The United States Law Week

Bankrupt Sedgwick Seeks Liquidation Deal with Ex-Partners

Nov. 8, 2019, 4:46 PM

Sedgwick may have an end in sight to its year-long Chapter 11 bankruptcy proceeding after the firm Nov. 7 proposed a liquidation plan that would also settle claims seeking equity repayments from nearly 50 former partners.

The former San Francisco-based law firm filed for bankruptcy in October last year after a drawn-out demise fueled by fleeing partners. Forty-seven of those partners are now being asked to pay about $1.9 million as part of a plan to liquidate the firm’s remaining assets.

The firm in June had sought to settle clawback claims with a group of 45 ex-partners for $1.7 million. The payments were made to partners after the firm became insolvent, according to a potentially disputed analysis of the firm’s finances.

“The settlement agreement will avoid unnecessary and protracted litigation involving bankruptcy law, various state law issues, and the difficulty of determining when the Debtor became insolvent,” Sedgwick’s bankruptcy counsel, John Lucas of Pachulski Stang Ziehl & Jones, wrote in the most recent filing.

The proposed plan would allow for unsecured creditors, who support the plan, to receive about 13% of their $20.4 million in claims against Sedgwick. The plan would be approved if creditors holding two-thirds of the value of claims and half the number of claims vote to accept it. The plan could also be approved by the judge in what is known as a “cram down.”

The next hearing in the case in San Francisco federal bankruptcy court is scheduled for Dec. 12.

Sedgwick became “arguably insolvent” on August 31, 2017, the filing says, when the firm’s lender, Citibank, terminated its credit line and called for repayment of $3 million in outstanding debt. That was shortly after a group of partners departed the firm’s New York and Chicago offices.

The committee for unsecured creditors believes the firm became insolvent after the first major departures from the firm occurred in January 2017.

That is when the firm’s chair emeritus Michael Tanenbaum launched a new firm with a group of departing partners. The eight equity partners that left that month generated about 46 percent of the firm’s net income in 2016, according to court documents. Tanenbaum alone collected more than $14 million in revenue in 2016, accounting for more than 8.5 percent of the firm’s total revenue that year, filings show.

Following that departure, the firm prepared a 2017 budget that projected net income in 2017 would be about 38 percent of what it was the year prior. Management also reduced equity payments to partners by about 55 percent, court documents say.

The firm spent much of 2017 seeking to acquire a smaller firm or find a larger merger partner, the filing says. While that was ultimately unsuccessful, the filing notes that another firm eventually took over Sedgwick’s offices in Irvine, California and Kansas City, Missouri.

London-based insurance firm Clyde & Co in December 2017 said it would hire 80 lawyers and staff from Sedgwick.

The case is In re Sedgwick LLP, Bankr. N.D. Cal., No. 18-31087, Disclosure Statement 11/7/19.

To contact the reporter on this story: Roy Strom in Chicago at rstrom@bloomberglaw.com

To contact the editors responsible for this story: Jessie Kokrda Kamens at jkamens@bloomberglaw.com; Rebekah Mintzer at rmintzer@bloomberglaw.com

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