Let us hark back to the end of 2006 — the Dow is soaring, credit is flowing freely, and default rates are at historic lows. Far from cursing its luck, the corporate restructuring group at Skadden Arps Slate Meagher & Flom is running at full tilt. Partners juggle at least four multibillion-dollar bankruptcies between them, including
Eighteen months later, the economy is in the tank, business bankruptcies are up nearly 50%, and Skadden’s bankruptcy lawyers are talking about the good old days. “We have been lucky enough to generate some smaller matters,” says partner DJ Baker. “But you cannot just replace a Refco or a Winn-Dixie with a couple of smaller cases in terms of keeping people busy.”
Many firms bulked up their bankruptcy departments in 2007, in anticipation of a flood of filings. But so far, the prototypical ‘countercyclical’ practice has not paid off as advertised. Partners at top bankruptcy and restructuring firms say that, unlike some previous recessions, the current downturn has not produced the kind of massive, complex Chapter 11 cases that generate the most work. The firms claim that they are finding ways to keep busy, and some say they are seeing a small increase in recent months. But unlike the years following the leveraged buy-out flame-out of the 1990s and the dotcom die-off of 2000, and without major frauds like Enron and Adelphia, times remain frustratingly lean.
Only 13 large public companies filed for bankruptcy protection in 2007, the fewest in 10 years, according to data compiled by the
More substantial companies that might have otherwise used Chapter 11 to reorganise and stay in business are winding up on the auction block because of the tight credit markets. “There is no liquidity, so there is nothing to fund reorganisations,” says Cooley Godward Kronish’s Lawrence Gottlieb. Despite a number of new representations tied to major retail bankruptcies, Cooley’s bankruptcy practice has been surprisingly flat, Gottlieb says: “There are lots of cases, but they are not as meaty.”
Representing a single debtor in a complex reorganisation can keep a team of partners and associates busy for years, but those cases are not materialising. Older cases that wrapped up in 2007 lasted an average of 737 days, according to the University of California’s data, while many of those filed in 2007-08 were either ‘prepackaged’ (i.e., with unopposed reor-g-ani-sation plans) or destined for liquidation. “Where it always used to be more lucrative to represent the debtor than to represent creditor committees, that probably evens out now,” says Weil Gotshal & Manges’ Harvey Miller. “Unless you have a Rust Belt client with union problems or an asbestos or environmental problem, most Chapter 11 cases are much shorter.”
Good news for firms that represent creditors? Not according to Daniel Golden of Akin Gump Strauss Hauer & Feld, who says 75% of his firm’s bankruptcy and restructuring work is devoted to representing creditors committees in active Chapter 11 cases. “The shops traditionally representing committees are hurting now,” says Golden (though Akin Gump is busy, he is quick to add). “The problem with representing creditors committees is that you need a debtor to go after.” And these days, the debtors just aren’t hanging around for lengthy Chapter 11 proceedings.
Martin Bienenstock, who left Weil Gotshal last year to start Dewey & LeBoeuf’s new business solutions and governance group, and who frequently represents creditors, agrees that individual Chapter 11 cases are not the lucrative workhorses they once were. Bienenstock now spends much of his time out of bankruptcy court, either restructuring a company’s pre-existing debt or trying to make matches between distressed businesses and bargain-hunting private equity firms.
As they wait for the bloodletting in the economy to offer up more filling fare, bankruptcy lawyers remain optimistic that the good times must be right around the corner. Until then, says Skadden’s Jan Baker, it is not impossible to stay busy with the smaller cases — “it just takes more of them.”
This article appeared in the June edition of The American Lawyer, Legal Week’s