In skillet combine chicken livers, onion, garlic, bay leaf, thyme, salt. Add water and simmer. Reduce heat and simmer until livers are barely pink inside (about 3 minutes). Remove from heat and let stand covered 5 minutes.
Discard bay leaf. Transfer all ingredients in skillet to a food processor (using strainer spoon). Puree. Add 2 TB butter at a time into food processor while running, then add Sherry until blended in. Add salt and pepper and process until completely smooth.
Using a spatula, transfer to storage containers and refrigerate until firm (about 1 hour). Serve chilled.