Dewey's dilemma over client files: to shred or not to shred

Reuters News
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Posted: Jul 12, 2012 4:37 PM
Dewey's dilemma over client files: to shred or not to shred

By Nick Brown

NEW YORK (Reuters) - Bankrupt law firm Dewey & LeBoeuf may not be doling out legal advice anymore, but evidence of its once-mighty law practice can still be found in boxes of client files scattered around the globe.

Now the defunct New York firm wants to get rid of these records. But disputes over who should pay to destroy them are raising questions about a bankrupt law firm's ethical obligation to protect client data and its duty to save money for creditors.

Dewey estimates it has "hundreds of thousands of boxes" of documents, some in its own possession, many housed at third-party warehouses, including more than 100,000 at a facility in Brooklyn, New York.

The firm, which can trace its roots back more than a century, also said in court filings it is not sure where all its old files are or who they belong to. The firm had offices in 12 countries, including Italy, Russia and Poland.

A Dewey lawyer said at a bankruptcy court hearing this week that the firm already is about $500,000 behind on fees to warehouses and desperately needs to shed storage costs to help repay creditors. Dewey has proposed giving some 4,500 former clients about 75 days to collect their files and then destroying records that go unclaimed.

But the firm's proposal lacked detail about how files would be discarded, drawing objections from former clients and creditors who feared trade secrets could be compromised unless the records are shredded or otherwise destroyed.

U.S. Bankruptcy Judge Martin Glenn, who is overseeing Dewey's wind-down, echoed concerns that financial data, transaction records, contracts, closing documents and other private data could be stolen, misused or made public.

"There'd be nothing stopping anybody from sending these files to The New York Times," Glenn said at Monday's hearing. "That really bothers me."

Dewey advised many big-name clients over its 103-year history, including bond insurer Ambac, National Football League players' groups and Lloyd's of London, leaving no shortage of sensitive files that could be buried in the boxes.

Lloyd's attorney Kizzy Jarashow said at Monday's hearing the company wants its files, but it isn't as simple as scooping them up from a storage unit. For one thing, she said, some files date to the 1930s, raising uncertainty as to their location.

Document destruction also doesn't come cheap, and no one is volunteering to foot the bill.

Solvent firms, which eventually need to dispose of mountains of paper documents accumulated from clients, normally pay for the process themselves. But Lara Sheikh, an attorney representing Dewey, said at the hearing that the firm likely could not afford the shredding costs.

Two storage facilities want to make sure they won't be on the hook. One of the firms, Boston-based Iron Mountain Information Management, a unit of Iron Mountain Inc, estimated in court papers it would cost $400,000 to shred its 31,000 boxes of Dewey records.

That cost could decrease if former clients retrieve their files, but that is unlikely given the prevalence of electronic storage that provides document backup, said Bill Brandt, a bankruptcy consultant helping wind down Dewey's operations.

"Rarely are these documents the originals," he said.

Judge Glenn gave Dewey the go-ahead to notify the firm's former clients and lawyers of the destruction plans but held off on approving the actual disposal. He called for Dewey to tap an ethics expert, at the firm's expense, to write a report on file destruction and Dewey's ethical responsibilities.

HAZY RULES

There is no law governing the destruction of files when a firm liquidates. However, bankruptcy law gives companies the right to abandon property it deems burdensome. A bankrupt company also has a fiduciary duty to save as much money as possible for creditors, which could clash with an ethical responsibility to pay for document shredding.

Dewey says its proposal is guided by the American Bar Association's Model Rules of Professional Conduct, which direct destruction of files when a firm is sold. The rules, followed in most states, require giving clients 90 days to retrieve records before transferring them to the acquiring firm.

New York's modified version of the rules, as well as California's Rules of Professional Conduct, lay out similar 90-day notice guidelines for the sale of a law firm, Dewey said.

Other countries may have their own disposal rules, but "it is simply too large a task" to analyze and implement them, Dewey said in court papers.

Dewey added that its proposal was also informed by methods employed in other law firm bankruptcies, though its 75-day window for the collection of files is considerably shorter than the 90- to 180-day periods used in past cases.

PASSING THE BUCK

Document disposal has triggered court battles in previous law firm bankruptcies. In the ongoing liquidation of law firm Thelen, which collapsed in 2009, the company argued that destruction costs should fall to the clients who own the files.

But Brandt, the Dewey consultant who also oversaw the 2006 bankruptcy of Coudert Brothers, disagrees. He said clients have leverage to refuse to pay for shredding. Warehouses, he added, will still destroy files, for fear of being held liable if unshredded records fall into the wrong hands.

After Dreier's 2008 bankruptcy, the firm took on some of the cost, paying warehouses $5 per box to destroy records.

In the Dewey case, Iron Mountain has sought a guarantee that if warehouses foot the bill, they will get administrative bankruptcy claims against Dewey, allowing them to be paid ahead of other creditors.

Judge Glenn said that was an issue for another day. "If you destroy files," he told warehouses at the hearing, "and you think you have an administrative claim, you can file it then."

Former Dewey partners could also be drawn in, as the firm's bankruptcy lawyers have suggested that partners who departed are still bound by ethics rules, even if the firm is not.

More than 700 former Dewey partners will be given an opportunity to retrieve files, said Dewey attorney Sheikh at this week's court hearing.

"Those former attorneys are subject to ethical rules," she said. "Hopefully they will act accordingly."

The case is In re Dewey & LeBoeuf LLP, U.S. Bankruptcy Court, Southern District of New York, No. 12-12321.

(Reporting by Nick Brown; Editing by Martha Graybow, Eric Effron and Richard Chang)