When Your Law Firm Goes Bust

By Quentin Fottrell

Law firms do go bust. And whether it’s a big international practice like New York-based Dewey & LeBoeuf or a small local firm, experts say clients need to act swiftly to protect their interests.

Dewey & LeBoeuf LLP filed for Chapter 11 bankruptcy protection in Manhattan Monday, making it one of the largest law-firm failures in U.S. history. The firm owes some $315 million to over 5,000 creditors, including secured lenders, landlords, vendors and employees, according to court papers. Dewey & LeBoeuf did not respond to requests for comment

The news follows several other recent high-profile collapses, including Heller Ehrman LLP in 2008, which filed for bankruptcy protection in 2008, and Coudert Brothers LLP in 2006. And although Dewey’s clients are mainly corporate, the procedures to follow after a bankruptcy hold true at smaller firms, says Esther DuVal, managing director at business management and accounting provider CBIZ MHM in New York. “Whether it’s a big corporate practice like Dewey & LeBoeuf or a small five-man firm in your local town, the client’s response to any bankruptcy should be the same,” she says.

In such instances, clients should request their files immediately and sign the releases to have their cases transferred to a new firm if the existing company is no longer in operation, experts say. It’s in the client’s interests to act as soon as the company files for bankruptcy as the firm will be inundated with requests from clients and creditors, experts say. Whether a client has 12 months to complete depositions or has a court date that’s just around the corner, they will all want to have their questions answered first, says Barry Covert, a lawyer based in Buffalo, New York. Dewey & LeBoeuf said in a statement Monday it would ask about 90 employees to remain on staff to assist in the wind-down of the firm, but Covert says smaller firms may not always have the resources to deal with the deluge of requests from clients. (Dewey & LeBoeuf did not respond to requests for comment.) “The bankruptcy of a law firm is similar to a run on a bank,” he says. “The firm will be swamped by frightened clients wanting to know what’s happening to their case.”

Unspent retainers belong to clients not the company, lawyers say, but they may have to get in line behind secured creditors if the company’s assets are frozen. “Law firms have an ethical obligation to separate retainers from other money owed to creditors,” Covert says. For instance, if the client paid a $50,000 retainer and has been billed for just $10,000 worth of service, the law firm is required to return $40,000 under American Bar Association’s rules. But it may not always be worthwhile pursuing a retainer through the courts, says New York-based lawyer Daniel Gershburg. “What’s it going to cost to have your legal claim recognized?” he says. “Do you want to get involved in a massive amount of litigation to get your money back?”

That said, clients can take preemptive actions if they suspect their law firm is in trouble, lawyers say. This is imperative for those whose court date is pending, Covert says. “It’s tough to predict if your firm is going bust,” Gershburg says, “but not impossible.”Among the warning signs: a glut of high-profile clients leaving within a small period of time or a series of big-name lawyers being poached by rival firms, he says. By the end of May, around two-thirds of Dewey & LeBoeuf’s 320 partners had left.

It looks like plaintiffs looking for their payout may have to think long and hard on how bad they really want the money. Bankruptcy slows everything down and rearranges the order of who gets paid first. However if plaintiffs feel like they are entitled to payment and will wait out the process, they should pursue the case.

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