Brobeck: the desertions, the failed merger, the end

Within a mere 48 hours, Brobeck Phleger & Harrison has seen its 77-year history dissolve before its eyes

This tale of disaffected partners, crippling debt and stifling property costs last week culminated in a fate Brobeck had been desperately fighting to avoid – total collapse.
It began on Wednesday (29 January) when two catastrophes collided.
Texas-based Steven Zager, a major Brobeck rainmaker and head of the firm's litigation practice, announced his decision to leave for Akin Gump Strauss Hauer & Feld, having fervently denied plans to depart just a week earlier.
Hours later, Morgan Lewis & Bockius, the white knight that had come to save Brobeck late last year after talks with Hogan & Hartson faltered in October, turned away from a merger.
While Morgan Lewis's chairman Francis Milone has told The Lawyer that in the end “a merger just wasn't possible”, speculation points to the departure of Zager as a flashpoint.
Despite Brobeck's management securing an oath of loyalty in November last year, Zager's departure showed that the West Coast firm was continuing to splinter at the core.
By Thursday morning, GreedyAssociates.com was already receiving messages from worried lawyers seeking truth to the rumour that the management at Brobeck was tabling a meeting to discuss winding-up.
That afternoon, lawyers had a real reason to be worried: over a videoconference, partners, associates and staff were facing their Waterloo as the decision was finally taken to shut down Brobeck.
Literally within hours, the vultures were circling; one source talks of 22 messages from headhunters on a senior partner's voicemail. But despite the bad taste of opportunism, the headhunters are shaping up to be the saviours of this tragic situation.
The firm, advised by Latham & Watkins, has yet to decide on what process it will go through to wind up the business.
It has not yet been determined, for example, if it will file for bankruptcy; this will depend on talks within the next few days with its largest creditor, Citibank, to which is owed an estimated $64m (£38.9m).
But the talk on the West Coast is that Brobeck's lawyers have just a couple of weeks to find a new firm.
Commenting on the speed of the proceedings, John Patchner, a spokesman at Brobeck, said: “In a situation like this, there's an extraordinary amount of uncertainty. Our clients are a priority, so resolving a situation like this as quickly as possible is desirable.”
By Friday the firm was believed to have already issued cheques to some associates. Neighbouring firms on the West Coast have spoken to The Lawyer about the inordinate number of hopeful calls they received on Thursday and Friday of last week.
There is some good news, though. As revealed by www.thelawyer.com/lawyernews on Friday, Brobeck's European operation, which operates as a joint venture with Hale and Dorr, is set to dodge dissolution after the Boston-based firm promised to take the London, Oxford and Munich offices under its wing.
Around 45 lawyers, including 19 partners, will be saved through Hale and Dorr's intervention. Although Brobeck Hale and Dorr was set up as a separate UK partnership in 1990, the joint venture still had a number of financial ties that bound it to both of its US parents. Any financial concerns will now be passed on to Hale and Dorr.
Thomas Kellerman, managing partner at Brobeck Hale and Dorr, told The Lawyer he had been in contact with the Boston firm for a number of months as the situation at Brobeck in the US unfolded.
There is some irony to the timing of Brobeck's collapse, with the firm having taken significant steps towards resolving its debt problems earlier this month.
On the proviso that the Morgan Lewis deal went through, it had managed to renegotiate its property leases with landlord Equity Office.
It is believed that the landlord agreed to take back some space that was left vacant as the firm's lawyers halved, from nearly 1,000 to the firm's last reported figure of 518.
Partner distributions for the first quarter of the year, totalling $26m (£15.8m), were being redirected straight to Citibank to pay down the reported $90m (£54.7m) debt mountain.
It is understood that the Brobeck partners as well as Morgan Lewis would have assumed liability for the balance once the merger was finalised.
This plan is now in tatters. Equity Office is likely to lose hundreds of thousands of dollars once Brobeck winds down.
But for Citibank, the main creditor, there may be some succour. Already a large chuck of the debt has been sorted out. But the interesting point here is who is going to pick up the rest of the tab.
Brobeck is a limited-liability partnership (LLP), but it is common practice with lenders to attach some individual liability as part of a loan agreement.
The existing partners have already been tapped for some of the debt, substantially reducing their liability. However, it is understood that some of the more senior partners are still facing a call for between $1m (£608,000) and $1.25m (£759,500).
But for those who were part of the 60-partner or so exodus that contributed to Brobeck's demise, it will be a case of the chickens coming home to roost.
It is believed that a number of these partners are still liable for the firm's debt and could be facing a potentially huge payout under the terms of Brobeck's partnership agreement.
It is not yet clear who still holds liability, since it never became public who negotiated a clean exit, severing all links with the firm.
Certainly, capital contributions in Brobeck from partners who have already left the firm will, or already have, all but vanished.
For those partners at Clifford Chance and Dewey Ballantine, where a rump of the Brobeck partners moved to, there is a real chance that they could still be personally liable for the West Coast firm's debts.
More pointedly, will the partners at their new firms be willing to cough up on behalf of these lawyers if and when required?
And for all partners, past and present, will the spectre of personal bankruptcy become a horrifying reality?
Looking to Brobeck's balance sheet, there are scant other areas where funds could be realised. The firm's overall gross revenue for 2002 plunged 21 per cent to $353m (£214.5m), while the year before saw a 9 per cent drop to $477m (£289.8m).
Also, since the firm, like most other US practices, works on a cash basis, by the year-end its receivables would literally consist of just weeks worth of work, although with late payments, accounts receivable could stretch to two or three months.
Nevertheless, these funds would only be a drop in the ocean on paying what is owed. It is not clear what work in progress could be worth.
There are many unansw-ered questions at this point, which is not surprising giv-en the speed at which Brobeck's dem-ise has occurred. But sadly, last week's events promise to be just the beginning of what is sure to become a tragic end to a once great firm.