A slowdown in Chapter 11 bankruptcy filings has led law firms to trim their ranks and steer bankruptcy attorneys into other areas, said attorneys in interviews with the Law Journal.
“Firms across the board have been trimming their restructuring practices because there’s been a pronounced slowdown in the field,” said John Rapisardi, a partner in O’Melveny & Myers and cochair of the firm’s restructuring practice.
While some attorneys say the “bankruptcy recession” will end when interest rates rise, others believe the change is long-lasting.
Generally, the number of Chapter 11 filings has been dropping every year since the height of the financial crisis. For the 12 months ending in June 2013, the number of business Chapter 11s in the Southern District was 455—a 71 percent drop compared with the filings in the year ending June 2009, according to statistics from the Administrative Office of the U.S. Courts. Most recently, in the second quarter of 2013, the Southern District saw 67 Chapter 11 filings, about a 70 percent drop from the same period last year.
In Delaware, the number of Chapter 11 filings for the year ending June 2013 was 759, down from 1,635 in the same term four years ago.
The number of Chapter 11 filings in the Northern and Western districts of New York saw moderate drops since the brunt of the recession, according to court statistics. Meanwhile, in the Eastern District, the number of new business reorganizations for the year ending 2013 was 246, only slightly lower from a peak in the year ending June 2010.
Nationwide, the number of all bankruptcies, both corporate and personal, has been on the decline.
“If you ask any honest restructuring professional, they will tell you business is slower than it was a couple years ago because there are fewer companies that are being restructured” said Stephen Lerner, chair of Squire Sanders’ restructuring and insolvency practice.
In addition, there are fewer cases with debt at more than $1 billion.
Attorneys point to a number of factors for the decline, including an improving economy, low interest rates and more investors willing to put funds into distressed companies outside of bankruptcy.
“Companies in debt three or four years ago could not have refinanced because interest rates were too high,” Rapisardi said. Businesses today can refinance with debt, bonds and loans with attractive interest rates, he said.
“It’s so cheap for companies to borrow money. They can always borrow more to pay old debt” or to continue operating, noted Edward Neiger, a managing partner at bankruptcy firm ASK LLP.
And in the past 10 years, there has been a “rise of the professional investor,” including hedge funds and private equity firms interested in distressed companies, said Damian Schaible, a partner at Davis Polk & Wardwell and chair of the New York City Bar’s bankruptcy committee. Schaible said he has seen debt-burdened companies better able to access capital and lending markets and avoid bankruptcy.
Meanwhile, changes to the bankruptcy code in 2005 accelerated Chapter 11 cases, in particular by shortening deadlines to file a reorganization plan and to assume or reject commercial real estate leases, Rapisardi said.
Law Firm Business
Law firms bulked up their practices in 2008 and 2009 when filings soared, and litigators and corporate attorneys became part of the bankruptcy teams.
Now, the drop in bankruptcy work “has forced a contraction in the industry in terms of firms cutting back on the size of bankruptcy practices and reallocating those resources to their other practice groups,” Rapisardi said.
Ropes & Gray partner Mark Bane, chair of the firm’s business restructuring department, said, “We used to be at a very steady clip adding people.” While his practice is still growing, Bane said, it’s at a slower rate.
Bane said he now focuses on out-of-court restructurings. Restructurings in court used to take up 90 percent of his practice; now it’s about 60 percent, he said.
Lerner, at Squire Sanders, said his firm is focusing on cross-border restructuring. He said his practice has fewer restructuring lawyers in the United States than it did five years ago, although the firm just hired a new partner. “A lot of firms have either reduced to some extent the number of restructuring lawyers or have slowed the hiring. We didn’t do anything different,” Lerner said.
Attorneys say some of their colleagues are turning to corporate or litigation work. “One part of bankruptcy is litigating. You could easily leverage that to practice in court,” Neiger said.
Rapisardi said he has noticed a focus on Chapter 9, the section of the law for municipality bankruptcies, and restructuring in Europe and Asia.
Schaible said Davis Polk has branched out to represent more professional investors in restructurings, including hedge funds and private equity firms.
The slowdown in filings has affected job prospects, lawyers said. “If you’re an attorney who has experience in bankruptcy and you’re looking for a job, it will probably be harder for you than if you’re an attorney who has litigation experience” or other expertise, Neiger said.
Bankruptcy lawyers said they saw a direct link between the slowdown in large cases and Weil Gotshal & Manges’ move this year to lay off 60 associates and 110 non-lawyer employees and to trim compensation of some partners.
“As the restructuring and litigation work related to the 2008 financial crisis winds down, and as the overall market for transaction activity remains at the lower levels which we believe is the new normal, we must now make the adjustments we avoided over the last few years to position the firm to continue to thrive,” said Barry Wolf, executive partner at Weil Gotshal in a firm memo in June.
Weil benefited from working on the largest cases during the recession, including Lehman Brothers and Washington Mutual.
Lorenzo Mendizabal, a lawyer and managing director of bankruptcy services at Epiq Systems, a consultant and a claims administrator in large bankruptcies, said other law firms have quietly laid off bankruptcy lawyers and refocused others. “It would not be surprising to see more reductions in other firms,” he said.
When the number of bankruptcies dip, “there’s no question you reduce associates. You carry them for as long as you can but at some point, it’s tough,” Mendizabal said. “Weil is probably the most pronounced and dramatic example of that downsizing that we are seeing in the market.”
A Weil representative did not return a phone message for comment.
In an age of $1,000 hourly rates for bankruptcy lawyers, Mendizabal said he believes large firms will change Chapter 11 staffing models in response to a call from the U.S. Trustee Program to lower bankruptcy costs.
‘Not Here to Stay’
“This bankruptcy recession is not here to stay. It will eventually have another cycle,” Rapisardi said, noting previous slowdowns in the 1990s and 2000s.
Right before the recession, the number of Chapter 11 filings in the Southern District and nationwide was lower than today, according to court statistics comparing the year ending June 2013 with the year ending June 2007.
“There was so much work in 2008 and 2009 that to me it feels like a much larger dropoff,” Lerner said. “We were drinking out of a fire hose in 2008 and 2009.”
Lerner said he predicts a rise of filings next year. “There are plenty of companies that are close enough to the edge that any kind of material change to business,” such as loss of customers or increase in borrowing rates, will tip them over to bankruptcy, Lerner said. Also, he said a substantial number of loans that are scheduled to mature in the next 18 months will likely trigger an increase in filings.
But others disagree. Mendizabal said he believes the number of filings next year will remain flat. He said the 2005 changes to the bankruptcy code will result in fewer Chapter 11 reorganizations over the long run, unless the code changes.
Bane, of Ropes & Gray, also said he was skeptical that Chapter 11 filing rates would ever return to such heights because a distressed company’s creditors are now more likely to reach a restructuring outside of court.