Frankenstorm brings down Heenan Blaikie

Frankenstorm brings down Heenan Blaikie
Illustration: Faye Rogers
Jim Middlemiss
Ask Marshall Pawar what brought down Heenan Blaikie LLP and the corporate lawyer slyly dodges the question, telling a reporter he prefers to focus on his new venture, MEP Business Counsel.
But his answers still speak volumes about the future of national law firms.

Pawar, a senior associate, and his Vancouver corporate colleagues were left scrambling to find a new home when the partners of Heenan Blaikie voted to dissolve the firm on Feb. 5. “Every individual got phone calls from a headhunter and had opportunities,” says Pawar, including joining a national firm. “We had a really cohesive group, a really good team.” Everyone wanted to continue practising together, so they formed MEP, comprising partners Arthur Evrensel, an entertainment lawyer who practised at Heenan, Ryan Patryluk, Pawar, and six associates. “The real strength of our team is that they work with a sense of big, international firm mentality and urgency and yet we can do it on the cost efficiencies of a smaller firm,” says Pawar.

The new firm took cheaper space and lowered rates. Today, he says, international deals are done via e-mails, videoconferencing, and conference calls. “Clients want to get the deal done.” They don’t need law firms with big overhead. “Quite frankly, I think that’s the way a lot of corporate firms are heading.”

If that’s the case, Heenan’s failure should send shivers down the spines of the 10,000 lawyers who practise at Canada’s biggest 30 law firms. That’s because it’s clear based on discussions with Heenan lawyers and insiders, most who declined to be quoted, no single event brought down the firm. Rather, it was a confluence of nine factors playing out over time which dissolved the glue that bound the lawyers and led to the dissolution vote.

    They include:
    • unbridled growth;
    • poor financial controls;
    • compensation jealousies;
    • succession issues;
    • firm infighting and rivalries;
    • weak partnership governance structure;
    • lack of leadership and oversight;
    • opportunistic competitors; and
    • a lousy economy.

Heenan likely could have survived one or two, because each one alone wouldn’t be sufficient to bring an end to a firm. Rather, like separate weather fronts, they collided forming a frankenstorm that engulfed the law firm. What should concern lawyers at national law firms is many of those storm fronts play out daily in legal practices across the country.

Vancouver lawyer Peter Gall, now of Gall Legge Grant & Munroe, says, “We didn’t have the leadership or the leadership structure or the management structure to hold it together.” Montreal labour lawyer Guy Tremblay, a former co-managing partner now at BCF, adds Heenan’s collapse can be attributed to a “loss of trust” among partners and a “lack of courage” to go forward together. “If you don’t have the nails or grout or whatever it takes to make them stick together, you have nothing. That had disappeared over time.”

Firm grew quickly

To understand Heenan’s demise, you have to understand how the firm grew and was managed. Founded in Montreal in 1973 by lawyers Roy Heenan, Peter Blaikie, Guy Dufort, and Don Johnston, it focused on labour, litigation, tax, and entertainment law. “I think we were one of the more friendly firms to work in because people weren’t always down your back,” says Roy Heenan, the defunct firm’s longtime chairman. “We had a reputation which was exceptional. I think, to see it go down so quickly, it was a big upset. I would have never believed that when I stepped down.”

Heenan quickly became one of Canada’s fastest growing law firms, expanding to Toronto in 1989, when entertainment and tax lawyer Norm Bacal left Montreal to set up the office. It opened offices in Vancouver in 1991, Trois-Rivières in 1992, Quebec City and Sherbrooke in 1998, Ottawa in 1999, Calgary in 2000, Victoria in 2006, and Paris in 2009. It also had a Singapore representative office. At its peak in 2010, the firm had almost 600 lawyers and 1,300 staff, says Tremblay.

Heenan also had a co-managing partner structure. For 14 years, Bacal and Tremblay ran the firm. For the most part, the co-management structure worked and the firm grew significantly as the economy hummed along. Any squabbles they had largely stayed behind closed doors. Heenan would referee disputes and inter-office rivalries. “One of my jobs as chairman was to make sure that there wasn’t any of that sort of competition going on,” says Heenan.

By 2012, Toronto was the biggest office with more than 200 lawyers, but the head office remained Montreal. Much of Toronto’s growth came through lateral hires. The challenge with hiring laterally is a law firm is essentially stealing talent from other firms. That usually means paying more money and there is a leap of faith the incoming lawyer will live up to expectations. In some cases, law firms can end up overpaying for under performers, fuelling compensation jealousies. Bringing in lateral hires also meant having newer lawyers who didn’t grow up in the firm’s congenial culture.

Building a law firm comprising a large labour practice and mixing in corporate also has inherent challenges. Labour was seen as calling the shots. It had blue chip clients and political clout, but as Toronto grew its corporate practice, it put pressure on the firm’s political make up. But Heenan felt the mix worked well. Labour lawyers bill steadily and rack up the hours, which allows corporate lawyers to hunt deals. “Labour could put in their hours and bill monthly and corporate can look for the deals nationally and internationally and they came into some fairly significant profits. That’s the way it worked most of time,” he says.

Others, however, saw it differently. There was a lack of cross-selling, noted one Quebec corporate lawyer, because labour lawyers focus their relationships on human resource professionals.
Corporate lawyers, on the other hand, are looking to the CFO and CEO for business. So corporate lawyers can help labour lawyers make entrees into companies, but not so much the other way around. “After a while, you get tired and don’t want to reciprocate anymore. But that issue, I don’t think, is unique to Heenan, it was just compounded by the fact that Heenan was a major force in labour,” says Gall, a labour lawyer. “Law firms have to figure out what they’re going to be. If you’re going to be a business law firm, a deal-making firm, then everything else is secondary.”

Labour and corporate also had disparate rates and costs for running their practices. The mix works well when everyone is busy, but is a disaster if things slow. When deals dry up, the corporate department slows dramatically, yet there is heavy overhead in terms of bodies and space. Labour law has fewer peaks and valleys.

Lawyers say disparate practice groups across the firm also made it difficult to arrive at consensus on things like international expansion and firm strategy. Even within practice groups there were discrepancies. Some lawyers had a domestic practice and saw offices in Paris and the use of international business consultants as unnecessary. Others note practice groups were not aligned across offices and lacked their own budgets. By not being more integrated, it would open the firm to inter-office rivalry, observes Patrick McKenna, a management consultant to law firms based in Edmonton.

International efforts questioned

So what happened? Many lawyers point to incidents involving Montreal lawyer Jacques Bouchard, Jr. as opening a fissure. Bouchard, director of international business, made headlines in The National Post in 2011 for his relations with controversial lobbyist and political consultant Ari Ben-Menashe, who was attempting to obtain attack helicopters for an African country. It caused a backlash. An internal investigation was commenced, which fomented dissent between partners and management. Bouchard resigned in late 2011.

Heenan’s name also came up in the investigation into Griffiths Energy International Inc. bribing of a Chadian ambassador’s wife in 2011 to land lucrative oil leases. The judge hearing the charges against Griffiths exonerated Heenan, noting the law firm advised against such bribes.

However, what those incidents did, lawyers say, is chip away at the trust partners had in management and cast a shadow over the firm’s international initiatives, which were already a bone of contention for some. The firm was paying international consultants in places like China and the Middle East to bring in work and the Paris office, which was central to the international efforts, was losing a few million dollars a year. That added to the grousing and some started questioning the firm’s direction. Others, however, saw it as the future. “There was this lack of confidence,” says David Blair, a transportation lawyer who left the firm for McCarthy Tétrault LLP in October 2013. “You need to have a global vision that everyone buys into.”

Succession bungled

While this played out, Heenan was about to undergo a leadership change as part of its succession plan. Roy Heenan stepped down as chairman at the beginning of 2012. The two co-managing partners were also both supposed to leave at the end of 2012, which made no sense, so Tremblay agreed to step down at the end of 2011.

Heenan says under the partnership agreement, replacing a co-managing partner required the executive committee to establish a subcommittee that would vet candidates and then put forward a recommendation to the executive committee. Robert Bonhomme, a hard-nosed labour lawyer described as a quick study, got the nod and took over beginning in 2012. However, that didn’t sit well with some lawyers in the firm, particularly in Toronto. The process was perceived as lacking transparency and for lawyers often the process is more important than the result, which created a negative atmosphere around Bonhomme’s ascendancy. When it came time to replace Bacal, the Toronto partners demanded a vote, rather than the selection process used for Bonhomme.

However, one of the concerns about an election, lawyers say, is that it doesn’t always bring out the best candidates. It becomes a popularity contest or an “anybody but” contest, creating more rivalry. But through an election, Kip Daechsel got the nod and stepped into Bacal’s shoes at the beginning of 2013. Both Tremblay and Bacal were told to step back and let the new leaders find their footing.

Lawyers say the new leadership faced greater scrutiny by partners still reeling over the prior incidents. The cross-examination was “just ridiculous,” said one Toronto lawyer.

Complicating the transition was the state of the legal economy, which was tanking, and Heenan faced its first significant slowdown. In the first nine months of 2013 deals were abysmal, according to Mergermarket Ltd., falling to the lowest levels since 2004, and Toronto was feeling the pinch. Blair says when “weathering storms you need to have a little bit of experience. All of a sudden there was a pretty big storm that came along and no one had been there before to weather it.”

Observers say one of the problems was Bonhomme already had a year under his belt when Daechsel came on board. Daechsel, described as a nice guy and a good lawyer, was part of the Toronto corporate group. The two were immediately at loggerheads. Bonhomme wanted to quickly cut costs, some say indiscriminately, to cope with declining revenues, particularly in Toronto, which he claimed was unprofitable. Some lawyers dubbed the cost cutters the “Tea Party.” Daechsel wanted to ride out the storm and lawyers say he later prepared a report that showed Toronto was profitable, and Montreal wasn’t, which only added fuel to the fire. Both men declined to comment for this story.

Insiders say the animosity between the two was noticeable. Bonhomme’s blunt approach rubbed some partners the wrong way and he is said to have ignored his co-managing partner. Others felt Daechsel was ineffective at reining in Bonhomme, which cost Daechsel credibility with partners.

At the same time, there was a void in the chairman’s seat. The executive committee did not replace Roy Heenan. It wasn’t like the firm lacked candidates, notes Heenan, rattling off the names of former Quebec premier Pierre-Marc Johnson; former Supreme Court of Canada justice Michel Bastarache; Marcel Aubut, president of the Canadian Olympic Committee; Bernard Amyot, past-president of the Canadian Bar Association; labour lawyers Doug Gilbert and Peter Gall; energy lawyer Jim Pasieka; or even Bacal as possible successors. “I never thought it would be difficult to get somebody to succeed me. We had some very prominent and capable people, but we could never get the executive committee to make that decision. They couldn’t arrive at a consensus because Montreal and Toronto were squabbling,” says Heenan. “Once you start pointing fingers, or competing internally, which is one of the serious problems in any law firm, it’s disastrous for a firm. That’s poison that eventually, I think, led to the final disaster.”

He saw the chairman as a critical role, especially given the dynamic emerging between the co-managing partners. “As chairman, obviously when my two managing partners were having disagreements, I would get called in and we’d settle a matter. But in the absence of the chairman, who does that? That’s one of the fundamental flaws.”

Lawyers also say the drive to cut costs created an environment of fear and panic internally. Heenan had been known as a collegial firm and a fun place to practise, but that was quickly changing.

‘Cumbersome’ management structure

Management inertia was also setting in. The firm’s governance model included two committees: the executive committee, which effectively operated as a board, and the national managing committee, which focused on operational issues. Gall says the dual committee and co-managing structure was “too cumbersome. It didn’t lend itself to effective leadership or decision-making.”

He also questions the viability of term limits for firm management. “You want your strongest and best leaders in those positions at all times. It’s not some democracy where everyone is going to be a leader. It doesn’t work. It’s a business organization.”

The executive committee struggled to come up with a strategic plan throughout 2013, which lawyers say compounded the infighting. Some lawyers felt a strategic plan would provide the feuding co-managing partners with a road map, but a plan never emerged.

In the summer, two meetings were called between key Montreal and Toronto partners to clear the air and get everybody rowing in the same direction. However, the situation didn’t improve.
Canadian Lawyer contacted Daechsel in early November about the growing departures. In a written statement Daechsel, acknowledged “2013 has been the most challenging year in many decades for our profession. I can assure you that our firm is on a very solid financial footing. We met budget last year [2012] and, depending on the results of the last quarter of this year [2013], historically our strongest quarter, we are optimistic that we will meet this year’s targets (which have been adjusted to reflect departures and additions).”

Shortly after, the executive committee sidelined him and Bacal stepped in. Despite the malaise, Heenan remained profitable with 2013 revenues of $222 million and $75 million in profit, according to the Financial Post. December 2013 billings hit $35 million, the highest ever.

Firm profits low

While tantalizing, the reality is that for a firm with 244 partners, according to Chambers Global 2014, that amounts to profits per partner of $307,000, which is “chump change for Bay Street, big firm standards,” says management consultant McKenna. The $75 million in profit “sounds good in principle, but once you start digging, the numbers aren’t there.” He adds that’s a gross profit margin of 33 per cent, which is low for a law firm. “They are not operating on the best margins.” Spread out over nine offices, “you can just see the finger pointing that was probably going on.”

The bleeding of lawyers continued into January 2014, when the daily media picked up on the departures. The ranks were quickly thinning. One lawyer estimated the firm had lost more than 100 fee billers in the span of just over a year. However, it still had fixed costs and excess space in Toronto. Another lawyer said the cuts weren’t properly aligned with a reduction in space. Other offices were moving or undergoing renovations, increasing costs. The firm also revealed income per partner was down 15 per cent.

In late December 2013 and early January this year, there were key resignations in Montreal. Eric Levy and Manon Thivierge, both considered “lifers” at the firm, decamped for Osler Hoskin & Harcourt LLP. Marie-Josée Hogue, who spent almost 27 years at Heenan, also resigned, moving to McCarthys. It rattled partners because they were seen as long-standing lawyers at the firm, and for some observers it spelled the end.

On Jan. 13, when Bonhomme resigned, and in what was described by respected Quebec legal blog Droit-Inc. as an internal memo, he dropped the ‘D’ word bombshell — dissolution — as being the route forward, which some lawyers felt was unnecessary.

What started as overcast skies in the beginning of 2013 had now grown into a full-blown frankenstorm. The run on the talent bank was now in full force. Recruiters and competing law firms that had been hammering at lawyers for months were now prying lawyers away, including some who held positions on various management committees at the firm. “No one wanted to take the lead to fix it. Everybody was working on their plan B as I could see it,” says Tremblay. “If you face tough moments, there’s a way out. You could say, ‘Let’s have the courage to face it. Let’s correct what is wrong and look into the future.’”

A partnership retreat the first weekend of February was a chance for a last-ditch attempt to keep the firm together, but instead became a “bittersweet” gathering. One observer says by then too many lawyers had left and there was no commitment on the part of those still around to bite the bullet and take the one or two years of short-term pain to get through it. Gall adds, “In the two weeks before the vote, everybody knew we were dissolving. The vote was a formality.”

Firm dissolves

An e-mail from Bacal to former partner Thomas Cotter — which was filed in litigation Cotter brought against the firm for repayment of his capital loan — provides insight into the end.

Cotter wrote Feb. 3, 2014, to demand his unpaid capital or he would sue. On Feb. 5, Bacal responded at 5:10 p.m., advising “five minutes ago the partners of the firm have voted to wind up the firm. . . . Really too bad that it has come to this. Unfortunately too many partners, like yourself, decided they preferred other platforms.”

Following the dissolution vote, lawyers began to move en masse. In terms of Toronto, discussions were opened with DLA Piper for a group of lawyers to become its Canadian operation. DLA had long been looking for a Canadian partner and according to a 2011 report in The Lawyer had been in talks with Heenan. When those DLA discussions began is a point of contention. A Globe and Mail report cited them taking place before the vote to dissolve, which if the firm was trying to restructure as partners were reportedly willing to do in December, would have simply been another blow to the eroding trust between the Toronto and Montreal offices. If Toronto bolted, then Montreal and the other offices would be left holding the liabilities. Some claim that’s what led to the Montreal departures of key lawyers in late 2012 and early 2013.

However, Toronto lawyers insist the DLA talks didn’t take place until it was clear Heenan was not going to survive and only got serious after the dissolution vote. After discussing numbers, DLA wasn’t interested, prompting one lawyer to suggest the Toronto group was naïve in its DLA dealings.

What’s next?

At press time, people were waiting for the other shoe to drop. A liquidation committee, headed by Vancouver partner John Legge, was appointed to oversee the “orderly wind-up” of the firm.
Restructuring expert Bill Aziz was hired to help with the dissolution. Calls to Aziz and Legge brought either a no comment or were not returned.

Two Alberta lawsuits from former partners Cotter and Jim Pasieka provide a glimpse into potential issues going forward. Cotter claims $299,000 and Pasieka $700,000 for return of capital. After resigning Aug. 1, 2013, they negotiated an agreement that their money would become due upon dissolution. Most of that is owed to the Bank of Montreal for capital loans. Heenan agreed to pay the loans back over 24 months starting in September 2014 and pay any interest. Those cases have been adjourned on consent.

A group of 13 ex-partners are in arbitration over their capital payments, trying to get them classified as debt and not equity so they would have higher priority over the firm’s assets. Their lawyer, Kent Rosenberg, declined to comment on the arbitration, noting it was confidential.

Its key landlords, Oxford Properties Group Inc. in Montreal and Brookfield Office Properties Inc. in Toronto, had yet to file lawsuits, but are owed millions under the leases. It’s not clear to what extent partners are personally liable. Some sources implied they weren’t, but the Alberta litigation suggests otherwise. In settlement letters to the men, Bonhomme wrote: “The firm confirms that, in accordance with section 7.5 of the Capitalization Policy, it has procured your release from the guarantees you provided to the Partnership’s landlords in Montréal and Toronto.”

Its two banks, BMO, which managed the capital loan program, and Royal Bank of Canada, had yet to file suit over their credit lines. One lawyer confirmed Heenan drew down a small amount on its operating line, but expected that would be covered by receivables.

It’s not clear how much partner capital is it stake, as partners contribute based on their income, but it’s in the millions. According to the Alberta litigation, the amount posted was 62 per cent of net income. That’s at the higher end of the scale for law firms, notes McKenna.

Under the partnership agreement, lawyers do not immediately receive their capital when they depart, so most of those who left will be lumped in with the remaining partners, which at the dissolution vote numbered around 170, according to one source. It’s not clear how many were equity partners. If money isn’t recovered to pay the capital loans, then partners are personally liable at a time when they are moving to new firms and would have to take out another capital loan to become an equity partner. There is also the practical reality of dissolution, notes Gary Luftspring, a former partner in Goodman & Carr LLP, which before Heenan was Canada’s last big law firm to implode in 2007. The files and records for 40 years of clients have to be dealt with. “What do you do with a ‘gabillion’ pieces of paper stored at Iron Mountain?” he asks. His partners spent years after the firm closed paying to store documents. Also, accounting and tax records need to be maintained. “There is all this piddly stuff that drives you around the bend.”

Heenan has nine offices. “That adds huge complexity” to the dissolution, he says, predicting former Heenan lawyers will learn in the process there are “good partners and bad partners.” He adds some clients will simply refuse to pay their bills.

Meanwhile at the new firm MEP it’s business as usual. “We haven’t really changed a heck of a lot in terms of the way we practise with each other as a group,” says Pawar. “At the end of the day, this is what was best for us and our clients.”

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