NEW YORK -- On November 25, 2014, John Altorelli, a former partner of Dewey & LeBoeuf LLP, made the difficult decision to file for bankruptcy after weeks of negotiations were unable to produce a settlement with the liquidating trustee of the Dewey & LeBoeuf Liquidation Trust in connection with a clawback litigation brought against him in Dewey’s bankruptcy case. His filing ends his almost three-year fight against a draconian position urged by the Dewey liquidating trustee – that partners in a New York LLP are strictly liable to repay every cent of compensation they earn during a period of the firm’s alleged insolvency.
John is both a hero and a victim in the Dewey tragedy. There are few, if any, Dewey partners who did more to benefit Dewey and its creditors. Over the five years preceding Dewey’s bankruptcy filing, John, and the team of attorneys he oversaw, generated nearly $100 million of fees for Dewey and its creditors. When he learned of the firm’s struggles, John did not abandon the ship. Instead, he voluntarily cut his pay by 75 percent and offered to contribute further capital to meet the firm’s cash flow needs. John remained nearly until the end, and he made sure to collect his outstanding receivables for the estate. He established a fund with his own money to pay for medical expenses and other emergency living expenses for the employees of Dewey & LeBoeuf who were terminated with little notice and without health insurance. Despite the turmoil that the Dewey demise caused him, he set up a network and worked tirelessly for months to find jobs for former Dewey employees.
At the same time, perhaps no one suffered more financial loss from the mismanagement and alleged crimes of Dewey’s leaders who misled John about the firm’s finances, and failed to pay him nearly half of the fixed compensation that he was promised. When Dewey filed for bankruptcy, John lost his entire capital account, and his savings in Dewey’s retirement plan became worthless. Upon Dewey’s bankruptcy filing, the Dewey estate attributed millions of dollars of cancellation of indebtedness income to him, resulting in a multi-million dollar tax liability. As if these losses were not enough, the liquidating trustee now seeks to recover from John every cent he was paid over the last four and a half years of Dewey’s existence.
John’s defenses to the Dewey litigation were greatly harmed by a decision issued in the case last month. On an issue of first impression, the court held that, under Section 277 of the New York Debtor Creditor Law, partners in a New York LLP are strictly liable for all compensation paid to them during a period of insolvency, regardless of whether they knew of the firm’s insolvency, and regardless of the fees they generated for the firm. The only defenses left to John were a solvency defense and establishing that he had a fixed compensation deal with Dewey. His solvency defense was substantially harmed when Dewey’s leaders were indicted for alleged financial misreporting, calling into question audited and unaudited financials that evidenced a solvent, profitable firm. John is no longer able to fund a solvency defense. As a further consequence of the indictment of Dewey’s former leaders, the key witnesses to the terms of his compensation are now unavailable to testify, protected by the Fifth Amendment privilege against self-incrimination. Under these grave circumstances, John spent the last several weeks attempting to negotiate a settlement based on his financial condition. When those efforts were unsuccessful, he was forced to file for bankruptcy.
John’s filing for bankruptcy is more than just a personal tragedy. The bankruptcy court’s holding that law firm partners are strictly liable to repay compensation while ignoring the fees the partner’s efforts generated for the firm bestows an enormous windfall on creditors, who now get to retain the value of the fees generated, and, at the same time, recover the entire compensation paid to partners for their efforts in generating those fees. The decision incentivizes productive, hard-working partners in NY LLPs to abandon their law firms at the first sign of financial distress rather than staying on to attempt to save the ship. John’s decision to stay at Dewey and help it through its financial difficulties only prolonged his exposure, and prevented him from moving to a new firm where he could have been compensated for his efforts. John’s bankruptcy filing underscores the danger of remaining loyal to the firm to help it survive through times of trouble.
John was represented in the Dewey bankruptcy case by Paul S. Jasper of Schnader Harrison Segal & Lewis LLP and Tom Califano of DLA Piper LLP (US). John is represented in his personal bankruptcy case by James Berman of Zeisler & Zeisler, P.C.