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BANKRUPTCIES — Bankruptcy Lawyers Hate Good Times

The condor, the kangaroo rat and the blunt-nosed leopard lizard are just some of the animals considered endangered in this state, but there’s another species that could be added to the list: the California bankruptcy attorney.

It seems trade in Chapter 11 reorganizations, one of the most lucrative types of bankruptcy filings, has all but dried up in Los Angeles, and that has lawyers scrambling to fill the gaps.

The hot economy provides part of the explanation. Good times mean fewer Chapter 11 filings. But local attorneys say much of the blame lies with the state of Delaware, which has built a multibillion-dollar cottage industry out of handling bankruptcy cases.

“On the West Coast, it’s been awful,” said David Gould, a bankruptcy attorney with McDermott, Will & Emery LLP in L.A. “Delaware has been adept at creating a very user-friendly system, and what business is left has gone there.”

Benjamin Seigel, a bankruptcy attorney with Buchalter, Nemer, Fields & Younger PC, said many longtime bankruptcy attorneys have been forced to go into other fields, such as corporate law, intellectual property and human resources law.

“My personal involvement in Chapter 11 bankruptcies stayed pretty constant even into the late ’90s,” Seigel said. “But in ’99 and 2000, I’ve seen a substantial decrease (in Chapter 11 filings).”

It turns out that many corporations see the courts in Delaware as more predictable, with a reputation for quickly approving prepackaged bankruptcy reorganization deals. And because most of the corporations were incorporated in the state to begin with, the law allows them to have their reorganizations handled there.

The United States Bankruptcy Court in Delaware has only three judges, and their track records are known. By comparison, the court’s Central District of California which covers L.A., Orange, San Bernardino, Ventura and Santa Barbara counties has 23 judges, making it a crap shoot which judge a company is going to draw.

Central District judges, meanwhile, have a reputation for being sticklers for procedure, while the courts in Delaware tend to be more “results-oriented,” as one attorney put it.

Meanwhile, the economy has a lot to do with the slowdown in local bankruptcy work. In 1991 there were 23,989 Chapter 11 filings nationwide, but the number dropped to 8,491 in 1999, according to the Administrative Office of the U.S. Courts. In California, the number of bankruptcy cases went from a high of 4,384 in 1992 to 821 cases last year, according to the same source.

Delaware, on the other hand, went from 41 Chapter 11 filings in 1989 to 2,013 in 1999, as the state cemented its reputation as the “in” place for corporate America’s bankruptcy scene.

UCLA law professor Lynn M. LoPucki said corporations like to file in Delaware because judges there have a reputation for being pro-management. As a result, bankruptcy law has become a huge cottage industry in Delaware.

In a recent study, LoPucki found that 56 percent of the 105 public companies with assets over $200 million that filed for Chapter 11 in the U.S. between 1995 and today did so in tiny Delaware. The estimated combined assets of the companies that have filed for Chapter 11 there since 1990 are $91 billion. If you consider that it typically costs a company 3 percent of its assets to conclude a Chapter 11 case, then bankruptcy law brought Delaware’s economy $2.7 billion over the last decade.

“If you want a couple of billion dollars for your economy, this is the way to get it,” said LoPucki.

That might explain why the state’s Republican U.S. senator, William V. Roth Jr., fought so vigorously last year when U.S. Rep. Howard Berman, D-Mission Hills, attempted to amend the bankruptcy law to require companies to file where they are headquartered. Berman’s intent was to make it easier for consumers who have a stake in a corporation’s Chapter 11 filing to protect their interests, said a staffer. But Roth managed to kill the effort.

“Twenty-five percent of the downtown Wilmington offices are rented by bankruptcy lawyers,” said Kenneth N. Klee, a UCLA law professor and principal with Klee, Tuchin, Bogdanoff & Stern LLP. “Bankruptcy is a major attraction of business to Wilmington. The Hotel du Pont is sold out on a regular basis.”

Klee said most law firms with large bankruptcy practices follow the cases to Delaware, where they often hire local attorneys as co-counsels. But most of the money for support services is spent in Delaware, not in the law firm’s city of origin.

Ironically, Klee was a staffer on the House Judiciary Committee when Congress revamped the nation’s bankruptcy laws in 1978. No one realized at the time that the provision allowing companies to file bankruptcy in their state of incorporation would cause such a stir so many years later, Klee said.

Seigel conceded it may be tough for the average Angeleno to feel sorry for bankruptcy attorneys, unless they harbor a fear that more attorneys will go into personal-injury work, he joked.

But things may be looking up for the legal beagles. With junk bond debt mounting and many dot-com and health care companies facing a difficult road ahead, the smell of carrion is already wafting in the air.

“A lot of people who don’t have a lot of work are optimistic we’re going to see a lot of bankruptcies,” Seigel said.

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