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As 2002 once again proved, the bankruptcy business is a land of the giants. Large national firms played the starring and supporting roles in most of last year’s biggest bankruptcies. But there is still a redoubt for smaller firms: Wilmington, Del. Delaware is an anomaly. It is a vital bankruptcy venue — second only to New York in importance — but most of the country’s top bankruptcy firms don’t have offices in Wilmington. That is partially for business reasons and partially a matter of taste; many bankruptcy partners don’t want to move to Wilmington, where Delaware’s two bankruptcy courts are based. As large firms have kept their distance from the First State, a handful of smaller firms, with head counts ranging from 80 to 120 lawyers, have flourished — namely, Young Conaway Stargatt & Taylor; Richards, Layton & Finger; Morris, Nichols, Arsht & Tunnell; and, recently, Pachulski, Stang, Ziehl, Young, Jones & Weintraub. These firms, of course, face stiff competition from larger firms. The Wilmington office of 235-lawyer, Philadelphia-based Saul Ewing, for example, has become one of the top bankruptcy operators in the state. And the leading national firms regularly swoop into Delaware to file and staff cases. But the local Delaware boutiques are still able to commandeer significant roles in most of the state’s big bankruptcies. “We are involved in just about every major Chapter 11 case [in Delaware] in some form or another,” says Mark Collins, head of bankruptcy at 120-lawyer Richards, Layton. And there are a lot of major cases to be had. Every week, at least one “mega” debtor — a company with more than $100 million in assets and 1,000 creditors — files for bankruptcy in Delaware, according to the clerk of the Delaware bankruptcy court. Indeed, Delaware hosted four of the 20 largest bankruptcies filed in 2002: McLeodUSA Inc., Budget Group Inc., the Kaiser Aluminum Corp., and Exide Technologies. Morris, Nichols serves as local counsel to the creditors committee in the McLeodUSA case; Young Conaway served as local debtor’s counsel in the Budget case; Richards, Layton was local debtor’s counsel in Kaiser Aluminum; and Pachulski, Stang was local debtor’s counsel in the Exide Technologies case. In the largest Delaware bankruptcies, the top national firms usually represent the debtor and creditors committee, and then those firms hire one of the local boutiques as co-counsel. According to a local rule promulgated by the Delaware bankruptcy court, out-of-town firms are required to hire as co-counsel a firm with a Delaware office. The local co-counsel must co-sign all the pleadings in the bankruptcy and is required to attend court hearings. Some bankruptcy lawyers deride Delaware’s local counsel rule as protectionist. In most jurisdictions, courts will simply admit out-of-town lawyers pro hac vice, or for the purpose of trying a particular case. In Delaware, out-of-town lawyers must be admitted pro hac vice and use local counsel. “Bankruptcy uses federal law, and it is a national practice,” says Kenneth Klee, a bankruptcy professor at University of California, Los Angeles, School of Law and a partner with Los Angeles’ Klee, Tuchin, Bogdanoff & Stern. “There is no justification for having local counsel rules except parochialism.” Others counter that Delaware’s local counsel rule exerts a moderating influence. Local lawyers, with their local reputations at stake, can guard against contentious and unethical behavior by “foreign” lawyers, the argument goes. “Local lawyers have more of a stake in the integrity of local [courts],” says Georgetown University Law Center ethics professor Milton Regan Jr. Valid or not, Delaware’s local counsel rule has been good for business. Since Delaware became a hot venue, following the 1990 bankruptcy of Continental Airlines Holdings Inc., the top national bankruptcy firms have all developed go-to local Delaware counsel. The most prominent exception is Skadden, Arps, Slate, Meagher & Flom, which is the only national bankruptcy powerhouse with an office in Delaware. The firm has 19 bankruptcy lawyers in its 60-attorney Wilmington office. Other firms, however, must go shopping for Delaware talent. Sidley Austin Brown & Wood, for example, often turns to Young Conaway for help; the Budget Group bankruptcy serves as an illustration of that. Pachulski, Stang, meanwhile, often acts as local counsel for Kirkland & Ellis; the two firms, for instance, teamed up in the Exide bankruptcy filed last year. At Pachulski, Stang and Young Conaway, local counsel work accounts for at least 15 percent of annual revenue. Some of the other top Delaware firms, such as Morris, Nichols and Richards, Layton, draw more than 35 percent of their annual revenue from local counsel work. Myron Trepper, head of bankruptcy at New York’s Willkie Farr & Gallagher, says that some national bankruptcy firms use local Delaware counsel as a mere “paper filer or mail drop.” Other firms use local counsel in a more substantial way. “We are in the middle,” says Trepper. “We tend to use the [Delaware] firms for what I call basic, standard matters . . . rejection of leases, objections to [creditors'] claims.” However small their role, Delaware lawyers have had an unusual opportunity to apprentice on some of the largest bankruptcies of the past decade, and to work alongside some of the country’s top bankruptcy counsel, says Richards, Layton’s Collins. “Many Delaware attorneys have had a learning experience that many lawyers outside of the state haven’t had,” he says. And the Delaware boutiques are increasingly parlaying that experience into lead counsel assignments. Take Pachulski, Stang. In January 2000 the Los Angeles-based bankruptcy boutique opened a Delaware office and staffed it with one lawyer — local bankruptcy hotshot Laura Davis Jones. Initially, she says, she split her time between local counsel and lead counsel work. The office has grown to 13 lawyers and now, she says, 75 percent of its work is of the lead counsel variety. “[Clients] are getting familiar with the firm and its depth and capacity,” she says. Notably, last year Pachulski, Stang was hired as lead debtor’s counsel in the Peregrine Systems Inc. bankruptcy, the 21st-largest bankruptcy filed in 2002. Other top Delaware firms tell a similar story. In the early ’90s, for example, Young Conaway acted as second-chair counsel in about 85 percent of its cases, says James Patton Jr., head of bankruptcy at the 85-lawyer firm. Now the firm acts as lead counsel in about 85 percent of its cases, he says. “With the growth of our lead counsel work,” says Patton, “our role as local counsel has also expanded; it has become a pretty collaborative relationship in a lot of cases.” Local Delaware firms also benefit from the fact that the large national firms are occasionally conflicted out of representations. When that happens, lawyers say, the national firms like to refer their business to smaller firms, such as those in Delaware, because they are not perceived as a competitive threat. In 2000, for example, Skadden would have faced conflicts had it served as lead debtor’s counsel in the Owens Corning bankruptcy. The $6.5 billion insulation manufacturer was the largest company to file for bankruptcy in 2000. Because of its potential conflicts, Skadden recommended that Owens Corning hire the Delaware office of Saul Ewing as lead counsel; the firm still serves in that capacity. “That has helped us convince [companies] that we can handle the lead [on big cases],” says Norman Pernick, head of bankruptcy in Saul Ewing’s Delaware office. The Delaware firms, of course, are not about to conquer the national Goliaths; Delaware lawyers fully admit that they have not yet become serious competitors to the likes of Weil, Gotshal & Manges or Skadden. When the Delaware firms act as lead counsel, it is usually in midmarket bankruptcies involving debtors with less than $500 million in assets. But that still raises a question. Why haven’t Weil and others moved into Delaware and captured the local firms’ slice of the bankruptcy pie, even if that slice is still relatively modest? The main reason is that the top firms don’t believe that they have lost good business opportunities simply because they don’t have a Delaware office, say lawyers at those firms. Yes, the firms must farm out some work to local Delaware counsel, but, say lawyers, it is often the sort of ho-hum work that the national firms are glad to hand over. Plus, it is often more efficient to have Delaware lawyers, who bill less than their big-city counterparts, handle certain duties. “There are situations where it is better to have local counsel go to court than to have high-priced New Yorkers board a train [to Delaware] or Chicagoans board a plane,” says Edward Weisfelner, a New York bankruptcy partner with Brown Rudnick Berlack Israels. Skadden, which opened its Delaware office in 1979 to handle corporate litigation, sees things differently. Anthony Clark, head of the firm’s Wilmington bankruptcy practice, believes there are enormous efficiencies in having a Delaware outpost. “It eliminates overlap and duplication of effort that, no matter how hard you try, you’ll have [when you affiliate with local counsel],” says Clark. The Delaware firms should continue to flourish as long as Delaware remains a favored bankruptcy venue. But will it? In recent years New York has overtaken it as the top bankruptcy venue, in part because of a perception that Delaware’s two bankruptcy judges can’t process cases as quickly as the eight judges in New York City, where the Southern District of New York bankruptcy courts are based. Last year, 892 Chapter 11 cases were filed in Wilmington, while 1,473 cases were filed in the Southern District, according to U.S. court system administrators. Relief may be on the way for Delaware. The House of Representatives recently passed the Bankruptcy Judgeship Act of 2003, which calls for four new bankruptcy judgeships in Delaware. In April the Senate was considering the legislation. The Delaware bankruptcy bar, not surprisingly, is excited at the prospect of some added judicial muscle. “If we get those judges and good people take those jobs,” says Skadden’s Clark, “I’m confident there will be additional filings [in Delaware] until [the new judges] get too busy.” If that happens, Delaware’s small-but-capable bankruptcy firms will, no doubt, share in much of the new bounty. This article was distributed by the American Lawyer Media News Service. Nathan Koppel is a senior reporter at The American Lawyer.

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