By Casey Sullivan

(Reuters) - A New York federal judge on Thursday approved a settlement that requires the insurer and former chairman of defunct law firm Dewey & LeBoeuf to pay $19.5 million to resolve claims with a trustee that leaders mismanaged the firm.

Dewey once employed more than 1,200 lawyers in 26 offices worldwide, but last May it became the largest U.S. law firm to file for bankruptcy. Its demise has been largely attributed to compensation guarantees the firm made to a significant portion of its partners.

The $19.5 million settlement resolves mismanagement claims against leaders of the New York law firm including former chairman Steve Davis. Davis has agreed to pay $511,145 and Dewey's insurer XL Specialty Insurance Company has agreed to pay $19 million to the firm's estate in exchange for a release from future litigation.

The settlement says Davis denies any wrongdoing in his managerial capacity and "maintains that he fulfilled his fiduciary duties and at all times acted in what he reasonably believed was in the best interest of Dewey".

As of April, the Manhattan district attorney's office was investigating alleged financial improprieties by the firm's former leaders, according to at least two sources with knowledge of the matter. The sources declined to comment publicly because they were not authorized to do so.

The settlement marks the latest recovery for Dewey's creditors who claim they are owed hundreds of millions of dollars in the wake of the firm's demise.

The $19.5 million will now go to satisfy Dewey's secured lenders such as JP Morgan Chase & Co. and unsecured creditors such as the Pension Benefit Guarantee Corp. At least 65 percent of the settlement will go to satisfy JP Morgan, the largest secured lender, which has funded Dewey's bankruptcy, according to a lawyer who is involved in the bankruptcy.

The mismanagement settlement marks the second significant recovery for creditors in Dewey's liquidation.

In October, Judge Glenn approved a $71.5 million settlement between some 400 former Dewey partners and the firm's estate. The deal required Dewey partners to pay portions of their compensation, ranging between $5,000 and $3.5 million individually, in exchange for a release from potential lawsuits over the firm's debts.

A spokeswoman for XL Specialty Insurance Company did not respond to a request for comment. Kevin Van Wart, a lawyer for Davis, said on Thursday that Davis was pleased with the settlement.

(Additional reporting by Karen Friefeld; Editing by Bob Burgdorfer and Stephen Coates)

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