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Dykema Gossett attorney Richard Gottlieb traveled last month to the lonely offices of an Irvine, Calif.-based subprime lender. A floor of the building that Gottlieb said buzzed with 150 analysts last year was now empty except for the conference room where he sat for a deposition with a client and other lawyers. There are likely to be many attorneys wandering the desolate halls of cash-strapped subprime lenders in coming months as some companies in the industry confront a host of legal and financial challenges. Outside attorneys working for the companies will help them with corporate restructurings, asset sales and bankruptcy filings; guide them through state and federal government probes; and take on class actions by consumers, investors and employees. Many companies in the industry are trying to repair their finances after their loan customers, people who had “subprime” or weak credit and often little money to put toward the purchase of a home, defaulted in greater numbers than expected on their mortgage loans. ‘Everyone is struggling’ Irvine-based New Century Financial Inc. filed for Chapter 11 bankruptcy protection this month, and Brea, Calif.-based Resmae Mortgage Corp. filed in February. In the wake of foreclosures and investment losses, federal agencies and at least six states have launched probes. “This has had an industrywide impact,” Gottlieb said in an interview from the Chicago office of Midwest firm Dykema Gossett. “Everyone is struggling; even if they were strong, they are struggling.” In a clear sign of the growing demand, Pillsbury Winthrop Shaw Pittman announced last week that it has launched a new pratice group focused on the legal issues surrounding the subprime mortgage market. Lawyers in the field said they expect additional companies to seek protection from creditors. The shake-out resembles a similar round of failures and consolidation in the subprime lending industry in the late 1990s, said Lynn LoPucki, a bankruptcy law professor at the University of California at Los Angeles School of Law. There were seven bankruptcy liquidations in 1997 and 1998, when the crisis peaked, he said. The spate of subprime home-lender filings are providing a burst of work for bankruptcy lawyers after a dearth of new bankruptcies in recent years. Attorneys are not only working on the filings, they’re also advising clients behind the scenes in an effort to help restructure operations outside of court, if possible. The lenders are tightening their lending requirements and laying off workers across the United States. New Century’s bankruptcy is being handled by Mark Collins of Wilmington, Del.-based Richards, Layton & Finger, along with Suzzanne Uhland, the San Francisco-based chairwoman for the restructuring group of O’Melveny & Myers. Resmae Mortgage also hired Richards Layton, and that company’s unsecured creditors are being represented by Wilmington’s Landis Rath & Cobb. While the bankruptcy engagements are likely to be short due to the lack of operations and asset selloffs by some of the failing companies, the selloffs will benefit other attorneys. Mergers and acquisition colleagues are stepping in to assist the companies in selling some of their loan portfolios at discount prices. For instance, Resmae Mortgage last month sold some assets to Citadel Investment Group LLC for $22 million. “We’re seeing this hit across multiple practice areas,” said Jerry Biederman, an attorney at Neal, Gerber & Eisenberg in Chicago, adding that this is the start of “a whole panoply of subprime-related legal issues.” Biederman declined to comment on his clients, but said that his firm had litigators as well as finance and bankruptcy attorneys working on various aspects of the situation. “You have significant financial players that have interests in this market,” Biederman said. McDermott, Will & Emery attorney Bill Smith said his firm is advising some banking and hedge fund clients on how to recoup some of the funds that they had loaned to the subprime lenders. It’s not a huge part of their portfolios, but it’s still an exposure in the tens of millions of dollars, he said. He declined to name his clients. Dykema’s Gottlieb, who leads his firm’s consumer financial services group, said Dykema is advising some clients who are looking to buy such assets at current so-called “scratch and dent” prices. Regulatory work In addition to the restructuring work, state and federal regulators’ scrutiny of the industry is pulling more attorneys into the mix. O’Melveny & Myers has turned to Dykema and New York’s Skadden, Arps, Slate, Meagher & Flom for assistance on New Century matters in that area, Gottlieb said. “I expect there will be continued enforcement and litigation activity around issues related to nontraditional mortgages loan products,” said Skadden attorney Andrew Sandler, whose consumer financial services enforcement and litigation group has about 15 to 20 lawyers working on various issues for clients in the industry. Among his firm’s clients are New Century and Fremont General Corp., he said. New Century has disclosed that the U.S. Securities and Exchange Commission and New York Stock Exchange regulators are looking into the company’s restatement of financial results announced in February. The U.S. Attorney’s Office for the Central District of California is also conducting a criminal inquiry related to trading in the company’s securities and accounting errors, the company has said in regulatory filings. Many states across the country, including Massachusetts, New York and Ohio said they’ve begun probes of subprime lending practices. For instance, New Century disclosed that Massachusetts, New Hampshire, New Jersey and New York have alleged that the company may have violated state laws by failing to fund mortgage loans after a mortgage closing and failing to meet other state requirements. And in Ohio, the company agreed to stop all foreclosures, pending a state review of the legality of some loans. A ‘crisis’ in Illinois Attorneys general in Georgia, Illinois, Iowa and North Carolina have also addressed the problem in recent months, according to the National Association of Attorneys General. In Illinois, Attorney General Lisa Madigan called the situation a “crisis,” noting that foreclosure filings rose by 55% in her state last year and are expected to jump even higher this year. Her office declined to comment on whether there’s an investigation under way. Attorney general investigations, state regulatory agency examinations, federal banking regulatory examinations and class actions are all part of the subprime lending-related legal work that Sandler said he expects to linger for the next two years. The industry’s woes are rife with opportunities for plaintiffs’ attorneys, who have already brought or are expected to bring class actions on behalf of people who invested in the subprime lenders or the mortgage-backed securities they issued, who received home loans from them, or who were fired by them amid the financial stress. There are already class actions pending against the lenders on behalf of consumers who say they were duped by the loans’ terms and ended up facing foreclosure or unexpectedly high mortgage payments. These are “desperation lawsuits” brought by consumers who can’t get out of the loans, said Gottlieb, who will act as defense counsel in the litigation. He said he doesn’t think they have any merit, but he knows they will be filed “in droves.” Employees of the failing subprime lending companies may also bring lawsuits because of lost compensation, Gottlieb said. NovaStar Financial Inc. of Kansas City, Mo., said last month that it would cut 350 employees, or 17%, of its work force, while Ameriquest Mortgage, a unit of Orange, Calif.-based ACC Capital Holdings, and Fremont General have also announced layoffs that will affect hundreds of workers. For the industry as a whole, there could be thousands of workers who make claims. Shareholders of the subprime lenders, whose stock prices plummeted as their financial situations deteriorated, have already brought many lawsuits. For instance, stockholders brought eight class actions against NovaStar and its executives between February and April in the U.S. District Court for the Western District of Missouri. The plaintiffs allege that the lender made false statements and failed to disclose certain information that adversely affected the company’s stock. NovaStar has said in regulatory filings that it believes the claims are without merit and that it plans to fight them. Investors who bought some of the mortgage-backed debt securities, which have also declined in value, may also have claims against subprime lenders, attorneys said. Class actions on that front may also reach beyond the lenders to the banks that were selling the securities on behalf of the lenders, said Chris Seeger, a plaintiffs’ attorney at Seeger Weiss in New York who is researching a lawsuit he plans to file this month. “We have many people who are contacting us and feel like they’ve been victims of the subprime lending industry,” Seeger said.

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