Welcome
The United States Law Week

Failed Sedgwick Seeks Clawback Settlement with Ex-Partners

June 7, 2019, 4:41 PM

Sedgwick asked a California bankruptcy judge on Thursday to approve a nearly $1.6 million claw-back settlement with 45 former partners who received equity payouts as the San Francisco-based law firm slowly failed throughout 2017.

As Sedgwick seeks to settle its claims against some former equity partners, the firm also said there may be viable breach of fiduciary duty claims against other ex-partners who are not part of the proposed settlement.

The partial compromise comes more than eight months after Sedgwick filed for Chapter 11 bankruptcy protection and a year-and-a-half after the 85-year-old firm ceased operations.The firm said confirmation of the deal could lead to the end of its bankruptcy case.

The filing also sheds more light on the firm’s finances leading up to its demise. The firm 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 three days after a report that 12 of the firm’s lawyers were departing the firm’s New York and Miami offices to join Robinson & Cole.

Also in August 2017, three equity partners departed the firm’s New York office and another equity partner in Chicago announced his plans to leave, the filing says.

“These events, and the actions by Citibank, were the key events that made it difficult for the Debtor to adjust its business plan and restructure the firm, and likely rendered the firm arguably insolvent,” says the firm’s filing, made by bankruptcy counsel John Lucas at Pachulski Stang Ziehl & Jones LLP.

The first major departure from Sedgwick’s partnership came in January 2017 when 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, the filings show.

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

The firm spent much of 2017 seeking smaller firms to acquire or to find a larger merger partner, the filing says. While that was ultimately unsuccessful, the filing notes that another firm ultimately 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.

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