The largest law firm bankruptcies in American history are Dewey & LeBoeuf, Heller Ehrman, Howrey, Brobeck Phleger & Harrison, and Thelen. Dewey’s 2012 failure, with more than $300 million in liabilities, is the biggest the profession has ever seen. The others collapsed under different pressures — a frozen credit line, a lost litigation pipeline, a popped tech bubble, a bad-timing merger — but every one of them broke the same way, and for the same underlying reason.
Why Big Law Firms Break
Most large law firms operate as partnerships. Equity partners split the profits and bear the liabilities. Unlike a corporation that retains earnings to build a financial cushion, a typical large firm distributes virtually all of its annual income to partners each year. Day-to-day operations run on revolving credit lines rather than accumulated reserves.
Two features of this structure make big firms uniquely fragile. First, partners can leave at any time. The profession’s ethical rules prohibit agreements that restrict a lawyer’s right to practice after leaving a firm, so there is no enforceable mechanism to stop departures. Second, when partners sense trouble, their rational move is to leave quickly rather than stay and risk personal liability for the firm’s debts.
The result is what scholars call a “partner run.” It works like a bank run: each departure makes the next one more likely, and the spiral accelerates until the firm can no longer function. Every collapse on this list went through some version of it.
Dewey and LeBoeuf, 2012
Dewey & LeBoeuf’s bankruptcy is the largest in the history of the American legal profession. At its peak, the firm employed more than 1,000 lawyers across 26 offices worldwide. It filed with roughly $315 million in liabilities, about $225 million of which was owed to banks. As the bankruptcy proceedings continued, potential liabilities grew to approximately $560 million.
A major contributor to the debt was a $125 million private bond offering in 2010, an unusual move for a law firm. The money was supposed to consolidate various loans and provide breathing room, but it only added high-interest obligations on top of an already strained balance sheet. At the same time, the firm was locked into guaranteed compensation contracts for its highest-earning partners, meaning fixed costs stayed high even as revenue softened.
Management allegedly manipulated financial statements to meet the profit-per-partner benchmarks required by lenders. The inflated numbers kept credit lines open and bond ratings intact while the firm’s cash position deteriorated. When the deception became apparent, partners fled in waves. Dewey filed for Chapter 11 bankruptcy protection.1Office of the Law Revision Counsel. 11 USC 301 – Voluntary Cases
Manhattan prosecutors accused three top executives of orchestrating a scheme to defraud banks and bond investors. The six-month trial ended in a hung jury. Former chairman Steven Davis later entered a deferred-prosecution agreement that included a five-year ban on practicing law in New York. Former CFO Joel Sanders was convicted and sentenced to a $1 million fine and 750 hours of community service, with no prison time. Former executive director Stephen DiCarmine was acquitted.
To resolve the bankruptcy, restructuring experts devised a Partner Contribution Plan that required former partners to return portions of their 2011 and 2012 compensation. Individual obligations ranged from $5,000 to $3.37 million, with the total settlement reaching $71.5 million. Even so, creditors recovered only a fraction of their claims.
Heller Ehrman, 2008
Heller Ehrman was a global firm with more than 700 attorneys when it collapsed in 2008. Its lenders, Bank of America and Citibank, had extended a $57 million credit line. When the firm fell into financial distress, its creditors declared it in default. With cash flow frozen, the partners voted to dissolve, and Heller notified clients that it would stop providing legal services as of October 31, 2008.2Supreme Court of California. Heller Ehrman LLP v Davis Wright Tremaine LLP
Heller’s dissolution plan included what is known as a Jewel waiver, named after the 1984 California case Jewel v. Boxer. The waiver was meant to release any claim Heller had to legal fees its former partners earned after leaving on hourly-rate matters. The bankruptcy administrator later challenged the waiver, arguing it was a fraudulent transfer of the firm’s rights to post-dissolution fees.
The case eventually reached the California Supreme Court, which ruled that a dissolved law firm has no property interest in hourly-fee legal matters. A firm has nothing more than an expectation that it will continue working on such matters, and any client can walk away at any time. The ruling protected partners who had moved to new firms but sharply limited what Heller’s creditors could recover from work completed after the dissolution.2Supreme Court of California. Heller Ehrman LLP v Davis Wright Tremaine LLP
Howrey LLP, 2011
Howrey was a prominent antitrust and intellectual property litigation firm that dissolved in March 2011 after its partners voted overwhelmingly to shut down. The decision capped months of accelerating departures. More than 140 partners left in the year before the vote. Revenue had dropped more than 16 percent in 2009 alone.
The firm’s heavy reliance on large-scale litigation, including contingency-fee antitrust cases, made its income inherently volatile. Big litigation demands significant upfront investment in attorney hours and costs before any recovery materializes. When key cases resolved or moved to other firms, revenue dropped faster than overhead could be cut. Howrey took on debt beginning in 2008 that it could not repay, and by 2011 it could no longer meet its lease obligations or operating costs. Creditors eventually forced an involuntary Chapter 7 bankruptcy, which was later converted to a Chapter 11 proceeding to facilitate an orderly wind-down.
Brobeck Phleger and Harrison, 2003
Brobeck, Phleger & Harrison’s 2003 failure is a textbook case of overconcentration in a single industry. During the late 1990s tech boom, the firm aggressively expanded to serve Silicon Valley’s venture capital and startup ecosystem. The strategy included raising first-year associate salaries to $135,000 to compete for talent, a move that pressured firms nationwide to follow suit.
When the dot-com bubble burst, the venture capital work that had fueled the firm evaporated. Brobeck was left with an oversized workforce and expensive office leases that far exceeded demand for its services. Management tried to find a merger partner, but the firm’s liabilities scared off every prospect. The partnership voted to dissolve, and the bankruptcy focused on liquidating assets to repay secured lenders. For the legal industry, Brobeck became shorthand for the danger of tying a firm’s survival to one sector’s fortunes.
Thelen LLP, 2008
Thelen LLP entered bankruptcy in late 2008 after an ill-timed merger ran into the global financial crisis. In late 2006, Thelen Reid merged with the 250-attorney firm Brown Raysman Millstein Felder & Steiner to create what was intended to be a national powerhouse. The consolidation brought together different firm cultures and significant costs for integrating offices, staff, and technology systems, capital the firm did not have in reserve.
When the 2008 financial crisis hit, Thelen’s core construction and real estate practices suffered a steep decline. A proposed rescue merger with another firm fell through. On October 28, 2008, Thelen’s partners voted to dissolve, and the firm later filed for Chapter 7 bankruptcy. The liquidation focused on collecting outstanding accounts receivable to pay retired partners and trade creditors.3Justia. In re Thelen LLP
Why Leaving Early Doesn’t Protect Partners
Partners who left a failing firm before the bankruptcy filing are not necessarily in the clear. Bankruptcy trustees have two powerful tools for recovering money from former partners, and both help explain why partner runs run so hot.
The first is the fraudulent transfer claim. Under the Bankruptcy Code, a trustee can recover payments the firm made without receiving reasonably equivalent value in return, if the firm was insolvent at the time or became insolvent because of the payment.4Office of the Law Revision Counsel. 11 USC 548 – Fraudulent Transfers and Obligations Partner draws taken from a firm that was already underwater can be clawed back under this theory. The Dewey & LeBoeuf partner contribution settlement, which collected $71.5 million from former partners, was built partly on this threat.
The second is the preferential transfer claim, which targets payments made within 90 days before the bankruptcy filing, or up to one year if the recipient was an insider, as partners typically are. If a partner received distributions while the firm was insolvent and those distributions gave the partner more than they would have received in a bankruptcy liquidation, the trustee can demand the money back.5Office of the Law Revision Counsel. 11 USC 547 – Preferences
The combination of these risks is what makes partner runs so destructive. Staying at a sinking firm means earning less and absorbing more liability. Leaving early means facing potential clawback suits years later. There is no clean exit from a law firm in financial distress, which is exactly why the spiral accelerates once it starts.