Dewey chair in litigation as restructuring prompts exits

Dewey Ballantine has made a capital call on its partners that will see it clear all debt that is recourse to partners by April.

The US firm, described by a prominent New York headhunter as "once a poster boy for debt", has completely restructured its capital policy as part of a wider move from an accruals to a cash-based system of accounting. The cash injection forms an integral part of this transition.

The cash call will clear $15m (£8.6m) of Dewey's current $33m (£18.9m) debt. The remaining $18m (£10.3m), raised during the 1990s in three private placements, was refinanced last October and is non-recourse to the partners. At its height in 1990, Dewey owed around $50m (£28.6m).

The move is believed to be behind the recent decision of a team of seven IP litigation partners to leave the firm for Dechert. Recent changes by Dewey aimed at strengthening its financial position have also led to litigation against a group of its partners, including chairman Mort Pierce.

The latter case, brought last year by former partner Joe Dowley, is not linked directly to the capital policy change, but highlights the risks firms face when restructuring in an attempt to raise profitability and reduce debt.

It centres on a redundancy programme in 2003, which immediately followed a vote to lower Dewey's level of funding for partners' pensions. The vote also introduced a lock-in period, during which partners would lose a significant portion of their pension if they left the firm. As one former partner puts it: "The allegation is that Joe voted on changes to the way the pension was going to be paid, not knowing there was to be a redundancy programme initiated."

Dowley's claim went further, however. Levelled against five partners, it singled out Pierce in particular. The claim, filed in Washington DC for breach of contract, breach of fiduciary duty and age discrimination, claimed Pierce was lining his own pockets. It said in one year he had received $3m (£1.7m) compensation, which would have reflected 4,500 billable hours, along with a $3m (£1.7m) bonus.

"Pierce's annualized hours amounted to more than 4,500 hours for FY 2004," the suit said. "If true, this would be an extraordinary pace… If untrue, it demonstrates a pattern of dishonest behavior designed to deceive clients and line his own pockets at the expense of his fellow partners…."

Speaking to The Lawyer, Pierce blasts the claim, calling it "completely without merit" and "not true". The $3m remuneration claim, Pierce adds, was also "completely" false.

"What he said about me is untrue and I resent being called a thief and a liar," he continues. "I'm a hard worker. I routinely bill between 2,900 and 3,400 hours. I'm a workaholic, I admit it. But the last time I looked that wasn't a crime."

Pierce admits he received a $3m bonus that year, but argues that he was paid appropriately and deserved what he received. "The compensation at Dewey is set by the management committee and then voted on by the entire partnership," he says. "It needs a majority of more than 50 per cent to be agreed. We're not a law firm that says how it is by fiat [decree]. That year I was given a $3m bonus based on a combination of billings and my overall combination to the firm. But I was vice-chairman, and also my team's billings that year were pushing $60m [£34.2m]."

A former Dewey partner lent weight to Pierce's claims. "His [Dowley's] figures were extrapolations," says the ex-partner. "So, for instance, if he'd billed a 400-hour month, which with Mort is possible, that would make a 4,800-hour year, which is not. No one works 4,800 hours."

The claim has now moved to arbitration and none of the parties involved (other than Pierce) returned calls for comment. Dowley is now a partner at DC firm McKenna Long & Aldridge and is being represented by Steve Chertkof of Heller Huron Chertkof Lerner Simon & Salzman. Kathleen McKenna of Proskauer Rose in New York is leading the case for Dewey.

The internal rumblings may not yet be over for Dewey, however. The team that left the firm for Dechert is believed to have balked at the thought of stumping up capital of $150,000 (£85,000) per junior equity partner and $250,000 (£142,000) for seniors. As the team had joined Dewey from the collapsed Brobeck Phleger & Harrison, it is not difficult to have some sympathy for it.

But for other Dewey partners, the move from a system where the firm's capital was garnered by retained profit to one that requires partners to inject capital up front is a significant cultural change, which may yet see more exits before the April deadline.

As a former Dewey partner says:"A number of partners may not be happy with the way the firm's run. They then have to decide whether they're going to put money in. That's the real issue. If people are going to leave, they'll jump over the next two months."