Former partners at Dewey & LeBoeuf agreed on Thursday to return more than $60 million of their compensation to help pay the failed law firm's creditors.
The proposed settlement, reached nearly three months after the firm collapsed, would be the first substantial recovery by Dewey's creditors, which are owed more than $300 million. The deal is subject to approval by a bankruptcy judge.
“This is a key milestone we are pleased to have reached: an early settlement that can deliver meaningful recoveries to creditors and let former partners put this behind them,†Joff Mitchell, Dewey's chief restructuring officer and an executive at the advisory firm Zolfo Cooper, said in a statement.
Roughly half of Dewey's 672 former partners signed the settlement, which required them to return a portion of their pay from 2011 and 2012. The amount was based on a complex formula tied to their compensation, ranging from a minimum of $5,000 for retired partners to $3.5 mill ion for the firm's highest-paid lawyers.
By agreeing to the deal, the partners insulated themselves from future lawsuits related to the firm's collapse. Those who refused to sign on could still face legal claims from creditors, which range from large banks and bondholders to a car service company and an executive recruiter.
The team overseeing the firm's liquidation prohibited the former chairman, Steven H. Davis, from participating in the settlement. The Manhattan district attorney's office is investigating Mr. Davis for possible financial improprieties. He has denied any wrongdoing.
Dewey's demise this year sent shock waves through the legal industry.
Once one of the country's largest law firms, the New York-based Dewey employed more than 2,500 people at its peak, including roughly 1,400 lawyers in 26 offices worldwide. The firm came apart earlier this year after weak financial performance forced it to slash compensation, leading to a partner exodus. A major cause of Dewey's financial woes was the lavish multiyear, multimillion-dollar guarantees it extended to its partners.
The settlement agreement, devised by Mr. Mitchell and his team, is novel, legal experts say. It is believed to be the first large law firm bankruptcy in which a group of partners collectively agreed to return a portion of their salaries to pay off creditors.
Previous bankruptcies, including those involving the firms Coudert Brothers and Howrey, have devolved into protracted legal disputes between creditors and the firms' former partners.
While Thursday's settlement represented progress in Dewey's bankruptcy, not everything is resolved. A group of retired partners filed papers with the bankruptcy court on Thursday, requesting that an independent examiner look at the proposed settlement. Last week, another group of retired partners asked the judge to appoint an independent trustee to liquidate the firm.
Retired partners have bee n among the more vocal factions complaining about the settlement. They argue that the plan goes easy on Dewey's former leaders, who they believe should bear primary responsibility for the firm's demise.
The retirees say that the team of restructuring professionals winding down the firm are conflicted and beholden to Dewey's former executives, all of whom have landed at other large law firms and can reward the professionals with future business.
“We need an impartial person looking at this,†said Cameron F. MacRae III, a former Dewey partner who is now at Duane Morris. “Until now, the fox has been allowed to design the chicken coop, and this can't go on.â€
The roughly $60 million recovered is two-thirds of the $90.4 million the estate is seeking from the partnership. Dewey's wind-down team had required minimum participation of $50 million before it would take the settlement to court for approval.
The firm's two highest paid partners were Berge S etrakian, a corporate dealmaker in New York, and Ralph Ferrara, a Washington-based securities litigator, whose 2011 and 2012 earnings were more than $12 million apiece. Each is having about $3.5 million recouped. It is unclear whether either of them agreed to the settlement.
On Thursday, a relatively junior partner said he had signed on to the settlement grudgingly, agreeing to return a low six-figure sum.
“I don't think I should have to pay anything back, because I wasn't part of the management that drove the firm into the ground,†said the partner, who requested anonymity because his new firm did not want him to speak publicly about Dewey. “But the deal gives me closure and allows me to move on.â€
In addition to recouped compensation, there are two other big pools of money that the wind-down team wants to recover. The biggest is about $200 million in outstanding client bills, but the team expects to recover only a fraction of that amount
Anot her potential recovery source is $60 million to $70 million in collections from existing deals and cases that Dewey's former partners took with them to other law firms. Courts have ruled that these so-called unfinished-business claims are the property of Dewey, and not the partners' new firms.
Nearly all of Dewey's partners have joined other firms. Jeffrey Kessler, for example, a prominent sports lawyer who led Dewey's litigation department, moved to Winston & Strawn and took about 60 lawyers with him.
A version of this article appeared in print on 08/17/2012, on page B6 of the NewYork edition with the headline: Former Dewey Partners to Return Millions in Compensation to Pay Creditors.