Heller creditors seek $150m from former partners of now-defunct firm

Heller Ehrman's creditors are now demanding $150m (£91m) from former partners of the now-defunct US law firm, reports The Recorder.

In a confidential mediation brief, creditors claim that Heller fraudulently conveyed that much to partners after it had become insolvent.

The document came to light as Heller's creditors and former partners prepare for their first mediation conference on Friday (30 October).

The creditors' brief contends that former Heller chairman Matthew Larrabee sent an email describing a $9.3m (£5.6m) payout to partners in 2007 as an "overdistribution." The creditors say the firm was already insolvent then, and that firm managers were trying to prop up the firm's profits per partner to attract a merger partner.

The brief, signed by creditors' counsel Thomas Willoughby, also contends that former chief finance officer Richard Holdrup directed that the payment be accounted for not as an "excess distribution" but as a "miscellaneous receivable."

Willoughby, a partner at California's Felderstein Fitzgerald Willoughby & Pascuzzi, said he was distressed that his brief was leaked to the media because the settlement discussions are confidential by order of the judge.

In his brief, he says the firm was insolvent because it had "unreasonably small capital" in 2007 and that payments made to partners in 2008 amount to fraudulent transfers.

Meanwhile, a group of 89 former Heller partners have said in their own confidential brief that they have hired John Keker of San Francisco litigation boutique Keker & Van Nest to represent them if creditors pursue a fraudulent conveyance suit.

The 89 former partners, which include ex-chair Larrabee, contend the firm collapsed because of wider economic conditions, and the departure of rainmakers responsible for $90m (£54m) worth of business in 2007. In their brief, they say creditors' "threats to bring fraudulent transfer claims against the former Heller shareholders rests on wishful lawyering, not credible evidence or viable legal theories."

The former partners point to clean audits by Ernst & Young and the continued willingness of their banks to lend them money as evidence the firm was profitable and well-capitalised at the end of 2007.

"The firm's undisputed financial results and the contemporaneous analyses of independent experts plainly demonstrate that Heller was financially healthy well beyond year-end 2007," the former partners say in their brief. "Even after spending more than $1m (£600,000), the [creditor's] committee has not found an expert willing to express a contrary view."

This article first appeared in The Recorder, a US sister title of Legal Week.