which seriousallegations of mismanagement have been made, including that the Firm was not properly organized or run as alimited liability partnership and including the period of time currently under criminal investigation.
34 McCormick Declaration at ¶ 11(j).35 Id. at ¶ 11(c). Note that the LeBoeuf 1990 Retirees has their December 2010 payments unilaterally deferred to
January of 2011 by the firm. Robinson Declaration at ¶ 11. Some partners may have received the sametreatment, thus pushing their distributions into 2011, while, upon information and belief, other partners mayhave received large distributions in late 2010. McCormick Declaration at ¶ 11(c).
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PCP is unquestionably slanted toward higher paid partners including Management and those
with guaranteed compensation packages. This discrimination in their favor is due to the
percentage and cap on return payments and the PCP Start Date, both of which come at the
expense of others, including former partners who were not at the Firm during the time in
question, such as most of the LeBoeuf 1990 Retirees. Furthermore, partners or former partners
who were not among these higher paid partners saw distributions expected in 2010 instead
pushed into 2011.36
30. 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,37 including but not limited to those partners who had
guaranteed compensation packages.38
31. 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
36 See e.g. SOFA at pp. 175, 214, 233, and 278; see also Robinson Declaration at ¶ 1137 Distributions during the one-year period alone were in excess of $250 million. See SOFA at p. 355.38 McCormick Declaration at ¶ 11(c); see supra n. 1.
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policy, as well as to any insurance policy covering the possible legal malpractice claims.39
32. The Debtor has failed to respond to questions of fact and law related to the basis
of the PCP, including with respect to any purported legal basis for the requested return of 2011
and 2012 pension plan payments previously made to retirees.40
33. Management and those who had guaranteed compensation that is, those who will
most benefit from the Proposed PCP Injunction are not distinguished from the lesser paid
partners who were not involved, either formally or informally, with the Firm’s Management.
These lesser paid partners, therefore, presumably receive little benefit from the Proposed PCP
Injunction due to the lack of third party exposure. Retirees and partners who left the Firm before
the PCP Start Date are asked to contribute, but will receive no benefit from the Proposed PCP
Injunction inasmuch as they could not be targets of tort or fraudulent transfer claims brought by
third-parties.41 Indeed, impecunious spouses of deceased former partners, and terminally ill and
superannuated former partners, who served the Firm long and faithfully, are not only being
deprived of their pensions, which they depended upon for daily essentials; but they are also
being frightened and intimidated into throwing what could be a substantial portion of their
remaining retirement savings into the PCP. They are told by Debtor’s bankruptcy counsel that
they must do so or be sued.
34. 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 (the “401k
39 See “In Dewey talks, a surprise $50 mln insurance policy emerges” attached hereto as Exhibit G-3 andavailable at : http://in.reuters.com/article/2012/07/20/dewey-insurance-idINL2E8IKAM720120720; see also
McCormick Declaration at ¶ 11(f).40 Id. at ¶ 11(g).41 See id. at ¶ 11(c).
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Plan”).42 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.43 In July 2012, while
the accounts remained unavailable for distribution, the Debtor imposed a 1% administrative fee,
which was deducted from each account.44
35. The Debtor attempted to justify this unnoticed deduction by mailing a letter
dated June 29, 2012, which advised the participants of the deduction of the 1% fee from their
401k Plan accounts, but the participants did not receive the letter until after the imposition of
this administrative fee, and until after the freezing of each participants 401k Plan.45
36. 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 (“ERISA”).
ARGUMENT
A. CAUSE EXISTS TO APPOINT AN INDEPENDENT THIRD-PARTY TO SERVEAS TRUSTEE PURSUANT TO § 1104(a)(1)
Although the Bankruptcy Code generally permits chapter 11 debtors to remain in control
of their assets and business operations,46 when a debtor in possession is incapable or unwilling to
42 See Declaration of Lawrence G. Acker in Support of the Motion attached hereto as Exhibit E (the “Acker Declaration”) at ¶ 7; Declaration of Andrew J. Fawbush in Support of the Motion attached hereto as Exhibit F(the “Fawbush Declaration”) at ¶ 3.
43 Acker Declaration at ¶ 4-5; Fawbush Declaration at ¶ 3.44 Acker Declaration at ¶ 5.45 Fawbush Declaration at ¶ 3.46 See In re Adelphia Commc’ns Corp., 336 B.R. 610, 655 (Bankr. S.D.N.Y. 2006).
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perform its statutory duties or “cause” otherwise exists, a chapter 11 trustee must be appointed.47
Under § 1104(a)(1), “cause” to appoint a trustee is a factual determination48 which includes, but
is not limited to,49 management’s “fraud, dishonesty, incompetence, or gross mismanagement of
the affairs of the debtor[.]”50
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
47 11 U.S.C. § 1104(a)(1); see, e.g., In re Ionosphere Clubs, Inc., 113 B.R. 164, 169 (Bankr. S.D.N.Y.1990)(appointing a trustee when the debtor grossly mismanaged its estate); In re Oklahoma Refining Co., 838F.2d 1133, 1136 (10th Cir. 1988) (affirming appointment of a trustee for cause where the company was not inoperation); In re Bonded Mailings, 20 B.R. 781, 786 (Bankr. E.D.N.Y. 1982) (appointing a trustee for causewhen the management of the debtor had engaged in fraudulent conduct).
48 See, e.g., In re Sharon Steel Corp., 871 F.2d 1217, 1226 (3rd Cir. 1989) (the question of whether to appoint atrustee in a chapter 11 case is decided on a case by case basis).
49 See In re Marvel Entertainment Group, Inc., 140 F.3d 463, 472 (3d Cir. 1998) (stating that “the language of §1104(a)(1) does not promulgate an exclusive list of causes for which a trustee must be appointed . . . .”); see
also 11 U.S.C. §§ 102(3) (rules of construction on word “includes) & 1104(a) (cause “includes” the groundscited).
50 Id. § 1104(a)(1). Courts in the Second Circuit have appointed chapter 11 trustees in situations where: (1)debtor’s managing employees could not be “depended upon to carry out the fiduciary responsibilities of atrustee[,]” In re U.S. Communications of Westchester, Inc., 123 B.R. 491, 495 (Bankr. S.D.N.Y. 1991); (2)debtor’s gross mismanagement was evidenced by inability to formulate a business plan and continuingenormous operating losses, see Ionosphere, 113 B.R. 164; (3) debtor’s management violated fiduciary duties
based on pre-petition conduct and not disclosing material information to creditors and the court, see In re V.Savino Oil & Heating Co., Inc., 99 B.R. 518 (Bankr. E.D.N.Y. 1989); (4) debtor’s directors had conflicts of interest that may have prejudiced the interests of creditors, see In re McCorhill Publishing, Inc., 73 B.R. 1013(Bankr. S.D.N.Y. 1987); and (5) debtor engaged in dishonest conduct by failing to appropriately discloserelevant financial information in its schedules, see In re Deena Packaging Industries, Inc., 29 B.R. 705 (Bankr.S.D.N.Y. 1983).
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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. The Ad Hoc Committee
requests that the Court find that “cause” exists to appoint a trustee under Section 1104(a)(1).
1. Gross Mismanagement Continues
Given the facts that have come to light, including the ongoing criminal investigation of
Davis, the mismanagement of the Debtor prior to the Petition Date is beyond dispute. However,
this egregious mismanagement did not end with the removal of Davis. Even after (i) the
formation of the Office of the Chairman which divested Davis of his sole Chairmanship, (ii) the
engagement of bankruptcy counsel, (iii) the divesting of Davis from all leadership positions, and
(iv) the formation of the current Wind-Down Committee, significant transfers continued to be
made to partners, including possibly to Davis, DiCarmine, Sanders, partners named to the Office
of the Chairman, and Horvath.51 These transfers were occurring despite the fact that
approximately 20% of the Debtor’s equity partners had resigned or left the Firm and more were
continuing to resign. And these transfers were made despite the fact that creditors of the Firm,
including the 1990 LeBoeuf Retirees, received nothing.52
Furthermore, based upon the facts known to the Ad Hoc Committee at this time, it
appears that the Debtor’s management continues to engage in questionable self-dealing through
the PCP (see discussion below).53 This outright mismanagement is further evidenced by the
Debtor’s unannounced withdrawals from the 401k Plan, and action currently under investigation
51 See Exhibit D at ¶¶ 5-6.52 See supra at ¶¶ 6 & 8-11.53 See supra at ¶¶ 27-30.
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by the Department of Labor.54 As a result of this latter 401k Plan debacle, retirees who left their
401k plans in the control of the Firm have been denied access to their funds (even if absent 2011-
2012 401k Plan contributions) and have had 1% of their funds taken by the Debtor. This
maneuver is apparently for the purpose of paying for the Debtor’s defense with regard to alleged
improprieties in the funding of the 401k Plan in 2011.55 This egregious situation further
exacerbates the plight of certain retirees, who now, in addition to not receiving their retiree
payments, cannot even access their own 401k Plan funds.
Given the pre-petition and post-petition mismanagement of the Debtor, “cause” exists for
the appointment of a trustee. As discussed below, “cause” is even more apparent when the
serious conflicts of interest of Debtor’s current management are considered.56
2. Debtor’s Current Management is Incapable of Exercising its FiduciaryDuties
A debtor in possession owes fiduciary duties to the bankruptcy estate,57 including “a duty
of care to protect the assets, a duty of loyalty and a duty of impartiality.” 58 Encompassed within
these duties is the statutory duty under § 1107(a) of the Bankruptcy Code to perform the duties
of a chapter 11 trustee under § 1106, including the duty of protecting and conserving property of
the estate for the benefit of creditors, and from refraining from acting in a manner that potentially
damages the estate.59 To fulfill these duties, a debtor in possession must avoid self-dealing,
54 See supra at ¶ 34.55 See supra at ¶¶ 34-36.56 The Ad Hoc Committee notes that it has received limited information as to the Debtor and its management and,
therefore, it reserves all rights to supplement the allegations contained herein as it discovers further informationrelated to the Debtor’s management.
57 See Smart World Techs., LLC v. Juno Online Servs., Inc. (In re Smart World Techs., LLC), 423 F.3d 166, 175(2d Cir. 2005) (stating that a debtor-in-possession's “duty to wisely manage the estate's legal claims is implicitin the debtor's role as the estate’s only fiduciary”).
58 In re Eurospark Industries, Inc., 424 B.R. 621, 627 (Bankr. E.D.N.Y. 2010) (internal quotations omitted).59 Ionosphere, 113 B.R. at 169.
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conflicts of interest and the appearance of impropriety.60 Thus, when the principals of a debtor
have a financial interest in conflict with the interests of the debtor, “a trustee should be appointed
in the best interests of creditors and all parties in interest in order to investigate the financial
affairs of the debtor.”61 For the reasons set forth below, Debtor’s current management is not
capable of fulfilling its statutory and fiduciary duties because of significant, actual conflicts of
interest creating, at a minimum, an appearance of impropriety. These conflicts of interest are an
independent basis for “cause” for appointing a trustee.
a. Conflicts of Interest of Meyer and Horvath
Since the Petition Date, the business of the Debtor has ended.62
Consequently, the
primary function of current management is to maximize the value of the Debtor’s assets for the
benefit of creditors, a significant portion of which are claims based on pre-petition
mismanagement and avoidance law. Yet, other than the CRO,63 the Debtor’s management—
Meyer and Horvath, who presumably direct the CRO—either participated in, or were appointed
by, Debtor’s pre-petition Management and, therefore, are themselves targets of the very claims
that require investigation and pursuit for the benefit of creditors. This overwhelming real conflict
of interest makes it impossible for Meyer and Horvath to act as fiduciaries of the Debtor’s estate.
Such a situation provides further independent “cause” for the appointment of a trustee.
60 Id.
61 McCorhill , 73 B.R. at 1017.62 Indeed, the Debtor has no business to operate and is suffering a “continuing loss to or diminution of the estate”
in satisfaction of the first prong of “cause” for mandatory conversion under 11 U.S.C. § 1112 (b)(4)(A). See
Loop Corp. v. United States Trustee, 379 F.3d 511, 515 (8th Cir. 2004) (affirming conversion of debtor’s casewhere “the ongoing expenses associated with administering the estate and attempting to negotiate a confirmable
plan constituted continuing loss to or diminution of the estate and, second, the debtors were liquidating andtherefore had no likelihood of rehabilitation.”) (internal quotations omitted); In re Denrose Diamond , 49 B.R.754, 757 (Bankr. S.D.N.Y. 1985) (stating that diminution of the estate sufficient to motivate conversion existswhere a secured creditor’s collateral is depreciating and there are no prospects to produce income).
63 But see infra at Section A(2)(b).
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Meyer was General Counsel prior to the Petition Date and remains in this role. Thus, she
is a potential target both under the Debtor’s mismanagement insurance policy,64 and, given the
allegations surrounding partnership irregularities, under its malpractice policy as well. Horvath
was also a member of Management pre-petition. Although not entirely known to the Ad Hoc
Committee given the Debtor’s disclosures to date,65 Meyer and Horvath undoubtedly received
pre-petition transfers that may be avoidable. Therefore, Meyer and Horvath necessarily have a
tainted interest going forward and cannot assess the interests of the estate objectively.66
b. Taint of Meyer and Horvath Extends to the CRO
The taint of pre-petition Management and the resulting conflicts of Meyer and Horvath
extend to the CRO because there is no non-conflicted, disinterested person supervising and
directing the CRO and its counsel. Without disinterested management, the CRO is not, and
cannot be, truly independent. An independent officer of the Court should be appointed to avoid
any issue of impropriety and impairment of integrity of the bankruptcy system in this case.67
64 The Debtor recently disclosed a $50 million mismanagement insurance policy. See Exhibit G-3.65 The Debtor’s failure to disclose the names of the partners filing in the SOFA (i) does not comply with the
disclosure required in the SOFA, 11 U.S.C. § 521(a) and Fed. R. Bankr. P. 1007; (ii) does not meet therequirements of Fed. R. Bankr. P. 9037 if the Debtor believes it has a right to redact information, (iii) isinconsistent with the way this information has been treated in other law firm bankruptcies ( see In re Coudert
Brothers, LLP , Case No. 06-12226 (Bankr. S.D.N.Y.) [Docket No. 3]; In re Howrey LLP , Case No. 11-31376(Bankr. N.D. Ca.) [Docket No. 132]); and (iv) most importantly, does not allow the Court or parties in interestto assess conflicts of interest (as appear probable to exist with Meyer and Horvath) or evaluate potential causesof action against individual partners, which are important assets of the estate.
66 See e.g., In re Microwave Prods. of Am., Inc., 102 B.R. 666, 676 (Bankr. W.D. Tenn. 1989) (trustee appointed
where debtor was not in a “strong position” to pursue possible claims due to a conflict of interest and fraudulenttransfers, and “a trustee would likely be able to investigate claims that could result in additional sums of moneycoming into the estate”); In re L.S. Good & Co., 8 B.R. 312, 315 (Bankr. W. Va. 1980) (appointing trusteeunder § 1104(a)(2) where “[t]he magnitude of the number of intercompany transactions places currentmanagement [of the debtor] in a position of having grave potential conflicts of interest and the presumptionarises that the current management of [the debtor] will be unable to make the impartial investigations anddecisions demanded in evaluating and pursuing inter-company claims on behalf of [the debtor].”)
67 Bankruptcy counsel was hired by pre-petition Management as well, and has significant, well-knownconnections with Martin Bienenstock, who was a member of the Office of the Chairman as of April 1, 2012..See In re Enron Creditors Recovery Corp. et al., Case No. 01-16034 (Bankr. S.D.N.Y.) (Togut conflictscounsel); In re Ames Department Stores, Inc., Case No. 01-42217 (Bankr. S.D.N.Y.) (same).
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c. Specific Issues Creating an Appearance of Impropriety
i. Admitted Failure to Investigate
This case was filed under the shadow of an investigation by the Manhattan District
Attorney’s Office, amid numerous allegations of mismanagement and worse. To the best of the
Ad Hoc Committee’s information and belief, the Debtor has never appointed a disinterested
committee or other person to investigate the facts. In this vein, the Debtor’s current management
admits in conjunction with the proposed PCP that it has not conducted any analysis of the causes
of action that may be available to the estate against Debtor’s former management or of the value
of such claims.68
ii. The PCP
The PCP, and the admissions of the Debtor related thereto, are evidence that at a
minimum post-petition management is not performing its function of maximizing the estate for
creditors, all in breach of its statutory and fiduciary duties as a debtor in possession, and at the
worst are evidence of possible self-dealing. Based on what has been disclosed to the Ad Hoc
Committee to date, post-petition management has neither applied the factors required for
approval of settlements under Federal Rule of Bankruptcy Procedure 9019 (“Rule 9019”)in
formulating the PCP nor does the proposed PCP meet those required factors for approval.69
The PCP is based on recovery of monies transferred by the Debtor to partners and non-
partners as of the 2011 PCP Start Date through the Petition Date in 2012.70 Almost 400 of the
68 See McCormick Declaration at ¶ 11(c).69 See In re Iridium Operating LLC , 478 F.3d 452, 462 (2d Cir. 2007) (stating the factors courts assess when
evaluating a proposed Rule 9019 settlement). Even if no party in interest objects to a Rule 9019 settlement, theCourt has an independent duty to insure that the requirements for approving settlements under Rule 9019 aremet. See id. at n. 18.
70 See supra at ¶ 23.
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700 persons from whom recovery is sought left the Firm before the PCP Start Date.71 While
service on the Dewey Executive Committee requires a higher contribution, the PCP does not
address either the differing potential liability of these partners,72 nor the numerous potential tort
claims against partners who formally or informally managed or controlled the Firm.
Significantly, the PCP contains the Proposed PCP Injunction which, among other things, would
provide those agreeing to make contributions (which, other than the Dewey Executive
Committee “premium,” are based solely on a percentage return (not to exceed 30%) of only the
distributions received in 2011 and 2012 with a $3.5 million cap) with a broad release from
claims of the estate, and an injunction preventing creditors, including the 1990 LeBoeuf Retirees,
from pursing their own individual claims against these persons. This is significant in light of the
fact that the release would cover pre-petition Management and others who are insiders (other
than Davis), as well as members of pre-petition Management who retain post-petition control of
the Debtor (and who will make no PCP contribution in exchange for this broad protection).73
In conjunction with the PCP, the Debtor has failed to respond to issues of fact and law as
to the basis of the PCP, including the basis for including retirees as persons who are asked to
contribute to the PCP.74 In fact, the Debtors have made many admissions making it clear that the
PCP is suspect. The following are some examples:
The PCP, if wholly accepted, would recover up to $90.4 million for the estate based on
transfers made after the January 2011 PCP Start Date. Yet, during the period from May 28,
2011 to the Petition Date alone, the Debtor made transfers of $250 million to its partners.75
71 See supra at ¶ 24.72 See supra at n. 31.73 See supra at ¶ 27.74 See supra at ¶ 32.75 See Exhibit D at ¶ 3.
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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.76 Thus, there is no
basis for the PCP Start Date set by the Debtor.
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.77
Thus, large transfers that were purportedly made in 2010 to partners managing or controlling
the Firm and those with guaranteed compensation packages are not being disclosed and are
excluded from consideration for recovery. This is so despite the fact that these transfers were
made within the Two-Year Avoidance Period and may be recoverable pursuant to
§ 548(a)(1)(B)(i) and (ii)(IV) of the Bankruptcy Code—dealing with compensation paid to
insiders without reasonably equivalent value—without regard to insolvency.78
It appears that the Debtors have not attempted to value potential tort claims that creditors,
including Ad Hoc Committee members, may have against pre-petition Management or even
current management—all of which the Proposed PCP Injunction would release. In fact, the
Debtor admits that, except for the premium to be paid by the Dewey Executive Committee, it
has not accounted for the value of such potential tort claims. 79 Although there is currently no
way to know, it does not appear that the Dewey Executive Committee premium adequately
compensates the estate for existing claims that may be released.
The Debtor does not appear to have considered the effect of the PCP on coverage under
existing insurance policies. As a result, there may be a risk that a release of members of the
Debtor’s pre-petition Management from liability, as proposed in the PCP, will jeopardize
76 See McCormick Declaration at ¶ 11(c-d).77 See supra at ¶ 30.78 11 U.S.C. § 548(a)(1)(B)(ii)(IV); see also In re TransTexas Gas Corp., 597 F.3d 298, 305 (5th Cir. 2010).79 See supra at ¶ 30.
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access to a $50 million “D&O” insurance policy for mismanagement of the Firm as well as to
any insurance policy with respect to the possible legal malpractice against the Firm that
current or former partners of the Firm, including General Counsel, may have perpetrated.80
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.
These examples show that the PCP is not well-grounded in fact or law. The PCP is a
hasty and “desperate” attempt by insiders to protect themselves and other insiders at the expense
of creditors, including the 1990 LeBoeuf Retirees.81 The PCP and the Debtor’s admissions thus
show that at a minimum post-petition management is not performing its function of maximizing
the estate for creditors consistent with its statutory and fiduciary duties as a debtor in possession.
As a result of the pre-petition Management’s mismanagement, the taint of current management
and the structure of the proposed PCP, including the Proposed PCP Injunction, there is at the
very least an appearance of impropriety that calls for the appointment of a trustee.
iii. Need for Investigation
As discussed above, debtors in possession have duties that overlap those of a chapter 11
trustee.82 Yet, there are some exceptions, including certain investigative and reporting duties
assigned only to trustees.83
If there ever was a case requiring independent investigating and
80 See supra at ¶¶ 14-16.81 See supra n.1.82 See 11 U.S.C. §§ 1106(a)(1), (5)-(8) & 1107(a).83 Specifically, a chapter 11 trustee must: :
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reporting, it is this case. Given the serious alleged misconduct of the pre-petition Management,
the pending criminal investigation, and the unwillingness of the Debtor’s management (which
overlaps the pre-petition Management) to investigate, disclose or pursue causes of action
available to the estate, it is imperative that a chapter 11 trustee be appointed.
B. APPOINTMENT OF A TRUSTEE IS BENEFICIAL TO ALL PARTIES ININTEREST
Even without regard to a court’s assessment of “cause” under § 1104(a)(1), a trustee must
be appointed under § 1104(a)(2) when it is in the best interests of creditors and the estate.84
When considering whether appointment of a trustee is in the best interests of creditors and the
estate, courts look to the practical realities of the case and typically consider numerous factors,
including the following:
the trustworthiness of the debtor;
the debtor in possession’s past and present performance and prospects for the debtor’srehabilitation;
the confidence – or lack thereof – of the business community and of creditors in present management; and
the benefits derived by the appointment of a trustee, balanced against the cost of
appointment.
85
Here, all four factors weigh heavily in favor of appointing a chapter 11 trustee.
1. The Debtor has Demonstrated That it is not Trustworthy
A debtor’s failure to investigate possible pre-petition avoidable transfers is conclusive
evidence of detriment to the estate and of an inability to trust the debtor to protect the interests
(3) except to the extent that the court orders otherwise, investigate the acts, conduct, assets, liabilities, andfinancial condition of the debtor, the operation of the debtor’s business . . ., and any other matter relevant to thecase or to the formulation of a plan;(4) as soon as practicable: (A) file a statement of any investigation conducted under paragraph (3) of thissubsection, including any fact ascertained pertaining to fraud, dishonesty, incompetence, misconduct,mismanagement, or irregularity in the management of the affairs of the debtor, or to a cause of action availableto the estate; and (B) transmit a copy or a summary of any such statement to any creditors’ committee or equitysecurity holders’ committee, to any indenture trustee, and to such other entity as the court designates[.].11 U.S.C. § 1106(a)(3)-(4); see id. § 1107(a) (stating debtors in possession do not share these duties).
84 See e.g., Ionosphere, 113 B.R. at 168; see also Sharon Steel , 871 F.2d at 1226; Adelphia, 336 B.R. at 658.85 Ionosphere, 113 B.R. at 168.
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of the estate.86 Here, Debtor’s management has demonstrated time and time again that it cannot
be trusted. There has been no disclosure of material facts, including relevant financial
information, no disclosure of payments made to certain partners that could be subject to
potential claw back litigation (including payments made in 2010 during the Two-Year
Avoidance Period), and no evidence of any identification or evaluation of the causes of action
held by the estate which could lead to recoveries inuring to the benefit of all creditors. Indeed,
creditors and even partner participants are asked to buy into the PCP based on completely
inadequate disclosure.87 Further, the “no fault” aspect of the PCP not only leaves significant
value on the table that a true identification of potential causes of action and analysis of Rule
9019 factors would uncover, but it in fact favors those at “fault” at the expense of those
“without fault” who are subject only to statutory “clawback” claims. The inappropriate
treatment of the 401k plans also demonstrates untrustworthiness of the Debtor’s current
management, including fees taken without proper notice and without real justification (thus
passing estate costs off to retirees and other 401k participants), and the unilateral freezing of
retiree accounts at a time when, because of the Firm’s breach of the 1990 LeBoeuf Retirement
Plan, access to those funds is even more important.
There can be no trust of those running the Debtor given their inherent conflicts and (i)
known pre-petition mismanagement and their connection thereto, (ii) the historical lack of
disclosure that continues to this day, (iii) the additional unknown but suspected mismanagement
and lack of investigation, (iv) the treatment of the 401k Plan, and (v) the PCP protection of
higher paid and potentially liable partners who controlled the Firm. Indeed, if there is any hope
86 See, e.g., In re Evans, 48 B.R. 46, 48-49 (Bankr. W.D. Tex. 1985).87 Indeed, given the comprehensiveness of the proposed PCP and the fact that it is admitted by the Debtor that it
cannot be implemented except in a plan of reorganization, it is important to note the limited disclosure given isfar less than what would be required under 11 U.S.C. § 1125.
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of a global settlement, that will only be possible with an independent party in control who ends
the Debtor’s current Management’s continuing policy of non-disclosure and who does the work
required by Rule 9019 as a predicate for any settlement.
2. The Debtor Will Not be Reorganized
The appointment of a trustee is in the best interests of creditors where no plan of
reorganization has been or can be proposed and all that remains is avoidance litigation. 88 Here,
the Debtor is not a going-concern, and the primary function of current management is liquidating
assets of the estate, including by prosecuting the estate’s claims. This function requires
absolutely no insider knowledge, and since most avoidance actions would be brought against
insiders, would most effectively be performed by an independent trustee.
3. Lack of Confidence
As discussed in detail above, the significant, actual conflicts of interest of Debtor’s
management make it impossible for it to perform its statutory and fiduciary duties in this case
and create an appearance of impropriety. Given these facts, there can be no confidence in
Debtor’s management and the appointment of a trustee would be in the best interests of creditors.
4. Benefits Derived by Trustee Appointment Outweigh Additional Costs
“[T]he court may order appointment only if the protection afforded by a trustee would not
be disproportionately higher than the value of the protection afforded.”89 Here, as discussed, the
Debtor is not acting in a manner that indicates that it is maximizing the assets of the estate. Thus,
the protection afforded by a trustee would not be disproportionately higher than the value of the
88 See Eurospark , 424 B.R. at 632 (citing In re Fiesta Homes of Ga., Inc., 125 B.R. 321, 326 (S.D. Ga. 1990)(appointment of a trustee, by way of conversion to chapter 7, appropriate where case was “a liquidation caseand litigation of the preferences is essentially all that is left to do, [and] there is no need to balance the proprietyof the appointment of a trustee with the present management's ability to run the company”)). The presence of this factor satisfies the second prong of “cause” for mandatory conversion found in 11 U.S.C. § 1112(b)(4)(A).See supra n. 62.
89 H.Rep. No. 95-595, 95 Cong. 1st Sess. (1977), U.S. Code Cong. & Admin. News. p. 5787.
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protection afforded. Furthermore, given the significant, actual conflicts of interest of Debtor’s
management, there is little trust of Debtor’s management which likely will result in greater
litigation costs. Appointment of a trustee not only will mitigate such costs, but it will serve to
protect the integrity of the bankruptcy system.
C. APPOINTMENT OF AN EXAMINER IS REQUIRED PURSUANT TO §1104(c)
The Debtor’s list of Top Twenty Unsecured Creditors filed with its petition lists over
$90,000,000 in unsecured debts, which significantly exceeds the $5,000,000 minimum threshold
for mandatory appointment of an examiner pursuant to § 1104(c)(2). The Court of Appeals for
the Sixth Circuit has stated that § 1104(c)(2) “plainly means that the bankruptcy court ‘shall’
order the appointment of an examiner when the total fixed, liquidated, unsecured debt exceeds $5
million, if [a party in interest] requests one.”90 Because the Debtor’s unsecured debts exceed the
$5,000,000 minimum, an examiner must be appointed.
Furthermore, the although the express language § 1104(c)(2) mandates the appointment
of an examiner in this case, it is worth noting that for the same reasons discussed above
regarding the appointment of a trustee, the appointment of examiner is appropriate under
§ 1104(c)(1) as being in the best interests of creditors.
CONCLUSION
WHEREFORE, based on the foregoing, the Ad Hoc Committee respectfully requests that
this Court enter an Order granting the Motion and appointing either a trustee or an examiner.
90 Morgenstern v. Revco D.S., Inc. (In re Revco D.S., Inc.), 898 F.2d 498, 500-01 (6th Cir. 1990). See also Marvel Entertainment , 140 F.3d at 472, 474 (appointment of examiner required where conditions of § 1104(a) are met);Sharon Steel , 871 F.2d at 1226 (same); Loral Stockholders Protective Comm. v. Loral Space &
Communications, Ltd. (In re Loral Space & Communications, Ltd.), No. 04 Civ. 8645RPP, 2004 WL 2979785,at *5 (S.D.N.Y. Dec. 23, 2004) (court has “no discretion” to deny appointment of an examiner).
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Dated: August 8, 2012
DORSEY & WHITNEY LLP
/s/ Eric Lopez Schnabel___________________ Eric Lopez Schnabel (ES5553)Jessica D. Mikhailevich (JM1043)51 W. 52nd Street New York, New York 10019Telephone: (212) 415-9200Facsimile: (212) 953-7201E-mail: [email protected]@dorsey.com
-and-
Annette Jarvis (Utah Bar No. 01649)Peggy Hunt (Utah Bar No. 06060)Kearns Building136 South Main Street, Suite 1000Salt Lake City, UT 84101-1655Telephone: (801) 933-8933Facsimile: (801) 933-7373E-mail: [email protected] [email protected]
Counsel to Ad Hoc Committee of Retired Partnersof LeBoeuf, Lamb, Leiby & MacRae
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