[ by Howard Haykin ] Former Dewey & LeBoeuf partners agreed on Thursday to return over $60 million of their compensation to help pay creditors of their former, failed law firm.  The proposed settlement was reached almost 3 months after the firm finally collapsed.  The collection is greatly welcomed by Dewey's creditor - owed over $300 million - largely because this would be the first substantial recovery by Dewey's creditors.  Any deal is subject to approval by a bankruptcy judge.

"This is a key milestone we are pleased to have reached: an early settlement that can deliver meaningful recoveries to creditors and let former partners put this behind them." -- Joff Mitchell, Dewey's chief restructuring officer and an executive at the advisory firm Zolfo Cooper.

Participating Partners. About half of Dewey's 672 former partners signed the settlement, which required them to return a portion of their pay from 2011 and 2012.  The amount was based on a complex formula tied to their compensation, ranging from a minimum of $5,000 for retired partners to $3.5 million for the firm's highest-paid lawyers. By agreeing to the deal, the partners insulated themselves from future lawsuits related to the firm's collapse.  Those who refused to sign on could still face legal claims from creditors, which range from large banks and bondholders to a car service company and an executive recruiter. Former Dewey chairman, Steven H. Davis, was prohibited from participating in the settlement.  The Manhattan district attorney's office currently is investigating Mr. Davis for possible financial improprieties.  He has denied any wrongdoing. Novel Settlement Agreement. The settlement was devised by Mr. Mitchell and his team, is novel, legal experts say. It's believed to be the first large law firm bankruptcy in which a group of partners collectively agreed to return a portion of their salaries to pay off creditors.  Previous bankruptcies, including those involving the firms Coudert Brothers and Howrey, have devolved into protracted legal disputes between creditors and the firms' former partners. Open Issues - Particularly with Retired Partners. Not everything is resolved.  A group of retired partners filed papers with the bankruptcy court on Thursday, requesting that an independent examiner look at the proposed settlement.  Last week, another group of retired partners asked the judge to appoint an independent trustee to liquidate the firm.

• Retired partners have been among the more vocal factions complaining about the settlement.
• They argue that the plan goes easy on Dewey's former leaders, who they believe should bear primary responsibility for the firm's demise.
• They say that the team of restructuring professionals winding down the firm are conflicted and beholden to Dewey's former executives, all of whom have landed at other large law firms and can reward the professionals with future business.
• "We need an impartial person looking at this," said Cameron F. MacRae III, a former Dewey partner who is now at Duane Morris. "Until now, the fox has been allowed to design the chicken coop, and this can't go on."

The $60 million or so committed to this settlement agreement covers about 2/3's of the $90.4 million the estate is seeking from the partnership.  Dewey's wind-down team had required minimum participation of $50 million before it would take the settlement to court for approval.

• The firm's 2 highest paid partners - NY Corporate Dealmaker Berge Setrakian, and Ralph Ferrara, Washington-based securities litigator, whose 2011 and 2012 earnings were more than $12 million apiece, would each have to contribute about $3.5 million.  It's unclear whether either of them agreed to the settlement.

• A relatively junior partner said he had signed on to the settlement grudgingly, agreeing to return a low six-figure sum.  "I don't think I should have to pay anything back, because I wasn't part of the management that drove the firm into the ground," said the partner, who requested anonymity because his new firm did not want him to speak publicly about Dewey.  "But the deal gives me closure and allows me to move on."

• In addition to recouped compensation, there are two other big pools of money that the wind-down team wants to recover.  The biggest is about $200 million in outstanding client bills, but the team expects to recover only a fraction of that sum.
• Another potential recovery source is $60 to $70 million million from partners who left the firm before it collapsed and took existing cases with them.

• Nearly all of Dewey's partners have joined other firms.  Jeffrey Kessler, for example, a prominent sports lawyer who led Dewey's litigation department, moved to Winston & Strawn and took about 60 lawyers with him.

For further details, go to:  [Dealbook, 8/16/12].