Creditors can expect a lengthy and litigious process to liquidate Dewey's assets, Friederike Heine reports

These things are never simple. Dewey & LeBoeuf's bankruptcy filing on 28 May leaves its wind-down committee with the challenge of managing a hugely complex insolvency while attempting to avoid the drawn-out, expensive proceedings that have bedevilled previous law firm insolvencies such as Brobeck Phleger & Harrison and Coudert Brothers.

The process is being run by chief restructuring officer Jonathan Mitchell of special advisory firm Zolfo Cooper. The other members of Dewey's wind-down committee are Janis Meyer and Stephen Horvath, respectively Dewey's general counsel and executive partner. They are being assisted by Francis Canellas, Dewey's finance director. Togut Segal & Segal has been appointed as legal counsel.

The primary aim of the committee will be to secure Dewey's biggest asset, the $255m (£163m) in accounts receivable from its US practice, plus additional invoices from its foreign network. The estate has also gained money from the transfer of some international arms, with Greenberg Traurig paying $6m (£3.8m) and Morgan Lewis & Bockius $4.14m (£2.65m) for ownership in Dewey's Polish and Russian arms respectively. Ninety staff have been kept on to manage the process and minimise disruption to the firm's 5,000 former clients.

Other aims include the closure of Dewey's many offices and resolution of leases, the evaluation of claims against Dewey's estate and the investigation of potential claims by the estate.

Dewey's collapse left the firm with huge liabilities to be resolved. The firm owed $225m (£144m) in secured debt, split between a $75m (£48m) credit facility and $150m (£96m) in bonds. JP Morgan is Dewey's largest secured creditor as the administrative agent for bank lenders on the credit facility and collateral agent to the bonds, which are understood to have been largely acquired by hedge funds.

Other obligations include an $80m (£51.2m) shortfall in pension obligations, $50m (£32m) in obligations to secured property personal lessors and around $40m (£25.6m) owed to trade creditors.

Dewey filed for bankruptcy with $13m (£8.3m) in cash, which will be used to pay the staff staying on to help liquidate its assets. Recent history of law firm insolvencies strongly suggests this will be a complex, litigious and lengthy process, with partners not only facing the loss of hundreds of thousands of dollars in capital but also the risk of clawback claims.

The selective nature of information about the firm's finances and governance released to partners means there is a substantial chance that Dewey's former management will face claims from partners. An early example was a claim filed this month by Henry Bunsow against former chairman Steven Davis, executive director Stephen DiCarmine, litigation head Jeffrey Kessler, partner James Woods and chief financial officer Joel Sanders.

Bunsow is seeking damages for claims including fraud and deceit, negligent misrepresentation, breach of fiduciary duties and unjust enrichment – he claims management concealed the true state of the business when persuading him to join on a $5m (£3.2m) guaranteed income for 2011 and 2012.

The claim will be watched closely as it goes to the heart of the firm's strategy of recruiting big-name partners and the messages about the firm's finances that management was giving partners and prospective hires.

Accusing the firm of running a "Ponzi scheme", Bunsow argues that Dewey's management deliberately misled him about its financial position, in part to gain a $1.8m (£1.15m) capital contribution which Bunsow paid via a Citibank professional practices loan (PPL). He also alleges that Davis told him Dewey was on course to achieve profits per equity partner of nearly $2m (£1.28m) in 2011, far above its actual results.

Former employees of the firm have also attempted to file a class action claim and Dewey's bankruptcy petition lists a string of claims lodged against the firm. Also contentious will be attempts to negotiate a settlement between Dewey's estate and its former partners. A conference call held by Dewey's bankruptcy team, including Meyer, Horvath and Mitchell, on 19 June, floated a settlement with former partners to bring money into the estate.

The proposal would absolve former partners except Davis of any future liability in return for putting in capital linked to their earnings in 2011 and 2012, providing the plan receives a 'critical mass' of support. Partners, who could number as many as 500 if those that left during 2010 or before are included, would also have to give up their claims against Dewey's estate.

The warning is plain: Dewey creditors are calling for a settlement to be reached by the end of July or the bankruptcy could be converted from a Chapter 11 to a Chapter 7. Proposals are expected early next month but reaching settlement will be complex, complicated by mistrust that the firm's former management are trying to protect their position.

One partner told Legal Week: "Given the timeframe and the conflicting interests of individual partners, I would be surprised if such a settlement actually materialises." He added: "What became clear during the call is that the partners do not trust Horvath and have qualms about waiving their rights to take legal action against members of Dewey's former senior management."

Also outstanding is the issue of professional practice loans (PPLs) to partners, with lenders calling on former partners to repay the loans provided when they joined Dewey to fund capital contributions.

Dewey's partnership called for those joining the partnership to contribute capital equating to 36% of their projected income for the year, with banks providing the initial capital via PPLs. (resigning partners received their capital back in three equal annual installments due on the following 31 December, suggesting over $80m (£51m) of partner capital will have been left in the firm).

During the conference call of 19 June, former partner Steven Otillar said that Citibank, the largest provider of PPLs in recent years, was pursuing legal action against him for the repayment of the loan. Other banks that have previously made PPLs to Dewey partners include Barclays and Coutts.

While some partners have repaid loans from personal resources, many argue they are unable to do so due to Dewey deferring large amounts of earnings in 2011 and 2012. Several claims have already been lodged in relation to deferred income, which has been estimated at more than $100m (£64m), but which some believe could exceed $200m (£128m).

Aside from the scale of the deal, Dewey will be watched as a rare example of an insolvency of a UK limited liability partnership (LLP) affiliated to a larger parent. There are conflicting views regarding the level of protection the LLP model affords for UK Dewey partners. Despite initial claims that UK partners were unlikely to be drawn into US clawback claims, the settlement deal has been pitched to all partners, including in the UK, with former UK finance partner Bruce Johnston urging ex-London partners to band together to instruct US bankruptcy counsel. But the issue that looks set to bedevil Johnston's pitch is that which faces the winding-up of Dewey at every turn: the lack of trust within the partnership and resentment directed at those seen as highly rewarded stars by the rest of the partnership.

As such several partners told Legal Week that they have no intention of joining the group in instructing US counsel. One ex-London partner said: "Although we were all members of the UK LLP, I do not think that our interests are in any way aligned – everyone came away from the firm with different problems. There are partners among the [UK partners] who should have known about the crisis and there is no way of being sure whether they were withholding information."

Dewey's top five unsecured creditors

Pension Benefit Guaranty Corporate: pension claim – $80m
1301 Properties Owner BL: property – $3.77m
Thomson Reuters: library services/legal research – $2.36m
Bank of America: credit card – $2.14m
HireCounsel: outsourced staffing – $1.55m