The Firms

February 28, 2011 5:10 PM

Winston's Delicate Dance

Posted by Julie Triedman

As they reportedly vote on whether to absorb a substantial number of Howrey attorneys, Winston & Strawn partners have plenty to weigh in terms of the legal and financial complications that can ensue when a healthy law firm takes on the assets of one that is failing, as senior reporter Julie Triedman reports in this preview from the March 2011 issue of The American Lawyer.

In late January,  after three months of talks with their Howrey counterparts about a possible merger, firm leaders at Winston & Strawn instead made individual offers to about three-quarters of Howrey's 220 partners. The offers, which came with a 21-day deadline, were contingent on an unspecified number of partners accepting Winston's offer, according to a current Howrey partner and one who recently left the firm.

Winston's gambit confounded law firm finance veterans and legal recruiters. Why, they wondered, was the firm forgoing a merger in favor of making mass offers to Howrey partners, which could leave Winston open to inheriting Howrey's liabilities?

Winston apparently hoped to land Howrey's best remaining assets--which by then included the Washington, D.C., IP, and antitrust groups--while dodging the struggling firm's presumed debts. That approach could work, if Howrey ends up winding down without actually tipping into bankruptcy. But if bankruptcy is in Howrey's future, and if Winston does take a big chunk of its lawyers, Winston could have trouble shielding itself from Howrey's liabilities, according to five experts in law firm finances with no specific knowledge of Howrey's finances. Says Milberg's Jonathan Landers, who advised on the dissolutions of Brobeck Phleger & Harrison; Heller Ehr­man; and Thelen: "The courts are smart enough to know that if you brought over 75 percent of partners, you've assumed successor liability."

It's true that healthy firms have managed to hire large groups of lawyers from firms that are failing without assuming all their liabilities. The key in those cases, experts say, is that the failing firms wound down without filing for bankruptcy and that potential creditors were appeased. In 2008 Sonnenschein, Nath & Rosenthal hired some 100 Thacher Proffitt & Wood lawyers, including 39 partners. The hires came just before Thacher partners voted to dissolve the firm. Sonnenschein, now known as SNR Denton, helped Thacher avoid bankruptcy by agreeing to take on its New York lease, and by negotiating with the firm's lender to cover some obligations to employees, according to an SNR Denton management source. Even after making those arrangements, this source says, Sonnenschein was hit with two suits asserting successor liability. Both were dismissed.

What should concern Winston, law firm finance experts say, is that unlike a smaller firm such as Thacher--which had 175 lawyers and a few offices when Sonnenschein stepped in--Howrey, with 16 offices worldwide and three times the employees, may find it much harder to avoid bankruptcy. Though unfamiliar with details of Howrey's real estate obligations, these experts say that its leases alone could make an out-of-court dissolution unlikely. "Landlords are tenacious and difficult to work with," says Landers, noting that it was a landlord that drove Brobeck into insolvency.

There are other potential concerns. Howrey's several hundred employees could assert claims, say bankruptcy experts. The firm could owe millions under the federal Worker Adjustment and Retraining Notification Act, plus severance and accrued vacation pay. In the Heller bankruptcy, which affected a similar number of lawyers, employees claimed $32 million in back pay and WARN damages; Heller settled for about $20 million, says a lawyer familiar with the settlement. And then there's the roughly $35 million in secured debt that two former partners say that Howrey owes to Citibank. (Citi says that it doesn't discuss clients; Howrey CEO Robert Ruyak declined to comment.)

Winston managing partner Thomas Fitzgerald did not return calls and e-mails, but a review of the firm's recent past is a reminder that it has dealt with struggling firms before--and knows where it can lead. In 2008 Winston hired about a dozen Heller refugees soon after that firm failed--and  months after the firms ended merger talks. Last December, the other shoe fell: Winston was one of 48 firms sued by the bankrupt Heller estate over proceeds from ongoing matters that departing partners took to their new firms. As of February, Winston hadn't responded to the suit--perhaps because it was busy with other things.

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Sadly, the end seems quite inevitable and the tough consequences to individual partners seem writ large. With 38 Am Law firm failures since Finley Kumble, the script, really a Greek tragedy, has been written and this will be a reprise of the preceeding performances:

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