The Firms

October 28, 2011 5:39 PM

New Howrey Trustee Says Firm's Bankruptcy Will Get Litigious

Posted by Sara Randazzo

Allan Diamond, the managing partner of Texas-based Diamond McCarthy, says he already had a full caseload of his own when he became the government-appointed Chapter 11 trustee of defunct law firm Howrey on October 7.

Since then, "It's been all Howrey, night and day," says Diamond, whose firm focuses on bankruptcy, litigation, and real estate work.

Even five months into the Chapter 11 proceedings—Howrey, which dissolved in March, converted what had been an involuntary Chapter 7 filing to a voluntary Chapter 11 case in June—Diamond says there is plenty of work to be done on simple housekeeping chores alone.

For instance, he says, there are 300,000 boxes of hard-copy client documents (down from the nearly 1 million left behind when the firm folded) and a huge cache of electronic documents in offices around the world that must still be disposed of or returned to clients.

Once some of the main administrative duties are finished, Diamond says he expects to turn his attention to his top priority as trustee: "Recovering as much money for the estate as possible."

Diamond says the recovery efforts will focus on chasing down unpaid accounts receivable (which he describes as the biggest potential source of income), pursuing cash and other assets tied up in Europe, and liquidating the firm's artwork and antiques.

Documents filed with the bankruptcy court in September listed more than $33 million in unpaid bills owed to the firm, though Citibank, the firm's largest creditor, argued in court papers that many of those bills are so dated that they will be hard to collect. The artwork still in the firm's possession, meanwhile, could be worth $1.2 million, according to a list of expenses and assets filed in the bankruptcy in August.

Eventually, Diamond says, the bankruptcy will get litigious, with lawsuits likely to be brought against former clients that won't pay their bills, as well against former partners in so-called Jewel v. Boxer claims that allow a bankrupt law firm with a presence in California to recoup profits from work that began at the firm and went elsewhere after it died.

Any litigation, however, is months away, Diamond says: "There are only so many things they can ask me to do in one day."

Another potential source of income: yet-to-be-collected contingency fees from cases that either followed former Howrey lawyers to other firms or are still being handled under the Howrey name. Diamond says that from what he's he's learned so far, there are five such cases in which Howrey remains the law firm of record; 27 other matters have moved to successor firms. While Howrey's partnership agreement includes a provision on how to divide the money when those cases conclude, Diamond says he still hasn't determined how favorable those agreements will be to the estate.

Diamond says that he will soon give the court a full accounting of the five ongoing cases that haven't moved to new firms. The list is likely to include Howrey's representation of a group of Hispanic farmers in a discrimination case against the U.S. Department of Agriculture, and a tentative, but controversial, $10.5 million contract to do work for the fledgling North Country Power Authority in upstate New York.

Prior to Diamond's appointment, Howrey's bankruptcy was overseen by a five-member dissolution committee with ties to the defunct firm working with lawyers from Wiley Rein in Washington, D.C., and Silicon Valley bankruptcy boutique Murray & Murray, as well as a pair of financial advisers. (Former Howrey chairman and CEO Robert Ruyak was paid for his work on the committee until mid-September, when he joined Winston & Strawn's Washington, D.C. office as a partner.)

Unlike those advisers, all of whom have already submitted fee requests in connection to their work on the case, Diamond says his compensation is set by the government and will be approved by the court when the bankruptcy concludes.

Diamond was modest when asked how he came to be selected as trustee, saying his name was likely suggested by people familiar with his trial practice, which relies heavily on bankruptcy and insolvency work. He is, for example, already overseeing all litigation related to the bankruptcy of Dreier LLP, which filed for Chapter 11 in December 2008 amid firm founder Marc Dreier's arrest and conviction for carrying out a massive investment fraud. Dreier is now serving a 20-year prison sentence.

Under the dissolution committee's oversight, the Howrey estate asked the court to move the proceedings out of San Francisco and to the Washington, D.C. area. In court papers, the firm argued that the D.C. area, home to most of Howrey's former employees, a large data center, and the majority of the firm's tangible assets, is a more appropriate and convenient venue for the bankruptcy to occur. The push to move the case east appears to be over now, which Diamond considers a positive development. In his view, keeping the case in front of U.S. bankruptcy court judge Dennis Montali, who is also overseeing the bankruptcies of Heller Ehrman and Brobeck, Phleger & Harrison, can only benefit Howrey.

"I believe all the constituents have now pretty much accepted the fact that it's in San Francisco," Diamond says.

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