This Law.com article reports on the avoidance lawsuits that the bankruptcy trustee of the former high tech law firm Brobeck, Phleger & Harrison is filing against the firm’s former partners for bonuses and a portion of the firm’s unpaid bank debt.
The key issues in pursuing former Brobck partners is when the firm became insolvent and whether partners took money out of the firm for inadequate consideration. Under the California Corporations Code, limited liability partnerships may make distributions to partners only when the total assets of the firm exceed liabilities.
The trustee contends that Brobeck’s income began to decline in 2000, a decline that accelerated during the second half of that year and continued until the firm tanked in September, 2003. Although Brobeck’s net per-partner income dropped to $245,000 for 2002, the trustee contends that Brobeck’s partners did not correspondingly reduce the distributions they received.
According to the trustee, in 2001 and 2002 alone, Brobeck’s partners spent more than $100 million more than the firm’s net income on partner distributions and leasehold improvements. Brobeck financed these excess distributions through debt, which increased from $34 million and $173,000 per partner in 2000 to $89 million and $505,000 per partner in 2002. In particular, the trustee asserts that Brobeck borrowed an additional $39 million on its credit line in the first quarter of 2002 and distributed over $43 million to its partners during the same time period.