Bill to Brobeck partners hits $284 million: trustee pushes failed firm's members to pay.

The trustee representing creditors of defunct law firm Brobeck Phleger & Harrison LLP is seeking to collect $284 million from its former partners to settle outstanding claims.

The settlement offer is the latest in a series of efforts by Bankruptcy Trustee Ronald Greenspan to collect money owed to unsecured creditors of the San Francisco firm.

In letters mailed to 230 former partners, about a third of whom are now scattered among various firms in Los Angeles, Greenspan said he arrived at the figure by adding the profits distributed to the partners beginning in 2001, when he claims they should have begun helping the firm recover from insolvency, until 2003, as the firm was dissolving.

"We happen to believe his theories of liability are incorrect and excessively aggressive and unsupported," said David Stem, a partner at Klee Tuchin Bogdanoff & Stern LLP representing a group of 120 former partners. "We don't believe it's well founded."

He said the partners have until early next year to respond to Greenspan, senior managing director of corporate finance and restructuring at FTI Consulting Inc. in Los Angeles.

Liquidation fallout

At its peak, Brobeck had 900 lawyers in offices scattered nationwide and generated annual revenue of $476 million. Focused on technology clients during the dot-com boom. the firm began suffering massive losses in 2001 as the bubble burst.

In May 2002, a group of 17 partners led by former Chairman Tower Snow left the firm for Clifford Chance. That departure, according to papers filed in U.S. Bankruptcy Court, Northern District of California, left the firm with $560 million in leasehold liabilities and $430,000 per partner in bank debt incurred by profit distributions.

Seven months later, the firm defaulted on a loan from Citibank, its principal secured creditor, court papers say. Shortly thereafter, in February 2003, Brobeck shut down. A liquidation committee, comprised primarily of former partners and firm employees, was formed to pursue claims against Clifford Chance for contributing to Brobeck's demise. That aspect of the dissolution was settled last month for $3.8 million.

An outside group of unsecured creditors, concerned they were not represented by the liquidation committee, succeeded in filing an involuntary Chapter 7 bankruptcy later that year, after which Greenspan was put in place to manage the estate.

Greenspan, whose attorneys did not return calls, has already orchestrated the settlement of some claims by collecting funds from various sources, including accounts receivable, Clifford Chance and Morgan Lewis & Bockius LLP, which last year hired about 60 former Brobeck partners. But the bulk of the claims remain.

Greenspan claims that while there are accounts receivable and investments that could satisfy some of the debt, seeking recompense from the 230 former partners remains the most viable option.

In filings, he said that the group could provide as much as $276 million in profits, $3.2 million in contingency bonuses and $5.7 million in capital notes.

Questioning liability

The settlement offer is not divided evenly among partners. Those that actively negotiated restructuring of the Citibank loan, the firm's dissolution and bankruptcy, and partner distributions would carry a heavier burden than those who worked at the firm for a few months before its demise.

Former Brobeck partners have formed steering committees, based on the amount of time they spent at the firm, to discuss the settlement offer with their lawyers.

The former partners claim they earned their profit distributions and that the firm was not insolvent in 2001 because it was still generating business. As partners in a limited liability partnership, they also claim they should not be held responsible for anything outside of contractual obligations, such as leases.

In court papers, Greenspan has argued they are liable under Section 16957 of the California Corporations Code. That section of the law says members of a limited liability partnership should not receive monetary distributions if the partnership subsequently would not be able to pay its debts. They also should not receive distributions if the partnership's total assets end up being less than its liabilities alter the firm dissolves.

Former Brobeck partners counter that the California code is limited in case law and should not be used. "The whole point of creating an LLP is to protect liability of partners," one former partner said. "If he's successful in eviscerating this, will law firms form LLPs?"

Whether they accept the settlement remains unclear.

"The game of law is about economics," the former partner said. "Just because you're fight doesn't mean you're ultimately going to win, or that it's not going to cost you anything. Any decision is based on what it's going to cost to fight, balanced against the likelihood of costs and pursuing the defense. On the other hand, there are a lot of us who can put together a significant legal budget."

Legal Failure

Milestones reached in the Brobeck Phleger bankruptcy.

* May 2882: Brobeck's former chairman, Tower Snow, leaves with 16 other partners for Clifford Chance

* February 2003: Firm dissolves

* September 2003: Unsecured creditors obtain involuntary petition for Chapter 7 bankruptcy

* November 2004: Citibank, its largest creditor, settles $8.2 million in outstanding debt for $2.85 million

* November 2004: Morgan Lewis & Bockius settles claims for unfinished business for $10.2 million in November

* November 2004: Clifford Chance settles claims for unfinished business and causing Brobeck's downfall for $3.75 million in November

* November 2884: Trustee makes $284 million settlement offer to 230 former partners