Anatomy of a BigLaw Collapse

How does a BigLaw giant with nearly a quarter of a billion dollars in annual revenue and a reputation as the “Rolls Royce of insurance firms” find itself in bankruptcy and tatters almost overnight?

For the California-based Sedgwick LLP, it happened slowly at first, and then all at once.

In October, the Am Law 200 firm – which has been around for more than 80 years – filed a Chapter 11 petition in federal bankruptcy court in San Francisco, according to the American Lawyer.

In that filing, the firm listed liabilities of up to $50 million (including more than $32 million owed on cancelled office leases and $9.2 million in accounts payable) against assets of $1.56 million in cash and $1.5 million in accounts receivable.

At its peak in 2008, Sedgwick had 380 lawyers in offices across the country. Within a decade, the headcount was zero.

This was a sad, swift and shocking fall.

Exodus of Top Talent

Sedgwick was a top-drawer firm almost from the moment it was founded in San Francisco in 1933. Along the way it earned a reputation as one of the pre-eminent insurance and product liability practices in the country. In 2012, the firm enjoyed its best year, with $212 million in gross revenue, according to news reports.

The good times continued to roll until 2016, when things began sliding downhill. Annual gross revenue dropped nearly $30 million and some of the firm’s top talent headed for the exits. In early 2017, all of the equity partners at the anchor office in Newark left to form a new firm. Soon after that, almost the entire Dallas office departed.

The loss of key partners – along with their associated attorneys and staff – caused a domino effect. Morale cratered. Revenue plunged. One major bank canceled a significant credit line because the firm was not in compliance with the lending agreement.

And then there was the merger that never was.

What Went Wrong?

“Sedgwick’s implosion was widely reported as the story of a merger gone awry,” writes Above the Law. “For much of 2017, Sedgwick was in public merger discussions with the British firm Clyde & Co. The acrimony of the merger discussions evidently triggered an exodus of over a quarter of the firm’s partnership over that time. Although losing that many partners in less than a year is never peachy, it was particularly bad at Sedgwick, where the firm had to repay the partners’ large capital contributions. With so many partners departing at once, it appears the firm’s capital payout obligations became more than the balance sheet could support and the firm collapsed on itself.”

More grim facts could be reported, but you get the idea. The good times for Sedgwick were very good indeed. But when bad news arrived, it came in a cascade: top rainmakers jumped ship, clients fled, office encumbered by hefty leases were shuttered. And so on.

You might think only solos and small firms sometimes struggle to keep the lights on? The saga of Sedgwick shows otherwise.

Sources:

• Above The Law https://abovethelaw.com/2017/12/sedgwick-death-by-billable-hours/
• American Lawyer https://www.law.com/americanlawyer/2018/10/02/sedgwick-files-for-bankruptcy-as-wind-down-fails/
• ABA Journal http://www.abajournal.com/news/article/reeling_sedgwick_loses_a_dozen_lawyers_firm_has_seen_more_than_30_partners
• com https://www.law.com/americanlawyer/2018/10/02/sedgwick-files-for-bankruptcy-as-wind-down-fails/