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The Pathology of Failed Law Firms

By Stephen M. 'Pete' Peterson

As of this writing, Dewey & LeBoeuf LLP filed for bankruptcy protection on May 28, 2012 and is closing its doors. After trying to cheat death by running through an elixir of mergers, lateral hires, and guaranteed contracts, it was not able to sustain viability as an international law firm that once boasted more than 1,300 lawyers in 12 countries. It failed to consider the consequences of its growth, visions of Bali Ha'i, and incompatible cultures. Overstated financial results didn't help matters either. (Dewey says that its numbers, which were restated by The Am Law Daily, were and are accurate and are due to methodological differences.) From January through April, the firm has lost over one-third of its 300 partners amid a confluence of issues including a mounting debt crisis. As a last ditch effort Dewey tried and failed to find a merger partner. Most of the remaining partners left in May.

As of the filing date, Dewey's Statement of Assets and Liabilities revealed a negative net-worth of $52 million. This figure does not include “fee” accounts receivable (which rapidly declines in value after the filing); work-in-progress (that will need to be collected by the bankruptcy trustee from other law firms); or contingent liabilities (e.g., facility leases). One can easily see that the partners will be subject to clawbacks, and an experienced bankruptcy trustee will attempt to clawback partner distributions from not only 2011 but also 2010 and earlier years.

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