Legal News

Befuddled Bankruptcy Lawyers Asking ?Where?s the Kaboom??

By Dan Slater

For months, bankruptcy lawyers in the U.S. have sounded a little like Marvin the Martian (pictured), the manic Looney Tunes character who ran around with his ray gun asking, “Where’s the kaboom?” (Sorry, Laird, we’ll bring you back for our next bankruptcy post).

That’s the lead to Ashby Jones’s Legal Beat column in today’s Journal, which picks up the theme we’ve been following for some time — when’s the crush of Chapter 11 filings finally going to reach the law firms?

To be sure, writes Jones, 2008 has seen its share of high-profile bankruptcy filings. And law firms’ bankruptcy departments are busier than they have been in several years. Still, the pickup in work isn’t of the type that many anticipated — a rush of Chapter 11 filings, one or two of which can keep a department humming for months, if not years. According to UCLA prof Lynn LoPucki’s Bankruptcy Research Database, 2008 is on pace to finish with about 26 Chapter 11 filings by companies valued at $250 million or more, twice the 13 filed in 2007 but fewer than a third of the 97 filed in 2001, during the last economic slump. “This is not a boom,” he said.

Still, hope springs eternal. Some think the Chapter 11 floodgates will open any second — that troubled companies looking for their next dose of financing will fail. “Instead of loans getting rolled over at slightly higher interest rates, lenders are just saying, ‘No, we’re not going to do this,’ ” said Greg Milmoe, co-head of the restructuring practice at Skadden, Arps, Slate, Meagher & Flom LLP. “That’s what’s going to trip up a lot of [companies] into full-fledged restructurings.”

Even so, a boom could be tempered by several factors, including a 2005 change to the bankruptcy laws, which added financial burdens on corporate debtors. And Chapter 11 typically requires big injections of cash both at the outset and at the end — cash that’s hard to come by. For instance, Steve & Barry’s — the cheap but chic retailer — failed to get debtor-in-possession financing and is aiming to either sell itself or to liquidate.

A relative dearth of Chapter 11 filings won’t necessarily leave bankruptcy lawyers without anything to do. But it will likely change the nature of their work. Expect to see troubled companies — and their lawyers — working harder to reach out-of-court agreements with their existing creditors. And watch for shorter Chapter 11 cases as existing lenders push for Steve & Barry’s-type liquidations and fire sales, rather than lengthy restructurings.

What does it all mean for the lawyers? “It depends on the firm’s business plan,” said Jack Williams, who teaches bankruptcy law at Georgia State University College of Law in Atlanta. Mr. Williams predicts that firms that can juggle a lot of short-term engagements are going to do well. “But those who stick with a more traditional approach,” like relying on one or two cases that drag on for years, might struggle. “That business plan just isn’t going to square with what’s going on.”

Photo: Wikimedia Commons

Full post as published by Law Blog - WSJ.com on July 16, 2008 (boomark / email).