LeClairRyan's offices in New York. Photo: Rick Kopstein/ALM

A federal bankruptcy judge is poised to hear arguments Thursday about whether dissolution proceedings for now-defunct LeClairRyan should be handled by a court-appointed liquidator.

The firm's primary lender, ABL Alliance LLLP, has backed a motion by the acting U.S. trustee for the region to move the law firm from Chapter 11 to Chapter 7, pointing to slower-than-anticipated collections since LeClairRyan filed for bankruptcy at the start of the month.

LeClairRyan, however, says that Chapter 11 remains the most efficient way to handle its liquidation, arguing that collections have picked up since the first week after the filing.

"The debtor has had a successful start in collecting revenue, reducing expenses and fulfilling its duties through this chapter 11 case," a team of attorneys for Hunton Andrews Kurth argued on behalf of the firm in a filing Monday.

The firm's initial Chapter 11 filing, in Virginia's Eastern District, indicated it owed $6.8 million out of an initial $15 million loan to ABL, an entity linked to lender Virginia Commercial Finance.

ABL has the first priority of two secured creditors, followed by ULX Partners, the joint venture the firm launched with UnitedLex to handle support services in 2018. Owed $8 million according to the Chapter 11 filing, UnitedLex has been silent during the bankruptcy process.

U.S. Trustee John Fitzgerald III, the acting trustee for Virginia, the District of Columbia and three other southeastern states, made the initial argument for moving the matter to Chapter 7 now, contending in a filing earlier this month that there is no question that the conversion is an inevitability. LeClairRyan now exists in name only, after its members voted to dissolve the firm in late July.

He said that a court-appointed liquidator would immediately be able "to stop the hemorrhaging, make decisions about what contracts to assume or reject, and start paving the road to recoveries from avoidance actions."

On the other hand, waiting would be worse, Fitzgerald argued.

"Delaying conversion would only saddle the estate with additional administrative expenses and render the transition to a Chapter 7 harder as the few employees left will continue to leave leaving the trustee with little to no historical knowledge or support," he said.

ABL then came out in support of the conversion in a filing Monday, saying it would not consent to letting the firm continuing to use cash on hand to support its unwinding after Thursday.

"The sole reason ABLA consented to the Debtor's use of its cash collateral at the outset of this case as a Chapter 11 proceeding was the perceived benefit from the continuity in collection of the accounts receivable and the apparatus that was in place to do so," the lender's attorneys with McGuireWoods argued.

That has not actually been the case, they continued, pointing to the firm's second weekly report from Sept. 15. That showed LeClairRyan was 28% behind its budgeted cash collections and that expenses exceeded the budget by 20%.

"The unfortunate reality is that cumulative collections have faltered to unacceptable levels despite continuity with the debtor-in-possession in control under chapter 11," ABL continued, adding that excessive and highly compensated staffing, inflated IT expenses and personnel inefficiencies were driving up expenses.

LeClairRyan's response, which followed ABL's filing but was directed to the U.S. trustee's initial motion, said that collections have been catching up to projects and that it has been able to reduce its debt to the lender by $1.8 million since the bankruptcy process began. But the firm did say that it was engaged in discussions with ABL and representatives of the U.S. trustee aimed at reaching an agreement for the next steps for the dissolution.

Also at stake in Thursday's hearings is the firm's plans for disposing of inactive client files that have not moved with its former attorneys to their new firms. LeClairRyan is looking for permission to destroy all remaining files after providing clients a 90-day window to respond.

LeClairRyan's longtime IT provider, Proxios, has argued that the procedure outlined by the firm is incomplete and, among other failings, might obligate it to negotiate with or obtain payment from the firm's former clients to either retrieve or store their files.

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