A California federal bankruptcy judge on Thursday approved a Chapter 11 plan for Sedgwick LLP that includes a settlement clawing back a total of $1.9 million from 47 former partners, over one ex-partner's objection to a provision barring non-settling partners from bringing claims against their colleagues who settled.

U.S. Bankruptcy Judge Hannah Blumenstiel of the Northern District of California signed off on the agreement between the defunct firm, its creditors' committee and the settling partners after a 45-minute hearing, in which she admonished the resisting partner's attorney for introducing arguments that were absent from her recent filing on the matter.

Sedgwick initially filed for Chapter 11 protection at the start of October 2018.

The settlement approved Thursday returns more money to creditors than an earlier proposed clawback deal, which covered $1.595 million paid to 45 partners during the firm's 2017 collapse.

Nineteen former partners did not participate in the settlement, including Troy McMahan, a products liability litigator now with King & Spalding. His attorney, Sweet & Walker's Lorna Walker, argued Thursday that it was not appropriate to release the settling partners from all potential claims from their former colleagues who have yet to settle.

But Pachulski Stang Ziehl & Jones attorney John Lucas, representing the defunct firm, noted that in her filing objecting to the deal, Walker had not referenced the section of the Chapter 11 plan incorporating the settlement with the former partners at all. That point was quickly embraced by Blumenstiel, who called Walker out for being "disingenuous."

"You are asking me, ma'am, to consider an argument you did not make in your objection, and that I am not willing do," the judge continued sternly, after Walker claimed that Lucas and the debtor had no authority to seek a third-party release. "I will not permit sandbagging like this. Your objection that wasn't made is overruled."

Blumenstiel moved on to address the substantive arguments in Walker's filing, including McMahan's concerns that certain "under-capitalized" partners are receiving discounts in their settlements of up to 70%, while others are not. The specific contributions of the settling partners have not been revealed.

"This argument, I am inclined to find, fails to appreciate the point of a settlement," the judge said. "The settling partners specifically agreed to treatment other than what the plan would otherwise afford them. That's the point of a settlement. While Mr. McMahan chose not to participate in that settlement, that doesn't mean he's being treated unfairly or unethically."

Lucas meanwhile defended the settlement by noting that the group of settling partners includes 24 attorneys who had no claims against them or who are putting in more than claims against them.

"They are collectively putting in $800,000 towards this settlement," he said.

Lucas continued by noting if the matter was converted to a Chapter 7 bankruptcy, as McMahan has proposed, those gains would be eliminated, leaving just $1.1 million on the table. After contingency fees, that figure would drop to $800,000, resulting in $1.1 million less available to the liquidating trust.

Blumenstiel ultimately agreed with the conclusion that a conversion to Chapter 7 would be more costly.

"Any Chapter 7 trustees would have ramp-up costs. They would have to hire counsel. They would have to come to speed on the lay of the land. That would take time and money," she said. "I don't think Mr. McMahan's objection demonstrates that he's thought that through in the way one should."

With the approval of the Chapter 11 plan, the liquidating trustee will take over and will likely continue efforts to settle with the 19 holdouts.

"We're happy that it went well yesterday and that we were able to get it into the hands of the liquidating trustee," said Sheppard, Mullin, Richter & Hampton partner Michael Lauter, who represents the creditors' committee. 

Lucas declined to comment on the hearing, and Walker did not immediately respond to a request for comment.

|

Read More

Warning Signs: How Big Law's Greatest Failures Unfolded

Once Storied Sedgwick Files for Bankruptcy as Wind-Down Fails

LeClairRyan to Shut Down, Ending Three-Decade Run