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SAN FRANCISCO-An improving economy isn’t good news for everyone. With fewer businesses going broke, the pace of traditional work for bankruptcy lawyers has slowed considerably-for now. Industry experts say a big reason is that money is flowing more freely-especially from hedge funds and private equity groups-to keep businesses afloat that might have filed for Chapter 11 bankruptcy in leaner times. But bankruptcy lawyers are evolving, and some even say the rivers of money may run dry in the near future-possibly during the next economic downturn. “There has never been liquidity like this before-never close to it in my 32 years,” said Frederick Holden Jr., a partner in Orrick, Herrington & Sutcliffe’s bankruptcy and debt-restructuring practice group in San Francisco. “I hope for everyone that it doesn’t cause any problems, but it seems unlikely.” Holden, who launched his career as a bankruptcy lawyer during the mid-1970s recession, said money alone can’t solve the problems that failing businesses are facing. “Now you have a lot of hedge funds coming in buying debt,” he said. “That’s all wonderful for the company, but if the company keeps losing money, that can only go on for so long.” Legal recruiter Lawrence Mullman said some firms are planning for just that. Though bankruptcy lawyers aren’t flying off the shelf like IP or corporate lawyers, there is some interest, he said. Skadden, Arps, Slate, Meagher & Flom of New York and Kirkland & Ellis of Chicago are among the firms beefing up their bankruptcy practices. “The demand is less, but some firms see what’s coming and are looking to make some strategic hires,” said Mullman, who works out of New York. “I think that they recognize that the cycle is going to begin again.” More Chapter 11s? While not a universally held belief, Holden and several other bankruptcy lawyers told The Recorder, an affiliate of The National Law Journal, they expect to see more Chapter 11s filed by late 2007. It would certainly be better for business, because in the last two years filings have dropped dramatically. In the 2004 fiscal year, a total of 10,113 businesses filed for Chapter 11 in U.S. bankruptcy court. In 2005, 5,856 businesses filed, and in 2006, only 5,475 businesses filed, according to statistics released by the courts. “The significant decline in local Chapter 11s means there’s less work on the West Coast, and we’re not immune to that,” said Peter Benvenutti, a partner in Heller Ehrman’s bankruptcy and restructuring practice in San Francisco. Benvenutti said the practice group-like many others on the West Coast-hasn’t been hiring additional attorneys in recent years. For Robert Eisenbach III, a Cooley Godward Kronish bankruptcy lawyer, the trend has meant a change in the focus of his work to what’s currently the rage: hedge fund financing. “During the 2001 to 2004 time period, there were just a lot more Chapter 11s being filed,” said Eisenbach, partner in charge at Palo Alto, Calif.-based Cooley’s San Francisco office. “As the number of bankruptcies goes down, we tend to get involved in more of out-of-court restructurings and litigation.” More and more, he’s been working with credit and finance lawyers on complex deals where hedge funds and private equity groups are injecting money into failing companies to steer them clear of bankruptcy court. “Unless there’s a strategic reason to be in bankruptcy, there are economic incentives to do restructuring out of court,” said Joseph Scherer, the partner who heads Cooley’s credit finance group. In the last four years, Scherer said he has worked with bankruptcy lawyers on a more regular basis, in large part because of the growing popularity of second lien loans instead of unsecured mezzanine financing. Expertise concerning what rights the second lien holder will get in bankruptcy is often needed, he said. It’s a trend recruiters are noticing, too. “[Demand] is actually starting to increase, and bankruptcy lawyers are looking for firms with strong bond and hedge fund practices,” said Lawrence Watanabe, a legal recruiter based in San Diego. Orrick’s Holden said there is also bankruptcy work in some industries that, for whatever reason, are not necessarily buoyed by the strong economy or free flow of financing. For instance, any industry that depends on energy may struggle when oil prices go up, he said. Although such cases haven’t rolled into Orrick’s San Francisco office, Holden said he’s still working on bankruptcy cases stemming from another industry-specific problem-exposure to asbestos litigation. Earlier this year, Holden finished his work representing a committee of retirees in Kaiser Aluminum Corp.’s Chapter 11 case, setting up a trust with Kaiser stock that will fund retirees’ pensions. Geography plays role Geography can also play a role in bankruptcy work. In the late 1990s, companies filing for bankruptcy and their lawyers headed for Delaware, because of a predictability when it came to the amount of fees awarded. But now the center of gravity has shifted to New York, Benvenutti said. “New York is generally considered to be a more user-friendly district,” he said. That’s good news for New York firms and major San Francisco Bay Area firms like Heller, Orrick or Cooley that have New York offices. Still, the bankruptcy market for lawyers is nothing like it was just a couple of years ago when the likes of Enron Corp. and WorldCom Inc. went bottoms up. “It was a terrific time for the bankruptcy bar: You had Kmart and United Airlines-we did work with Aloha Airlines,” said Richard Lapping, co-chairman of Thelen Reid Brown Raysman & Steiner’s bankruptcy and creditors’ rights group. “These were huge bankruptcy cases that meant a lot of work for a lot of lawyers.” Lapping, like other bankruptcy lawyers, said that trend might return. “There’s a little bit of tension in the economy, and we’re getting calls that there may be work in the offing looking forward,” he said.

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