debtors motion for entry of order approving pcp

TOGUT, SEGAL & SEGAL LLP One Penn Plaza Suite 3335 New York, New York 10119 (212) 594-5000 Albert Togut Scott E. Ratner Steven S. Flores Counsel to the Debtor and Debtor in Possession

HEARING DATE: September 20, 2012 at 10:00 a.m. OBJECTION DEADLINE: September 13, 2012 at 4:00 p.m.

UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF NEW YORK ---------------------------------------------------------------X : : In re: : Chapter 11 : DEWEY & LEBOEUF LLP, : Case No. 12-12321 (MG) : : Debtor. : : ---------------------------------------------------------------X

DEBTOR’S MOTION FOR ENTRY OF AN ORDER, PURSUANT TO BANKRUPTCY RULE

9019 AND 11 U.S.C. §§ 105(a) AND 362, APPROVING PARTNER CONTRIBUTION SETTLEMENT AGREEMENTS

AND MUTUAL RELEASES FOR PARTICIPATING PARTNERS TO: THE HONORABLE MARTIN GLENN,

UNITED STATES BANKRUPTCY JUDGE:

Dewey & LeBoeuf LLP, as debtor and debtor in possession (the “Debtor”

or “DL”), hereby moves this Court (the “Motion”) for entry of an order approving

certain Partner Contribution Settlement Agreements and Mutual Releases (each a

“PCP” and, collectively, the “PCPs”),1 substantially in the forms annexed to the Ratner

1 Capitalized terms used but not defined in this Motion shall have the meaning ascribed to such terms

in the PCPs.

12-12321-mg Doc 399 Filed 08/29/12 Entered 08/29/12 16:55:24 Main Document Pg 1 of 25

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Declaration (defined below) between the Debtor and each Participating Partner,2 and in

support of this Motion, respectfully states:

PRELIMINARY STATEMENT

The Debtor has sought, from the very start of this case, to achieve the most

efficient, desirable, intelligent, and rapid solution possible for the resolution of partner

issues arising from the failure of the largest law firm ever to file for bankruptcy. Never

before has a law firm debtor mobilized its former partners -- who, out of necessity, have

had to relocate to numerous firms, revive their careers, devote their attention to

rebuilding their practices, dealt with the trauma of their failed firm, cope with the

emotions of shock, anger, and dismay resulting therefrom -- and, within just weeks after

all of this happened, been called upon to reach into their pockets and agree to pay

towards a settlement with creditors. That “ask” was difficult for partners to accept.

Many of them were also being asked to pay off personal loans they had to take to

finance their capital contributions to DL that had to be repaid despite that their capital

was lost in DL’s collapse. And all of them had to come to the realization that with DL’s

bankruptcy, they also could potentially be saddled with adverse tax consequences to

the extent they were to realize “phantom income” as a result of the cancellation of debt

if or when DL’s debt is not repaid in full.

In the typical law firm bankruptcy case, the “ask” doesn’t occur until

years into the case and when it does, it often takes even more years before partner 2 For purposes of this Motion, the term Participating Partner includes: (i) Accinni, Cartolano e

Associati Studio Legale (“Accinni”), an independent legal association organized under the laws of Italy; (ii) the Accinni Firm Participating Partners, each a member of DL and a partner of Dewey & LeBoeuf Studio Legale, an affiliate of DL and one of its Predecessor Entities; (iii) Grimaldi Studio Legale (“Grimaldi”), an independent legal association organized under the laws of Italy; and (iv) the Grimaldi Participating Partners, each a member of DL and a partner of Dewey & LeBoeuf Studio Legale, the predecessor entity of Grimaldi, an affiliate of DL and one of its Predecessor Entities. As described in the Mitchell Declaration (defined herein, the PCP of Grimaldi and the Grimaldi Participating Partners is conditional on the subsequent execution of an Asset Settlement Agreement.


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payments are made. The cost of getting to that point can be staggering for both the

estate and partner defendants. And the emotional wear and tear on partners, who are

not able to put their former firm behind them, coupled with the delay and inherent

uncertainty of time-consuming litigation against hundreds of partners, can be

debilitating.

The Debtor made an appeal to creditors to allow for partners to

compromise the maximum amount that might be collected from them if the partners

would agree to pay the creditors upfront, rather than at the end of the case. And the

Debtor committed that, if creditors would accept this never before tried approach, it

would conduct the case in record time, proposing a plan as soon as the PCPs were

approved, moving as fast as possible to a plan confirmation, hopefully before the end of

this year.

This case is not even three months old. The Debtor set a $50 million target

to bring the PCPs to Court for approval and asked the partners to sign up if they would

support this approach. More than 400 of them did, exceeding the Debtor’s goal by more

than $20 million. The PCP has not only been accepted, it has overwhelming support.

The partners have committed more than $70 million.3

This Motion represents the culmination of an extremely intense process

involving the active participation of the Debtor’s lenders, the Official Committee of

Unsecured Creditors (the “Official Creditors Committee”), the Debtor’s former

partners, and their many financial and legal advisors. Implementation of the PCP will

avoid years of costly and uncertain litigation, and millions of dollars in administrative

expenses. It provides certainty. It allows partners to go on with their lives and for

3 A portion of the settlement funds pledged are contigent on future conditions described in this Motion

and related declarations.


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creditors to get a quick return on their claims. It avoids years of litigation that would

clog the Bankruptcy Court’s already crowded calendar.

The alternative to the PCPs – commencing over 400 cases that each turn on

unique facts – could involve substantial risk and uncertainty. Insolvency could be a

threshold issue for all fraudulent conveyance claims (and would be costly to prove and

vigorously contested). Moreover, many of the issues that would be raised in litigation

concern unsettled law in this Judicial Circuit. Even if the Debtor were to prevail in

litigation, it would undoubtedly face collection issues that can be avoided with a

consensual resolution.

The Debtor seeks approval of the forms of PCPs entered into with the

Participating Partners as a necessary step for the implementation of each PCP. As

required by the PCPs, the Debtor also seeks approval of the form of injunction provided

for in the PCPs, which will ultimately be implemented through a Chapter 11 plan to be

filed by the Debtor within the next month or so.

The PCPs resulted from numerous conference calls with dozens, and on

several occasions, hundreds of participants, and at least two “town hall” type meetings

conducted by representatives of the Debtor and held in ballrooms of Manhattan hotels

so that all former partners could attend, listen and be heard, including those retirees

represented by the Ad Hoc Committee of Retired Partners of LeBoeuf, Lamb, Leiby &

MacRae.

After many weeks of such discussions with the various parties in interest,

the first version of the PCPs were made available by the Debtor to all former partners

on August 1, 2012, with an acceptance deadline of August 7, 2012. To facilitate broad

partner participation in the settlement process (and to incorporate additional comments

from counsel to former partners, the Official Creditors Committee and the Secured


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Lenders4), the forms of agreement were the subject of continuing negotiations and were

revised and circulated multiple times for review and comment. Many counsel for more

than 150 partners participated in those negotiations. The Debtor also extended the

acceptance deadline for the PCPs, ultimately to August 16, 2012.

The PCPs before the Court are the product of extensive arm’s length

bargaining conducted on the Debtor’s behalf primarily by estate fiduciaries. That more

than 400 partners, the Collateral Agent5 and the Official Creditors Committee are

supportive of implementation of the PCPs (and this Motion) is a monumental

achievement, and perhaps the best evidence that the settlements are fair and made in

good faith.

Pledged proceeds from Participating Partners’ payments aside, other

benefits to the Debtor’s estate include:

• The Debtor’s estate will receive the benefit of settlement payments many years earlier than it would in the event a long and costly investigation was undertaken and litigation pursued.

• The Debtor’s estate will avoid the substantial costs of administering a protracted bankruptcy over many years.

• The settlements will avoid the uncertainty that would be created by litigating with former partners. Partners have advanced -- and, if sued, would likely interpose -- numerous defenses and counterclaims in response to claims assertable by the Debtor’s estate.

• The settlements leave intact potential claims against key managers of DL and Non-Settling Partners.

4 “Secured Lenders” means parties to a secured credit agreement dated as of April 16, 2010 (the “Credit

Agreement”), together with holders of senior secured notes issued by the Debtor. 5 JPMorgan Chase Bank, N.A. (“JPMorgan”) serves as collateral agent (the “Collateral Agent”) to the

Secured Lenders pursuant to that certain intercreditor agreement dated as of April 16, 2010. Pursuant to the Credit Agreement, JPMorgan also serves as administrative agent to a certain subset of the Secured Lenders. For the sake of simplicity, JPMorgan will be referred to throughout the Motion as the “Collateral Agent,” irrespective of the capacity in which it may have acted with respect to specified events detailed herein.


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• PCPs with DL’s largest “rainmakers” preserve the Debtor’s Unfinished Business Claims based on the doctrine articulated in “Jewel vs. Boxer.”

• Partners are required to cooperate in the collection of unbilled time and accounts receivable to receive the benefits of the PCPs.

• Direct claims that Participating Partners have against Non-Settling Partners are assigned to the Debtor’s estate.

• The Participating Partners release claims against one another.

• The Debtor (and the Participating Partners) will obtain appropriate releases under the terms of the PCPs.

Many of these features will provide additional sources of recovery to the Debtor’s estate

and/or serve to minimize the costs of administering this Chapter 11 case.

Further investigation or delay is not needed to prove the obvious: these

settlements are made in good faith; and they are fair, equitable, and in the best interests

of the Debtor’s estate, and represent a sound exercise of the Debtor’s business

judgment. The more than $70 million in settlement payments pledged by Participating

Partners through the PCPs represents an unprecedented success that far exceeds the

“lowest point in the range of reasonableness” which is the principal legal hurdle that

must be satisfied.

The PCPs obligate the Debtor to exchange mutual releases with, and to

obtain an injunction for the benefit of, Participating Partners. Under the terms of the

PCPs, the scope of the injunction bargained for must be approved now, but it will be

implemented later through a confirmed Chapter 11 plan. The injunction which the

Debtor is obligated to obtain is proper in scope because it is limited to claims or causes

of action that are either: (i) property of the Debtor’s estate, or (ii) derivative of a right

assertable by, or belonging to, the Debtor. Many Participating Partners made clear that

if the Debtor did not commit to obtaining the injunction as delineated in the PCPs, the


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more than $70 million in settlement payments that have been pledged would not have

been attainable.

Granting the Motion and approving the PCPs, including the injunctive

provisions contained therein, will facilitate an elegant end to this bankruptcy case and

help generate proceeds in the very near future for distribution to creditors, secured and

unsecured alike, under a confirmed Chapter 11 plan.

BACKGROUND

1. On May 28, 2012 (the “Petition Date”), the Debtor filed a voluntary

petition in this Court for relief under Chapter 11 of title 11 of the United States Code

(the “Bankruptcy Code”). The factual background regarding the Debtor is set forth in

detail in the Declaration of Jonathan A. Mitchell submitted in accordance with Local

Bankruptcy Rule 1007-2 in support of the Debtor’s Chapter 11 petition (the “First Day

Declaration”) filed on the Petition Date [Docket No. 2], which is incorporated herein by

reference. The supplemental declaration of Jonathan A. Mitchell (the “Mitchell Decl.”),

along with the declaration of David Pauker (the “Pauker Decl.”), have also been filed in

support of the Motion (and are also incorporated herein by reference).

2. The Debtor’s lead counsel (Albert Togut) made public the Debtor’s

intention to attempt to reach consensus on a PCP at the very first hearing in the case.

He explained that it was the goal to have the Debtor’s former partners voluntarily

contribute money to the estate based on objective criteria:

TOGUT: We have been very busy pre-petition dealing with the issue of partner contributions. That usually comes at the tail end. That’s something that usually takes three or four years to achieve. We hired Goldin Associates, which has done this before in Coudert for the Examiner, to help us develop a sensible approach to partner contribution amounts and a plan to make this approach a reality . . . . We’ve [also] engaged the lender group and their advisors, FTI, and made a lot of progress towards a solution . . . .


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Our goal is to get to a negotiated settlement and to bring in money without the staggering administration expenses that you see in case after case of these law firm failures.

Declaration of Scott E. Ratner, Esq., dated August 29, 2012 (“Ratner Decl.”), at Exhibit

(“Ex.”) 1 (23:3-24).

3. Togut, Segal & Segal LLP (the “Togut Firm”) and Goldin

Associates, LLC (the “Goldin Firm”), working before the Chapter 11 petition was filed

and thereafter at the direction and under the supervision of Jonathan Mitchell of the

Zolfo Cooper firm in his capacity as the Debtor’s Chief Restructuring Officer (the

“CRO”), devised the PCPs. See Mitchell Decl., ¶ 10. As part of the development of the

PCPs, the Debtor established an amount that each former partner was required to pay

(the “Partner Contribution Amount”) to obtain a general release from the estate and the

other benefits provided by the PCPs.

4. The goal of the PCPs is simple – to create value for the estate earlier

in the case and to minimize administrative costs by avoiding costly and time-

consuming litigation. See Mitchell Decl., ¶¶ 9, 11.

5. To develop proposals for the PCPs, it was necessary to investigate,

review and analyze potential claims that could be asserted against former partners and

that would be subject to compromise as part of a settlement. In that process, the

Debtor’s professionals reviewed, among other things, the Debtor’s financial records for

2011 and 2012 and determined that the Debtor had paid more than $400 million to

partners in 2011 and 2012 (during the period prior to the Petition Date). See Pauker

Decl., ¶¶ 12, 31. The Debtor’s professionals considered that those sums could be subject

to various estate causes of action. See Pauker Decl., ¶¶ 16, 18, 31.

6. Under the PCPs, a former partner’s Partner Contribution Amount

incorporates three components: first, a “PCP Amount” that is largely based on the


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payments received by the former partner during 2011 and 2012; second, an amount

attributable to unreimbursed tax advances made by DL on behalf of the partner; and,

third, an amount on account of any unpaid capital contributions contractually due and

owing from the partner. See Pauker Decl., Ex. 1. Subject to the terms and conditions of

the PCPs, payment of the Partner Contribution Amount settles all claims the Debtor’s

estate may have against Participating Partners, other than the Debtor's Unfinished

Business Claims against certain former partners.6 See Pauker Decl., ¶ 12.

7. Based upon a review of the Debtor’s records and the facts and

circumstances attendant to individual partners and categories of partners, the Debtor

determined that it would be appropriate and in the best interest of the estate to seek

aggregate Partner Contribution Amounts of approximately $89 million,7 consisting of:

PCP Amounts totaling approximately $74.5 million; tax advance reimbursement

amounts of $9.8 million; and unpaid capital contribution amounts of $4.8 million. See

Pauker Decl., ¶ 12.8 In connection with the Debtor’s offer of settlement, each former

partner received a form of PCP, together with a calculation of his or her Partner

Contribution Amount, which was set forth in Exhibit “B” to such partner’s PCP.9 Each

partner’s individual Exhibit “B” sets forth the calculation of the PCP Amount, tax

advance reimbursements and unpaid capital contribution to be paid by the partner.

See Pauker Decl., ¶ 12. 6 The Debtor currently is engaged in negotiations with former partners and their new law firms in an

attempt to settle the Unfinished Business Claims. The goal is to complete those settlements in the coming weeks. Proposed settlements of those claims will be presented to the Court in a further motion.

7 See Pauker Decl., n. 2. 8 Annexed as Exhibit “1” to the Pauker Declaration are the aggregate Proposed Contribution Amounts

of all of the Debtor’s former partners and an explanation of the calculation. 9 A form of PCP and an Exhibit “B” were disclosed to partners through a secure website and/or

emailed.


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8. After nearly four weeks of discussions with advisors for the various

groups impacted by the PCPs, the Debtor made the first version of the PCPs available to

partners on August 1, 2012, with an acceptance deadline of August 7, 2012. See Mitchell

Decl., ¶ 17. To facilitate broad partner participation in the settlement process (and to

incorporate comments from advisors to the Collateral Agent, the Official Creditors

Committee, and more than 150 former partners), the forms of agreement were

subsequently revised and circulated for review and comment multiple times. See

Mitchell Decl., ¶ 17. The Debtor also extended the acceptance deadline for the PCPs,

ultimately to August 16, 2012.

9. As of today, over 400 Participating Partners have committed to

make approximately $71 million in settlement payments,10 constituting approximately

80% of the aggregate of all Partner Contribution Amounts sought from former partners

under the PCPs. See Pauker Decl., ¶ 13.11

JURISDICTION AND STATUTORY PREDICATES

10. This Court has subject matter jurisdiction over this Motion

pursuant to 28 U.S.C. § 1334 and the Amended Standing Order [M10-468], dated

January 31, 2012 (Preska, C.J.). This is a core proceeding pursuant to 28 U.S.C.

§ 157(b)(2)(A). The Court can exercise its subject matter jurisdiction pursuant to

28 U.S.C. § 157(b)(1).

10 As further described below, the Participating Partners have the option of making a lump-sum

payment or executing a interest-bearing Note to be paid in full within three (3) years. 11 The Debtor’s forms of PCP are being submitted with this Motion for approval. The specific PCPs

have not been submitted because, among other reasons, the names of participants and specific contribution amounts are confidential. This information can be provided to the Court upon request.


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11. The statutory predicates for the relief requested herein are sections

105(a) and 362 of the Bankruptcy Code and Rule 9019 of the Federal Rules of

Bankruptcy Procedure (the “Bankruptcy Rules”).

RELIEF REQUESTED

12. The Debtor requests entry of an order in the form annexed hereto

as Exhibit “1” (the “9019 Order”), among other things: (a) finding that the settlements

and releases embodied in the PCPs have been entered into and made in good faith;

(b) approving the PCPs and the form of injunction required therein to be implemented

under a Chapter 11 plan; (c) providing that the stay provisions of section 362 of the

Bankruptcy Code apply to all claims of the Debtor and the Debtor’s Chapter 11 estate

that are the subject of the Debtor Released Claims; (d) providing that the Bankruptcy

Court expressly reserves jurisdiction, including its exclusive jurisdiction pursuant to 28

U.S.C. § 1334(e) to enforce the injunction to be issued pursuant to the terms of the PCPs,

the stay provisions of section 362 of the Bankruptcy Code over any and all disputes,

actions, contested matters, or other proceedings brought with respect to the PCPs, and

any and all claims of the Debtor and the Debtor’s Chapter 11 estate that are the subject

of the Debtor Released Claims; and (e) such other relief as this Court deems just and

proper.

THE PARTNER CONTRIBUTION PLAN

13. The PCP Amount is based on payments received by former

partners during 2011 and 2012 and was determined according to a progressive payment


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table.12 Pursuant to the progressive payment table, partners who received more from

DL not only pay a greater settlement amount, but also pay a greater proportion of

amounts received. Additionally, partners receiving payments in excess of their draws

during 2012 are subject to an additional 20% payment premium on account of such

amounts. Members of DL’s Executive Committee (i.e. management) are subject to an

additional payment premium of up to 20% based on length of service on the committee.

See Pauker Decl., ¶ 35(b). Notably, the marginal additional payment premium for the

highest compensated former partners exceeds 50% for 2012 payments and 30% for 2011

payments.13 See Pauker Decl., ¶ 14. Partner Contribution Amounts were reached

through the uniform application of the PCP methodology. See Mitchell Decl., ¶ 18.

14. It is the Debtor’s firmly held belief based on its review and the

personal experience of several of the estate’s fiduciaries that the PCPs will generate a

larger net return for the Debtor’s estate than would otherwise be attainable from former

partners on a litigated basis. In considering the appropriateness of compromising and

settling its potential claims against former partners, many factors were taken into

account by the Debtor, including, inter alia:

• The outcome of litigation against former partners would not be free from doubt. Former partners have maintained, and could be expected to assert, numerous defenses and counterclaims in response to claims brought by the estate;

12 The progressive payment table used to calculate the PCP Amounts is included in Exhibit “1” annexed

to the Pauker Declaration. In conjunction with the calculations under the progressive payment table, certain credits are applied to gross payments received by former partners.

13 There is a maximum payment of $3.5 million, which impacts only one former partner. Participating Partners may receive a reduction of up to 5% of their Partner Contribution Amounts based on (a) collection of their accounts receivable between August 1, 2012 and September 15, 2012 in full or discounted, as approved by the Collateral Agent for the Debtor’s Secured Lenders or (b) $70 million in Partner Contribution Amounts having been committed to by former partners who timely signed and returned PCPs. Credits based on aggregate Partner Contribution Amounts will be calculated based on PCPs approved and effective as of the Effective Date.


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• The insolvency of the Debtor would be less difficult to demonstrate immediately prior to the commencement of the bankruptcy case, but would be comparatively more difficult and likely contested with respect to earlier dates; and

• The PCPs do not resolve Unfinished Business Claims involving DL’s largest “rainmakers” but leave them to be settled or otherwise resolved by September 30, 2012.

See Pauker Decl., ¶ 15 (discussing these and other factors).

THE PROPOSED SETTLEMENT

15. The principal terms of the PCPs are: 14

• The Releases. Upon the Effective Date, the Participating Partners and the Debtor each provide broad mutual releases. The releases do not extend to Steven H. Davis (DL’s former Chairman of the Partnership); Stephen DiCarmine (DL’s former Executive Director); Joel Sanders (DL’s former Chief Financial Officer); or any current or former equity or salaried partner who does not become a Participating Partner. The Debtor releases are to the fullest extent of any right or interest of the Debtor or its bankruptcy estate. However, there are two main forms of Debtor release. In one form, the term “Debtor Released Claims” includes claims or causes of action arising from or under the unfinished business doctrine. In the other form, the term Debtor Released Claims excludes such Unfinished Business Claims. The Debtor and its advisors are analyzing Unfinished Business Claim liability for certain former partners. Former partners who may have such liability have not been permitted to sign a form of PCP that releases those claims. The form of PCP excluding Unfinished Business Claims is attached to the Ratner Decl. at Ex. 2, and the form PCP including such claims is attached at Ex. 3 (with a blackline to show differences between the forms).

• Injunction (and Limitations). The Debtor is obligated to obtain an injunction for

the benefit of Participating Partners.15 Without this protection, it is unlikely that the Participating Partners would make the valuable contributions provided in the PCPs. Subject to the terms of the PCPs, the Debtor is not deemed to release, or obligated to seek to enjoin, any claim or cause of action that is not derivative

14 The summary of the settlement is provided as a convenience. In the event of any conflicts between

this summary and the PCPs, the PCPs control. 15 In connection with confirmation of a Chapter 11 plan, the Debtor is also obligated to request a “Bar

Order” that, among other things, is intended to preclude any liability of any of the “Releasees” to any person or entity for indemnification, contribution, or otherwise on any claim that is or arises from the Debtor Released Claims and where the alleged injury to such person or entity arises from that person’s or entity’s alleged liability to the Debtor. The Debtor is not seeking implementation or approval of the scope of the Bar Order now. Neither the implementation nor approval of the scope of the Bar Order is a condition to effectiveness of the PCPs. The complete terms of the Bar Order are provided in paragraph 4 of the PCPs.


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of a claim or right assertable by or belonging to the Debtor or is not otherwise property of the Debtor’s estate, provided that any claims between or among the Participating Partners and/or relating to the affairs of the Debtor shall be deemed released (as further described below).

• Releases by the Participating Partner of Each Other. Upon the Effective Date,

the Participating Partner releases claims against other Participating Partners that in any way relate to, among other things, the Debtor, the Predecessor Entities, or a Related Entity. The release provides important protection to Participating Partners from future litigation and will also preserve Debtor-related insurance proceeds.

• Covenants and Assignment of Claims. The Participating Partners covenant that

they will not file any claim against the Debtor (except for proofs of claim against the Debtor in the Bankruptcy Case, which will be deemed withdrawn upon the Effective Date). Moreover, to the extent the Participating Partners have any direct claims against non-settling partners, those claims are irrevocably assigned to the Debtor (with certain exceptions). This assignment of claims will limit litigation thereby preserving Debtor-related insurance proceeds.

• Effective Date. The Effective Date will occur when the last of the following

events has occurred:

the Court shall have entered a Final Order approving the PCPs and the form of injunction described in the PCPs to be implemented under a Chapter 11 plan;

the Parties shall agree to a settlement of all Unfinished Business Claims

asserted against a Participating Partner, if any, in the coming weeks;16 the Bankruptcy Court shall have entered a Final Order confirming a Chapter

11 plan that (i) incorporates and implements the terms of the PCPs, including the releases and injunctions provided for therein, and (ii) provides that no holder of a claim arising under the Debtor’s Credit Agreement or under the Note Agreement, shall be entitled to a distribution of any amounts paid to the Debtor’s estate by the Partner Parties unless such holder releases any and all claims that such holder may hold against such Partner Parties, in such holder’s capacity as a holder of a claim under the Credit Agreement or Note Agreement, relating to the Debtor, the Predecessor Entities or a Related Entity;

the effective date of the Chapter 11 Plan shall have occurred; and

16 The failure to satisfy this condition does not prevent the PCP from becoming binding and effective;

provided, however, if this condition has not been satisfied by September 30, 2012, the Participating Partner against whom Unfinished Business Claims could be asserted can terminate his or her PCP by written notice to be received by the Debtor no later than October 5, 2012.


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the Debtor, in consultation with its advisors, shall have provided the Creditors’ Committee and the Collateral Agent a certificate certifying that the Debtor believes, in good faith, that, as of the day that is five (5) calendar days prior to the hearing scheduled on approval of a disclosure statement relating to the Chapter 11 Plan, the Participating Partner has complied with his/her obligations with respect to unbilled time and outstanding accounts receivable for the benefit of the Debtor’s estate.

• Payment. The Participating Partners shall, within ten (10) business days of the

publication of Effective Date Notice: (i) pay to the Debtor the Partner Contribution Amount in cash; or (ii) execute and deliver to the Debtor a fully completed Note in a principal amount equal to the Partner Contribution Amount.

• Cooperation. The Participating Partners agree to, among other things,

reasonably cooperate in good faith in the billing of unbilled time and the collection of outstanding receivables for the benefit of the Debtor’s Chapter 11 estate, and shall reasonably cooperate in the Debtor’s investigation and prosecution of Unfinished Business Claims.

16. In a few special instances, the PCPs have been modified or

amended to account for unique considerations. See Mitchell Decl., ¶ 26 (describing

modifications); see also Ratner Decl., ¶ 8-11 (attaching modified agreements with

blacklines, and one amendment).

ARGUMENT

A. The PCPs Should Be Approved

17. Approval of the PCPs is governed by Bankruptcy Rule 9019(a),

which provides, in relevant part, that “[o]n motion by the trustee and after notice and a

hearing, the court may approve a compromise and settlement.” Bankruptcy Rule

9019(a).

18. A court must determine that a settlement under Bankruptcy Rule

9019 is fair, equitable, and in the best interests of the estate before it may approve it.

Protective Comm. For Indep. Stockholders of TMT Trailer Ferry, Inc. v. Anderson (“TMT

Trailer”), 390 U.S. 414, 424-25 (1968); In re Ionosphere Clubs, Inc., 156 B.R. 414, 426


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(S.D.N.Y. 1993), aff’d, 17 F.3d 600 (2d Cir. 1994); In re Mrs. Weinberg's Kosher Foods, Inc.,

278 B.R. 358, 365 (Bankr. S.D.N.Y. 2002); In re MF Global Inc., Case No. 11–2790 2012 WL

3242533 at *5 (Bankr. S.D.N.Y. Aug 10, 2012).

19. In doing so, the Court need not decide the numerous issues of law

and fact raised by a compromise or settlement “but must only ‘canvass the issues and

see whether the settlement falls below the lowest point in the range of reasonableness.’”

In re Adelphia Commc’n. Corp., 327 B.R. 143, 159 (Bankr. S.D.N.Y. 2005) (quoting In re

W.T. Grant Co., 699 F.2d 599, 608 (2d Cir. 1983)). The Court need not “conduct a ‘mini-

trial’” but rather “only need be apprised of those facts that are necessary to enable it to

evaluate the settlement and make a considered and independent judgment. In re

Adelphia, 327 B.R. at 159.

20. The decision to approve or deny a particular settlement involving a

bankruptcy estate lies within the discretion of the bankruptcy court. See In re Drexel

Burnham Lambert Group, Inc., 134 B.R. 499, 505 (Bankr. S.D.N.Y. 1991); see also Nellis v.

Shugrue, 165 B.R. 115, 122-23 (S.D.N.Y. 1994). A court may exercise its discretion “in

light of the general public policy favoring settlements.” In re Hibbard Brown & Co., Inc.,

217 B.R. 41, 46 (Bankr. S.D.N.Y. 1998) (citing cases). And, in order to evaluate the

necessary facts, a court may rely on the opinion of the debtor, settlement parties and

professionals. See In re Purofied Down Prods. Corp., 150 B.R. 519, 522 (S.D.N.Y. 1993); In

re Chemtura Corp., 439 B.R. 561, 594 (Bankr. S.D.N.Y. 2010); See also In re MF Global Inc.,

Case No. 11–2790 2012 WL 3242533 at *5 (Bankr. S.D.N.Y. Aug 10, 2012) (recognizing

the business judgment of the debtor in recommending a settlement should be

considered).

21. Courts evaluate the following factors when considering whether to

approve a settlement:


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(a) the balance between the litigation's possibility of success and the settlement's future benefits;

(b) the likelihood of complex and protracted litigation, “with its attendant expense, inconvenience, and delay,” including the difficulty in collecting on the judgment;

(c) “the paramount interests of the creditors,” including each affected class's relative benefits “and the degree to which creditors either do not object to or affirmatively support the proposed settlement”;

(d) whether other parties in interest support the settlement;

(e) the “competency and experience of counsel” supporting the settlement;

(f) “the nature and breadth of releases to be obtained by officers and directors”; and

(g) “the extent to which the settlement is the product of arm's length bargaining.”

See Motorola, Inc. v. Official Comm. of Unsecured Creditors (In re Iridium Operating LLC),

478 F.3d 452, 462 (2d Cir. 2007).

22. The PCPs meet each of the Iridium factors and amply satisfy the

TMT Trailer standards for approval of a settlement. The PCPs are fair and equitable and

in the best interests of the estate because, together, they resolve on a consensual basis

potential claims and causes of action assertable against more than 400 former partners

on terms well above the “lowest point in the range of reasonableness,” and the proceeds

to be generated will serve as the key foundation for a feasible, largely consensual plan

of reorganization.

i. The Outcome of Litigation Is Uncertain While Settlement Benefits Are Substantial

23. The first Iridium factor reflects the Supreme Court’s view that a

court should form an “intelligent and objective opinion” of the probability of success in

the underlying litigation and inherent costs of such litigation. TMT Trailer, 390 U.S. at

424. As set forth at length in the Pauker Declaration, the Goldin Firm was retained to,


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among other things, evaluate certain potential claims against partners and former

partners (“Partner Claims”) and formulate and participate in the negotiation of a

settlement of the Partner Claims.

24. Partner Claims are comprised of: (a) claims arising under Chapter

5 of the Bankruptcy Code to recover approximately $432 million in payments received

by partners during 2011 and 2012; (b) claims for reimbursement of tax advances;

(c) claims for unpaid capital contributions; (d) claims based on breach of fiduciary

duty; and (e) claims based on contractual obligations under the Debtor’s partnership

agreement. See Pauker Decl., ¶¶ 18, 31.

25. The Participating Partners and the Togut and Goldin Firms

identified numerous defenses and counterclaims to the Partner Claims that factored

into the PCP Amount, including: (a) an assertion that the Participating Partners

provided fair or “reasonably equivalent value” in good faith for most of the payments

received; (b) an assertion of rights of set-off and/or recoupment on account of under-

distributions from prior periods; (c) counterclaims based on unpaid contractual

guaranteed compensation and other bonuses; (d) claims based on fraud or fraudulent

inducement; (e) claims based on lost profits and opportunity costs; (f) claims to recover

undistributed grantor trust payments or deferred compensation; (g) claims based on

lost retirement benefits and pension contributions; (h) claims for unreimbursed

expenses; (i) claims for return of capital arising from fraud or constructive fraud;

(j) claims based on inducement to take out loans to finance capital contributions; and

(k) claims for breach of fiduciary duty against certain partners who, in turn, have

indemnification rights against the Debtor. See Pauker Decl., ¶¶ 22-26.

26. The Debtor and its advisors also considered potential responses to

these defenses and counterclaims, including: (a) partner claims may be subordinated to


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the claims of the Debtor’s general creditors whether by reason of the Debtor’s

partnership agreement, state law, or section 510(b) of the Bankruptcy Code;

(b) contractual guaranteed compensation agreements may be avoidable under section

548(a)(1)(B)(iv) of the Bankruptcy Code; and (c) avoidance claims are not subject to set-

off or recoupment rights pursuant to section 502(d) of the Bankruptcy Code. See Pauker

Decl., ¶ 23.

27. Notwithstanding the Debtor’s potential responses to Participating

Partner defenses and counterclaims, the Debtor and its advisors also considered the

large number of former partners and partner groups that actively engaged in

negotiations relating to the Partner Claims and the PCPs, many of whom were

represented by highly skilled and experienced members of the bankruptcy bar.

28. For these and many other reasons, pursuing any or all of the

Partner Claims would raise significant and complex issues of fact and law, all of which

carry significant litigation risk (to all parties). Accordingly, the CRO, in consultation

with the Togut and Goldin Firms, made a well-considered business judgment to settle

and compromise the Partner Claims utilizing the PCP methodologies developed by the

Goldin Firm (as described in the Pauker Declaration) for the approximately $71 million

in Partner Contribution Amounts to be paid by the Participating Partners as provided

for in the PCPs. The PCPs were determined to be in the best interests of the estate as a

means to maximize value and provide a path forward to efficiently conclude the

Debtor’s Chapter 11 case, without the considerable cost, delay and uncertainty that

would inevitably be faced if the Partner Claims were fully investigated and litigated.

See Mitchell Decl., ¶ 11.


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ii. The Alternative to the PCPs Is Years of Complex, Costly Litigation

29. In evaluating the reasonableness of a settlement, a court should

“form an educated estimate of the complexity, expense, and likely duration of such

litigation, the possible difficulties of collecting on any judgment which might be

obtained, and all other factors relevant to a full and fair assessment of the wisdom of the

proposed compromise.” TMT Trailer, 390 U.S. at 424.

30. Clearly, any litigation over the Partner Claims would be highly

contentious, drawn-out and costly. In connection with negotiation of the PCPs, the

Debtor and its advisors negotiated with more than 150 partners many of whom were

represented by highly sophisticated and able counsel.

31. The alternative to the PCP is years of protracted litigation. Without

the PCPs, the Debtor would be faced with more than 400 separate adversary

proceedings, which it simply does not have the resources to prosecute. Each of these

cases would turn on their own facts, so the cost (and uncertainty) of the “litigation

alternative” cannot be overstated.

32. Insolvency would be a threshold issue for all fraudulent

conveyance claims. Proving insolvency would be expensive and vigorously contested.

33. Moreover, many of the issues that would be raised in litigation

concern unsettled law in this Judicial Circuit.

34. Even if the Debtor were to prevail in litigation, it would

undoubtedly face collection issues that can be avoided (or at least mitigated) within the

context of a consensual settlement.

iii. The PCPs Have Widespread Support

35. It appears that virtually every constituency in the Debtor’s Chapter

11 case supports the PCPs. Significantly, the vast majority of the Debtor’s former


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partners have elected to accept the terms of the PCPs by entering into PCPs, and the

Official Creditors Committee, as a fiduciary body charged with representing the

interests of all of the Debtor’s unsecured creditors, and the Secured Lenders have

voiced their general support for the PCPs. As detailed in the Mitchell Declaration (see ¶

17), the PCPs were developed over many weeks of intense negotiations with the

Secured Lenders, the Official Creditors Committee and various former partners and

partner groups. Both the Secured Lenders and the Official Creditors Committee

actively participated in the PCP process and supported, with few if any exceptions, the

decisions made and actions taken by the Debtor in developing and implementing the

PCP. The result of these negotiations is a comprehensive settlement that is fair,

equitable, and in the best interests of the estate.

iv. The PCPs Are Supported By Highly Skilled Counsel and Advisors

36. The Debtor and the Participating Partners have been represented

by skilled and experienced bankruptcy practitioners during the negotiations involving

the promulgation of the PCPs, which further supports approval of the settlement.

Courts have given this factor considerable weight. See In re Adelphia, 327 B.R. at 164; see

also In re Chemtura Corp., 439 B.R. at 608 (“No argument has been made, nor could any

argument be made that counsel who put the Settlement together were anything less

than highly skilled in their craft . . . .”). If the PCPs are not approved, these same skilled

attorneys who are representing former partners in support of the PCPs will zealously

represent their clients to impede any recovery by the Debtor.

v. Nature and Breadth of Releases Are Proper

37. The releases proposed to be exchanged under the PCPs are

appropriate and an integral part of the comprehensive resolution of the Partner Claims

achieved by the PCPs. The releases provided for under the PCPs fall within one of two


22

categories – those that are being given by, or among, the Participating Partners and

those that the Debtor is giving to the Participating Partners.

38. The Participating Partners have agreed, as provided for in the

PCPs, to give releases for the benefit of each other resolving all of the underlying

disputes relating to Partner Claims and other claims arising from or related to the

Debtor and related entities with finality, a critical component of gaining partner support

for the PCPs. See, e.g., Ratner Decl., Ex. 2, ¶ 6. This will extinguish hundreds, if not

thousands, of ancillary claims (and hundreds of potential lawsuits). Mutual releases are

typical and customary in settlements in general.

39. With respect to the releases being given by the Debtor to

Participating Partners under the PCPs, all Debtor claims, including derivative claims,

accrue to a debtor in possession upon the filing of bankruptcy, and the debtor in

possession is “vested with the power to settle the estate’s claims.” Police & Fire

Retirement System v. Ambac Fin. Group (In re Ambac Fin. Group, Inc.), 2011 WL 6844533 at

*2 (S.D.N.Y. Dec. 29, 2011) (quoting Smart World Techs., LLC v. Juno Online Servs., Inc.,

423 F.3d 166, 175 (2d Cir. 2005)).

40. The releases are an integral part of the PCPs. The Debtor believes

that without the consensual releases the Participating Partners would not have entered

into the PCPs.

vi. The PCPs Are the Product of Arm’s Length Bargaining

41. The PCPs are indisputably the product of good-faith, arm’s length

negotiations that took place over two months involving various representatives of, and

advisors to, the Debtor, the Secured Lenders, the Official Creditors Committee and

more than 150 former partners and/or their counsel. See Mitchell Decl., ¶ 16.

Ultimately, the PCPs represent concessions by all of the parties, are the result of


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extensive negotiations by parties with competing economic interests, and were not the

result of fraud or collusion. See In re Chemtura Corp., 439 B.R. at 608 (“Finally, I find that

the Settlement was truly the product of arms-length bargaining, and not fraud or

collusion.”).

42. Moreover, the fact that the PCPs include members of the Wind-

Down Committee (Horvath and Meyer) does not alter the fact that the proposed

consensual resolution of Partner Claims was negotiated at arm’s length and fully

reviewed by the Debtor’s independent CRO and outside professional advisors prior to

approval.

THE SCOPE OF THE INJUNCTION IS APPROPRIATE

43. With this Motion, the Debtor is obligated to seek approval, but not

implementation, of the form of injunction set out in the PCPs. If this Court does not

approve “in substance” the form of injunction set out in paragraph 3 of the PCPs (as

limited by paragraph 5), Participating Partners can withdraw their participation in the

PCPs. Importantly, with this Motion, the Debtor is not seeking the implementation, or

approval of the scope, of the separate and distinct Bar Order described in paragraph 4

of the PCPs. Thus, the Bar Order is not at issue in this Motion.

44. As for the injunction, it is both appropriate and necessary because,

without it, the $71 million in pledged settlement payments would not have been

attainable. See Mitchell Decl., ¶ 23. More importantly, paragraph 5 of all PCPs limit the

injunction as follows:

Notwithstanding the foregoing, nothing in paragraphs 2, 3 or 10 shall be deemed to release, or obligate the Debtor to obtain an order enjoining: any claim or cause of action that is not derivative of a claim or right assertable by or belonging to the Debtor or is not otherwise property of the Debtor’s estate. . . .


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See Ratner Decl., Ex. 2 at ¶ 5 (emphasis added); Ratner Decl., Ex. 3 at ¶ 5. Therefore, the

injunction will only reach claims or causes of action that are either: (i) property of the

Debtor’s estate, or (ii) derivative of a right asssertable by, or belonging to, the Debtor.

45. “State law determines which claims belong to the estate, and hence,

can be asserted by the trustee.” Goldin v. Primavera Familienstiftugn, et al. (In re Granite

Partners, L.P.), 194 B.R. 318, 324 (Bankr. S.D.N.Y. 1996) (citing cases); see also St. Paul Fire

& Marine Ins. Co. v. PepsiCo, Inc., 884 F.2d 688, 700 (2d Cir. 1989). If, under state law, a

cause of action belongs to the estate, the trustee has the exclusive standing to assert it.

See Granite Partners, 194 B.R. at 324-25 (enjoining an action to prosecute waste,

mismanagement and breach of fiduciary duty); see also iXL Enters. v. GE Capital Corp.,

167 Fed. Appx. 824, 826 (2d Cir. 2006) (allowing a debtor to be substituted as plaintiff of

an existing pre-petition derivative action because such a claim was property of the

debtor’s estate).

46. The scope of the injunction is proper here, because it could only

apply to claims that belong to the bankruptcy estate, or are derivative of claims

belonging to the estate -- all claims that the Debtor has the exclusive standing to assert.

17 See, e.g., Fox v. Picard (In re Madoff ), 848 F.Supp.2d 469, 481 (S.D.N.Y. 2012) (“[A]

bankruptcy court may enjoin actions that are derivative or duplicative of claims

17 In In re Metromedia Fiber Network, Inc., 416 F.3d 136 (2d Cir. 2005), the Second Circuit set forth the test

to scrutinize non-consensual releases of non-debtor claims, which requires: (1) a finding of “unusual circumstances” warranting approval of the provisions and (2) that the court has subject matter jurisdiction over such claims. Id. at 143. With this Motion, the Debtor is not seeking to enjoin any claims, but only to have its form of injunction approved by the Court. The limited injunction sought by the Debtor will be implemented through a Chapter 11 plan. Moreover, the injunction will not apply to any claims that the Debtor does not have the exclusive standing to assert. Inapplicability of Metromedia aside, unusual circumstances clearly exist here because, among other reasons: (i) the releases and injunction were necessary to get partner participation in the PCP; (ii) the releases and injunction are limited in scope; and (iii) the substantial consideration to be received by the Debtor’s estate in exchange for the releases and injunction will be one of the largest asset of the Debtor’s estate and critical to the success of this case and the recoveries to be obtained by creditors. See In re Coudert Brothers LLP, Case No. 06-12226 (Bankr. S.D.N.Y. Aug. 27, 2008) (Docket No. 883).


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brought by the trustee, or that could have been brought by the trustee in the first

instance.”); In re The 1031 Tax Group, LLC, 397 B.R. 670, 680-81 (Bankr. S.D.N.Y. 2008)

(holding that derivative claims are property of the estate); In re Mrs. Weinberg's Kosher

Foods, Inc., 278 B.R. 358, 365 (Bankr. S.D.N.Y. 2002) (holding that, in approving a

settlement, a bankruptcy court “may enjoin creditors from prosecuting the settled

claims derivatively in another court”).

NOTICE

47. Notice of this Motion has been provided by in accordance with this

Court’s Administrative Order Establishing Case Management Procedures, dated May

30, 2012 [Docket No. 30]. In light of the nature of the relief requested, the Debtor

submits that no further notice is necessary.

NO PRIOR APPLICATION

48. No previous motion for the relief sought herein has been made to

this or any other Court.

CONCLUSION

WHEREFORE, the Debtor respectfully requests entry of the order

annexed hereto, and for such further and different relief as is just and proper.

Dated: New York, New York August 29, 2012

DEWEY & LEBOEUF LLP, By its Attorneys TOGUT, SEGAL & SEGAL LLP By: /s/ Albert Togut ALBERT TOGUT SCOTT E. RATNER STEVEN S. FLORES One Penn Plaza, Suite 3335 New York, New York 10119 (212) 594-5000


debtors motion for entry of order approving pcp

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