Laventhol & Horwath Will File for Chapter 11, Dissolve Firm

Laventhol & Horwath fired most of its 3,400 employees and confirmed Tuesday that it will file for bankruptcy court protection and dissolve the nation’s seventh-largest accounting firm.

Now begins a legal headache that is sure to last for years, as courts determine the depth of the firm’s problems, for which all its partners and even some retired partners potentially are liable.

The dissolution also set off a scramble for clients as many of Laventhol’s 350 or so partners form new partnerships or look to affiliate with other accounting firms.

“A series of tragic circumstances brought this proud firm to this sad day,” said Robert Levine, chief executive of Laventhol & Horwath. “Now, the proud name of Laventhol & Horwath will exist no more.”

A plan to save the Philadelphia firm by shrinking it drastically could not be worked out because a cash crunch left Laventhol unable to repay its bank loans, Levine said in a statement. Laventhol & Horwath will file its Chapter 11 bankruptcy petition in New York, probably today.

Levine said the cash squeeze was brought on by high litigation defense costs, a slump in the real estate and hospitality markets in which Laventhol specializes, and a generally slow economy.

Under Chapter 11 of the U.S. Bankruptcy Code, a company is protected from creditors while it works out a plan to pay them. Levine’s statement noted that Laventhol’s liabilities far exceed its assets, although figures were not given.

Laventhol has $85 million in bank debt alone. But potential liabilities from pending lawsuits alleging poor accounting and consulting work could add millions of dollars to the total.

Two big clients of Laventhol, Trans World Airlines and Hyatt Corp., both said they are looking for new accountants to complete their crucial year-end audits.

“We’ve been doing business with Laventhol & Horwath for at least 15 years, and they’ve done a very good job for us,” said Karen Rugen, a spokeswoman for Chicago-based Hyatt. “We’re disappointed,” but the change will create little disruption, she said.

And a fair amount of quiet poaching of Laventhol clients by competitors already is going on, industry observers said.

“I’m sure that all the clients that Laventhol & Horwath had are being approached quietly and are being asked, ‘Hey, who’s going to do your year-end audit?’ ” said Thomas Tew, a Miami bankruptcy attorney representing several Laventhol partners and the new groups they are forming. Many partners have told him that their clients are sticking by them, Tew said.

Stephen Bone, executive director of Robert L. Mayer Corp., a commercial and residential developer based in Newport Beach, said he intends to keep giving the company’s accounting work to Rich Kipper. Kipper is a partner at Laventhol & Horwath’s Costa Mesa office who plans to become an owner of the successor firm. “The advice we get doesn’t come from the mystique of L&H; but from the expertise and judgment of the individual,” Bone said.

Laventhol’s bankruptcy filing will not protect its partners and even some recently retired partners from litigation, if the firm’s assets are insufficient to satisfy creditors, said Edmund M. Kaufman, senior partner with the Los Angeles bankruptcy law firm of Irell & Manella.

“Until recently, who ever heard of major law firms or major accounting firms going into bankruptcy?” he asked. “But it’s clear that partners are not insulated by bankruptcy from the debts of the partnership.”

As a practical matter, however, partners seldom get stuck for debts of a big partnership failure, said Tew, who himself was a partner in the 250-partner firm of Finley Kumble Wagner Heine Underberg Manley Myerson & Casey. It folded in late 1987 and is still in the courts.

“This is what you call a human tragedy,” said Saul Leonard, who specialized in the hospitality and gaming industries in the Los Angeles Laventhol office and now plans to open his own consulting business.

“What we have to do,” he said, “is go on and do everything better as individuals than we did before.”

Times staff writer Leslie Berkman contributed to this story.

Clients Consider: Although the Orange County office will become an independent, some clients are looking elsewhere. D6