FORTUNE — After months of twisting in the wind as nearly 300 partners abandoned ship and took clients with them, the international law firm, Dewey & LeBoeuf, officially sank late Monday evening to become the biggest law firm failure ever. The firm that once had more than 1,100 lawyers operating in 15 countries filed for Chapter 11 bankruptcy and announced that Dewey & LeBoeuf will be going out of business forever.
The firm filed for bankruptcy at U.S. Bankruptcy Court in Manhattan and made similar filings at courts in London and Paris to cover its overseas operations. Dewey & LeBoeuf was the product of a 2007 merger between two New York-based law firms, Dewey Ballantine and LeBoeuf, Lamb, Greene & MacRae — each nearly a century old.
Once ranked 22nd-largest in the world by American Lawyer magazine, Dewey & LeBoeuf, like many of the so-called “Big Law” firms, was built in part by luring experienced lawyers from other firms with promises of high pay and extended contracts. That practice of “lateral hires” was more in line with professional sports teams than old line legal partnerships, where clients belonged to the firm and partners received relatively similar paychecks.
The firm collapsed as a result of mismanagement that left the firm more than $300 million in debt, unable to pay its lawyers and unable to stem massive defections by more than 300 partners who took most of their clients with them to new firms. The bankruptcy filing Monday listed more than 5,000 creditors.
While other “Big Law” firms with more than 1,000 lawyers and global reach are suffering from the twin troubles of lingering recession and overpaying for lawyers to expand into new practice areas, few borrowed nearly as much money as Dewey & LeBoeuf did — its credit line included a private bond placement of $125 million in 2010. In the face of diminished business in 2008 and 2009, Dewey’s management team essentially ‘doubled down” by accelerating the hiring of high-priced partners from outside in an effort to expand the firm out of trouble.
Few firms offered such lavish contracts either — Ralph Ferrara, a Washington-based lawyer for Dewey who once was general counsel for the Securities & Exchange Commission, made more than $10 million last year. Morton Pierce, the former head of Dewey Ballantine who became Vice Chairman of the merged firm, says the now-bankrupt firm still owes him $61 million that he was to receive over eight years as retirement benefits and deferred compensation.
Stephen M. Axinn, a former longtime partner at the esteemed law firm Skadden, Arps, Slate, Meagher & Flom, does not believe the collapse of Dewey & LeBoeuf is necessarily a harbinger for other big firms as much as it is a warning about how a law firm’s culture needs to be protected. “The collapse of Dewey can be attributed to too much debt, to too many lateral partners, to a merger that never really integrated the two cultures of the two firms, that’s all true,” says Axinn, now a name partner at Axinn, Veltrop, Harkrider LLP. “But if the leadership of the combined firm had placed the interests of the firm ahead of their own interests, this would never have happened.”
Dewey’s Monday’s press release was from Sitrick & Company, a crisis management public relations firm brought in earlier this year by former Dewey & LeBoeuf chairman Steven H. Davis as the firm’s collapse appeared imminent. The Dewey & LeBoeuf statement said the Chapter 11 bankruptcy filing was the “most orderly and efficient way possible” for the firm to preserve assets and wind down its business.
The firm once employed more than 2,000 people and its headquarters occupied 10 upper floors at 1301 Avenue of the Americas in New York City. Under the proposed bankruptcy, the firm will be run by bankruptcy experts while about 90 Dewey employees will remain on the payroll.
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Former partners and associates are also expected to help the firm recover payments from clients who owe more than $250 million for legal work. Those so-called collectibles, along with some real estate leases on offices, make up most of the assets the firm may have available for creditors.
The Pension Benefit Guaranty Corporation already has sued the firm to protect three of its employee pension plans, which are underfunded by more than $80 million. Other civil suits also have been filed against the firm, including one seeking $300,000 in unpaid bills for janitorial service.
About a month ago, the firm told its partners that The Manhattan District Attorney, Cyrus Vance, was investigating Steven Davis, the former chairman and dominant force behind the merger, for possible criminal conduct.