Dewey and LeBoeuf Bankruptcy A One-Off, But Still...

The New York law firm Dewey & LeBoeuf filed for bankruptcy yesterday, ending a long drama over the fate of a law firm that tried to use size, debt and expensive, high-profile partners to escape the increasingly challenging economics of big law practices.

Dewey & LeBoeuf filed a 12-page bankruptcy petition in New York on Memorial Day listing 5,000 to 10,000 creditors and more than $100 million in debt. In accompanying filings it said the firm created by the 2007 merger of Dewey Ballantine and LeBouef, Lamb Greene and MacCrae was once one of the largest law firms on earth, with 1,300 attorneys in 12 nations and more than 5,000 clients. Unfortunately, the firm said, it was “formed at the onset of one of the worst economic downturns in U.S. history,” and saddled with expensive pay agreements with high-profile new partners “based on expectations and projections that, in many cases, were not ultimately met.”

The firm listed $225 million in debt, including $150 million in notes it issued in 2010 to try and consolidate various loans.

The largest unsecured creditor is the Pension Benefit Guaranty Corp., the federal agency that backstops private pension plans when the sponsors can no longer pay them. On May 10 Reuters reported that the government moved to seize the law firm’s retirement plans, which Pensions & Investmentsreported had about $150 million in assets.

Other creditors, like the pension plans, represent a roll of costs that big law firms are struggling to maintain as clients start to demand lower rates, substitute in-house lawyers for outside firms, and even hire auditors to examine legal bills. The No. 2 creditor was Dewey & LeBouef’s landlord, at $3.8 million, followed by Thomson Reuters, the legal research provider, at $2.6 million. Reed Elsevier‘sLexisNexis unit also is owed $1.7 million.

Dewey & LeBoeuf failed for the same reason so many big investment banks foundered in the financial crisis: Faced with deteriorating economic conditions in the only business it knows, the firm tried to fight back by levering up, getting bigger, and paying more to recruit rainmaker partners who would bring profitable clients its way. But the strategy failed as the firm couldn’t bill enough to cover all the fixed costs it added to its operations. In its final months it cut back partner distributions by $100 million, triggering an exodus of lawyers accustomed to earning $1 million a year or more.

“It reinforces strongly the belief most people have now — that law firms are not indestructible,” saidStephen Poor, the longtime managing partner ofSeyfarth Shaw, a Chicago firm that has increased its use of low-cost offshore legal processing services and industrial-style business analysis to maintain profitability. “It’s a highly competitive business and if you’re just assuming that everything is going to consistently get better, you’re going to make judgments about the business  — levels of debt, buildouts, guarantees — based on the premise the firm is indestructible.”

I’ve written about the new-style law firms are springing up to take business from the Dewey & LeBouefs of the world, including LegalZoom, which filed for an initial stock offering earlier this year; Axiom Law, which dispenses with expensive office space and partner contracts; Google-financed RocketLawyer; and the behind-the-scenes battle over bar association rules that prevent non-lawyers from drafting wills and other simple, but profitable, documents for consumers.

Already these new ventures are making life hard for solo practitioners. But corporate clients are squeezing the top end of the business, by hiring consultants to analyze their bills and challenging charges that were once routine, such as rent for conference rooms and $250-an-hour billing for associates fresh out of law school. It is the margin between what those hardworking associates earn and what the firm charges — known as leverage in the trade — that helps pay $1 million-a-year distributions to the partners.

Dewey & LeBoeuf, in other court filings, said it is down to 150 employees and mostly finance and administrative staff. Those employees were entitled to three to five weeks of paid time off and were running up $89,000 a month in medical insurance costs, the law firm said, or a little less than $600 a month per employee. The firm said it tried to find a merger partner earlier this year as its own partners fled (and unnamed former employees sicced the ManhattanDistrict Attorney on former Chairman Steven Davis for alleged criminal wrongdoing).

It managed to sell some of its assets including a Warasaw office to Greenberg Traurig for $6 million, but the outflow of partners and cash was too much to sustain.

Dewey & LeBoeuf’s demise doesn’t mean the end of 1,000-attorney law firms, but it shows the risks in taking that model and levering it up. Just as Bear Stearns executives thought they could preserve their paychecks by increasing leverage to 30-t0-1, law firms that take on debt and hire expensive new partners to try and drive up revenue will discover they can’t escape deteriorating firm economics that way.

“This industry has changed,” said Poor, of Seyfarth Shaw. “You now have whole range of competition, not just from megafirms, but virtual firms, legal process outsourcers, and midsized regional firms.  Buyers of legal services have more choices.”

Full article can be seen here:  http://www.forbes.com/sites/danielfisher/2012/05/29/dewey-leboeuf-bankruptcy-a-one-off-but-still/2/