One of Michigan’s biggest bankruptcy law firms has put itself under Chapter 11 protection, proving that no business is bankruptcy-proof when lawyers are involved.
Frego & Associates, led by attorney James Frego, has filed for bankruptcy and blamed its financial problems on payments owed to Mr. Frego’s former firm, which has shut down.
Frego, based in Dearborn Heights, plans continue filing about 100 Chapter 7 or Chapter 13 bankruptcy cases each month for clients while the firm’s leaders use bankruptcy to negotiate lower payments to be paid to the former law firm’s estate.
“The relief is there for everyone,” said James Frego told Bankruptcy Beat. “…from the person who is on a fixed income and earns less than $1,000 a month to a company as big as General Motors.”
Not to mention that city down the road called Detroit, which filed the biggest municipal bankruptcy case in U.S. history in July. The city of 700,000 residents is trying to negotiate deals with bondholders and retirees who are owed roughly $18 billion.
Frego & Associates, meanwhile, will use its bankruptcy to rethink its advertising strategy. The law firm spends most of its marketing money on advertisements in the Yellow Pages phone directory, and a bankruptcy judge could allow Frego officials to break those advertising contracts if they successfully argue that the expense isn’t worth it.
Frego & Associates, which also has offices in Ann Arbor, Warren and Flint, filed for bankruptcy last month. And no, the firm’s staff of 11 lawyers isn’t handling the case.
Mr. Frego’s former law firm dissolved in 2011 following disagreements between Mr. Frego and Dennis Brodsky, a lawyer who shared ownership of the firm with Mr. Frego.
The receiver who was put in charge of shutting down that old firm is eying customer payments that followed Mr. Frego to his new firm but originated in the old firm. He’s pushing Mr. Frego’s new law firm to pay about $220,000, according to court papers filed in U.S Bankruptcy Court in Detroit.
Like many law firms, Frego & Associates’ only major asset is the right to collect unpaid client bills, and those debts have “varying levels of collectability,” according to court papers.
Frego & Associates advertises that clients can file for bankruptcy now but pay some of the cost later— a business model that appeals to people who don’t have the several thousand dollars it costs to file for protection. That business model, however, can also lead to a lot of unpaid bills.
Mr. Frego told Bankruptcy Beat that, despite a nationwide slowdown in consumer bankruptcy filings, his own firm’s business has held steady. Michigan’s bankruptcies spiked in 2009 with more than 67,000 cases, but the state recorded only 40,914 filings last year, according to Epiq Systems Inc.
But the dispute between Mr. Frego and Mr. Brodsky began well before the bankruptcy-filings slowdown. The former law firm, which was called Frego & Brodsky, was established in 2004 after Mr. Brodsky paid more than $120,000 for a 50% ownership stake in the firm.
Mr. Brodsky said in a lawsuit that Mr. Frego soon got seller’s remorse. He claims that Mr. Frego began overloading him with work and spending the firm’s money excessively—a move that would mean that both lawyers share a smaller amount of profit from the business. Mr. Frego’s lawyers denied those allegations and many others throughout the lawsuit.
Soon after Mr. Brodsky returned from hip surgery in July 2009, he says that the locks were changed on the firm’s main office and that staffers told clients that he was no longer with the firm. Mr. Brodsky alleges that Mr. Frego didn’t have the power to fire him.
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