Sedgwick declares bankruptcy in filing that traces the law firm’s downfall

The dissolved law firm Sedgwick has filed for bankruptcy.

Sedgwick filed a Chapter 11 bankruptcy petition Tuesday in federal bankruptcy court in San Francisco, the American Lawyer reports.

The firm generally estimates its liabilities at up to $50 million and says in a declaration that there are about $32.6 million in claims from the termination of office leases as well as about $9.2 million owed in accounts payable.

The firm had assets of about $1.56 million in cash and recoverable accounts receivable of about $1.5 million, the declaration says.

A Pachulski Stang partner in San Francisco representing Sedgwick, John Lucas, told the American Lawyer that the firm is analyzing whether it has clawback claims against former partners.

Sedgwick had its best year in 2012 with $212 million in gross revenue, the American Lawyer reports. According to the bankruptcy declaration, Sedgwick “established a well-deserved reputation for high-end insurance work and as one of the pre-eminent product liability firms in the country.”

By 2016, Sedgwick’s gross revenue had dropped to $183 million. In January 2017, all of the equity partners in the firm’s Newark, New Jersey, office announced they were leaving to form a new firm, and by the end of the month all but three lawyers in the office had left. That same month, virtually the entire Dallas office also left the firm for Drinkle Biddle & Reath.

“The departure of these equity partners (and the associated attorneys and staff) was not expected,” the filing says. Sedgwick responded by transferring leases to the new and acquiring law firms. At the same time, the firm’s equity partners reduced their compensation draws. In the following months, a handful of other equity partners who were generating lower revenues left the firm, in accord with a business plan, the declaration says.

In August 2017, Citibank terminated an agreement to provide a $17 million revolving line of credit because Sedgwick was no longer in compliance with a provision requiring a minimum number of equity partners. Sedgwick began to repay the approximately $3 million in an outstanding amount under the credit line, and had paid the money back by November 2017.

After Citibank terminated the agreement, Sedwick engaged in merger or acquisition discussions, taking the view that the firm could continue to operate through the growth or by operating in a scaled-down version. But by the end of 2017, the equity partners recognized it was unrealistic to expect a sufficient number of lawyers and staff to remain with the firm. The firm announced it would be closing in early January 2018.

Sedgwick had been trying to reach settlements with its larger creditors, but the creditors group wasn’t willing to continue negotiations outside a formal bankruptcy filing, the declaration says. The firm declaration says it hopes negotiations with former equity partners can produce a resolution on clawback claims.

“While Sedgwick was not able to achieve the goal of merging with or entering into a multi-lateral acquisition with another law firm,” the declaration says, “the firm believes that the hard work of its former equity partners helped preserve an operation that would have closed much sooner and left employees without an opportunity to transition to new jobs and attorneys without a platform to continue serving their clients at another firm.

“In fact, it is believed that every lawyer and staff member who wished to remain in the workforce was able to find suitable new employment and I do not believe this would have been possible had this devoted group not stayed to the end rather than electing to wind up the firm at a much earlier time,” says the declaration, signed by dissolution committee member Gregory Read.