The collapse of the venerable Dewey & LeBoeuf law firm is a cautionary tale from which observers have drawn many lessons, including cautions about the perils associated with large law firm mergers and the challenges associated with various forms of law firm partner compensation. The firm’s failure and the claims that have subsequently arisen against the firm’s former managers also highlight important issues surrounding management liability insurance for law firms.
As discussed here, the Dewey & LeBoeuf firm was the result of a 2007 merger between the Dewey Ballantine firm and the LeBoeuf Lamb Greene & MacRae firm. After encountering financial difficulties, the firm filed for bankruptcy in May 2012. A detailed description of the firm’s collapse can be found here. In the bankruptcy proceedings, as part of the firm’s liquidation plan, about 400 former Dewey partners agreed to repay the firm’s bankruptcy estate a portion of the compensation they had earned during 2011 and 2012. The total value of the partner contribution plan is $71.5 million. This agreement allowed these former partners to avoid further claims from the estate.
However, the committee representing the firm’s unsecured creditors sought and obtained leave of the bankruptcy court to pursue separate claims against the firm’s former leaders – former firm Chairman Steven Davis, former executive director Stephen DiCarmine and former Chief Executive Officer Joel Sanders. (These three individuals were expressly excluded from the agreement embodies in the $71.5 partnership contribution plan.) Late last year, representatives of the estate sent Davis a demand letter, accusing Davis of mismanagement. In papers filed with the court seeking leave to pursue claims against the three men, the estate’s representatives alleged that the three firm leaders had, among other things, “over-distributed the Firm’s available cash to select partners; abusively relied on guarantee agreements that bore no economic rationality; and concealed the firm’s true financial condition from its partners, employees and creditors.”
On April 22, 2013, representatives of the estate filed a settlement agreement reflecting that Davis, the bankruptcy estate and the law firm’s primary D&O insurer had reached an agreement to settle the estates claims against Davis. A copy of the settlement agreement can be found here. A copy of the motion to the bankruptcy court to approve the settlement can be found here. Among other things, Davis agreed to pay $511,145 to the estate and in addition the firm’s primary D&O insurer agreed to pay $19 million in settlement of the claims against him. Sara Randazzo’s April 23, 2013 Am Law Litigation Daily article about the settlement with Davis can be found here.
On May 2, 2013, DiCarmine and Sanders, who are not parties to the Davis settlement, filed limited objections to the proposed settlement. A copy of their objections, in which they asked the bankruptcy court to reject or modify the settlement, can be found here. Among other things, the two men objected that the $19 million insurance settlement would, together with the $6 million “soft cap” on defense fees, deplete the $25 million limit of liability of the primary policy, while additional claims remain or have been threatened against the two of them. The two men also object that the release contained in the settlement agreement not only releases the primary D&O insurer but, according to the two men, the law firm’s excess D&O insurers as well. (According to the Am Law Litigation Daily article linked above, the law firm carried a total of $50 million D&O insurance, provided by three different insurers that the article identifies.) . Tom Huddleston’s May 2, 2012 Am Law Litigation Daily article discussing the objections can be found here.
The outcome of the efforts of Davis and of the firm’s primary management liability insurer to settle the claims against him, as well as the impact of the objections, remains to be seen. While the situation still has further to go before it is fully resolved, the circumstances also present some important insurance implications.
First and foremost, these circumstances underscore the importance for law firms of a separate program of management liability insurance. Attorneys are well aware of their need to procure and maintain errors and omissions insurance – or what they typically think of as malpractice insurance. But while they understand their need to have insurance in the event of claims against them asserting that they erred in the delivery of client services, attorneys, or at least some of them, can be reluctant to accept their need to also maintain insurance protecting their firm’s managers against claims for wrongful acts committed in the management of their firm.
As these circumstances demonstrate, law firm managers face the possibility of potential claims for a wide variety of potential claimants. Indeed, law firm managers at least potentially face potential claims from the same general range of claimants as does any privately held business and therefore the need for management liability insurance is the same. At a minimum these circumstances provide a vivid illustration to use to explain to law firm manager trying to understand the kinds of claims that might be asserted against them.
Second, the size of the proposed settlement with Davis has important implications for law firms when they consider how much management liability insurance to buy. By the same token, the multiplicity of claims that have been asserted against the former firm managers (which are detailed in the filing the objectors presented to the court) underscore the breadth of litigation that can arise against firm management. Many law firms do not need to be persuaded that they need to carry hefty limits of liability for their E&O insurance, but they may underestimate their needs when it comes to their management liability insurance. As a reader pointed out to me in a recent email exchange, many law firms carry significantly greater levels of E&O insurance than management liability insurance. The scale of the claims involved here could encourage some law firms to consider increasing the limits of liability for their management liability insurance program.
Third, this situation also raises important considerations with respect to the terms and conditions of a law firm’s management liability insurance program. In November 2012, when the unsecured creditors’ committee first sought leave of the bankruptcy court to pursue claims against the three former firm leaders, one concern that was raised was whether the firm’s management liability insurance would provide coverage for a claim of that type, as the creditors committee in effect would be asserting the law firm’s own claims against the individuals.
The concern was that these claims might run afoul of the policy preclusion of coverage for claims filed by one insured against another insured. The fact that the estate and Davis have reached a settlement agreement to be funded largely by management liability insurance suggests that this potential coverage issue was resolved. But the fact that this concern was raised does have important implications about the need to ensure that the insured vs. insured exclusion is revised to insure that it does not preclude coverage for claims brought by representatives of the bankruptcy estate, such as a bankruptcy trustee or creditors’ committee.
There are other insured vs. insured exclusion concerns potentially affecting coverage under a law firm management liability insurance policy. For example, one type of claim that frequently arises in the law firm context is a claim by a law firm partner not involved in firm management against the firm’s managers. The way a law firm’s management liability policy would respond to this type of claim is an important coverage consideration, as is the policy’s response to partnership and compensation issues.
Many observers have chosen to interpret the demise of the Dewey & LeBoeuf law firm as a sort of a morality tale about the wages of supposed greed and excess. While some may find enough from the law firm’s demise to support that kind of an interpretation, it would be unfortunate if those lessons were the only ones drawn from these events. Even if the law firm’s collapse is the result of the firm’s own peculiar set of circumstances, there are still important lessons for other law firms, even those that consider their circumstances to be different from those of the late lamented Dewey LeBoeuf firm. Among the lessons that every firm would do well to heed is the message about the importance of management liability insurance for law firm managers.
Special thanks to a loyal reader for sending me a copy of the objection to the Davis settlement.
FDIC Files Another Failed Bank Lawsuit: On April 30, 2013, the FDIC filed its latest lawsuit against former directors and officers of a failed bank. In a suit the agency filed in the Northern District of Illinois in its capacity as receiver of the failed Midwest Bank and Trust Company of Elmwood Park, Illinois, which failed on May 14, 2010, the FDIC asserts claims for gross negligence, negligence and breaches of fiduciary duty against 18 former directors and officers of the bank. A copy of the FDIC’s complaint can be found here. The American Banker’s May 2, 2013 article about the lawsuit can be found here.
In its complaint, the FDIC alleges that the Defendants “exhibited an extreme departure from the standard of care and want of even scant care in agreeing to lend $100 million to six uncreditwortthy borrowers and affiliated parties” without employing care and diligence to ensure that the borrowers were creditworthy or that the proposed projects were even feasible or would likely result in repayment of the loans. The alleged misconduct allegedly took place after regulators had warned the bank about its lending practices. The complaint further alleges that the defendants “disregarded prior experience, criticism and the Bank’s specific policy” in connection with $85 million in investments in certain preferred stock. Despite prior bad experience with similar investments, the defendants “pursued an uninformed gamble and held the stock until it had most of its value,” producing a loss for the bank that allegedly could have been avoided if the bank had followed its own announced policies and practices. In its complaint the FDIC seeks to recover over “$128 million in damages.”
With the filing of this latest complaint, the FDIC has now filed a total of 58 lawsuits against former directors and officers of failed banks, including fourteen so far this year. As I discussed here, it seems likely there will be more to come, as well. Special thanks to a loyal reader who sent me a copy of the Midway Bank complaint.
Mugging for the Camera: Following its cameo appearance during Advisen’s recent quarterly claims update webinar, one of The D&O Diary’s coffee mugs also made a guest appearance on Twitter, as captured below. To find out how you can get one of The D&O Diary coffee mugs, refer here.