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Things look grim on the Internet landscape these days, but the Silicon Alley blues have yet to yield much green for bankruptcy lawyers. In some cases, however, failing dot-coms find that there are good business reasons for seeking Chapter 11 protection, such as cashing in on a below-market Manhattan lease — a move that landlords are contesting. More than 80 dot-coms have shut down or filed for bankruptcy since the beginning of the year, according to dotcomfailures.com’s Dead List, an index of Internet companies that have closed their doors. Nearly half of these firms went belly-up in the last two months alone. New York City’s Silicon Alley is suffering along with the rest of the country, with at least a dozen publicized casualties. Adding to the list are many others whose demise have gone largely unnoticed. And for those companies still standing, belt-tightening has become the norm, primarily in the form of marketing cutbacks and layoffs. In the last few months, New York’s dot-coms have laid off more than 3,500 people. Analysts say the bloodbath is far from over. This is because many dot-coms are running out of cash and venture capitalists are no longer willing to fund those without a strong potential for profitability. Among recent Silicon Alley failures have been Webcaster Pseudo Programs Inc., which recently filed for Chapter 11 bankruptcy protection, on the heels of APBnews.com, furniture e-tailer, living.com and the U.S. subsidiary of fashion e-tailer boo.com. But with such companies, bankruptcy is actually the exception to the rule. Most failed dot-coms simply “throw the key on the floor and say farewell,” said Keith J. Shapiro, co-chair of Greenberg Traurig LLP’s national bankruptcy and reorganization practice and president of the American Bankruptcy Institute. “When the cash runs out and you can’t pay payroll, even Chapter 11 won’t help you,” Shapiro said. And by the time they go under, these companies cannot afford bankruptcy, explained Larren M. Nashelsky, a partner at the New York office of Morrison & Foerster LLP. “A bankruptcy of any substantial size can’t be done for less than $100,000,” he added. Certain circumstances, however, will compel a company to seek Chapter 11 protection, even though it does not expect to reorganize in the traditional sense. For instance, a potential buyer of a distressed dot-com will insist that it file for bankruptcy first, explained Jeffrey W. Levitan, a partner at Proskauer Rose LLP. Under the bankruptcy code, assets can be purchased relatively cleanly, he said. Another reason for filing, said Lawrence P. Gottesman, a partner at Brown Raysman Millstein Felder & Steiner LLP, is when the rights to an asset are unclear or contested. LEASES AS ASSETS One such asset is often the company’s lease, which in Manhattan’s sizzling real estate market can be worth quite a bit. At least two failed dot-coms — boo.com and Pseudo Programs — have sought bankruptcy protection in an effort to resell their leases over the landlord’s objections. Both companies say they would like to sell or reassign their leases to other companies seeking to take advantage of the below-market rents in the original lease agreements. In the “midtown south” region, which encompasses Silicon Alley, commercial rents have gone up nearly 60 percent since the beginning of the year, from $29 a square foot to $45 a square foot on average, said Jason Spicer, associate director of research at the realty firm Cushman & Wakefield. The companies would sell the leases at a price slightly higher than what they paid, but still well below the current market value. Any money from the sale would go toward outstanding debt. An “assume and assign,” as the procedure is known, “usually sails through,” said Chester B. Salomon, of the bankruptcy boutique Salomon Green & Ostrow PC, who represents Pseudo Programs. But both companies have found themselves grappling with troublesome lease provisions that the landlords are using to contest the sale. In the case of Pseudo Programs, the landlord is arguing that an “unusual” clause allows it to break the lease on 90 days’ notice, Salomon said. Boo.com, which gave up the ghost this past spring, won its right to reassign its lease to Radical.com by an order entered Nov. 29, according to Shapiro, the company’s lawyer. But the battle is not yet over. Boo.com is fighting a lease provision that kicks back to the landlord any proceeds the company may gain from a reassignment of the lease, Shapiro explained. These clauses have become much more prevalent in the last few years, said Emanuel C. Grillo, a partner at the New York office of Salans. “After the wave of retail bankruptcies, the landlords learned their lesson,” he said. OTHER CONSIDERATIONS IN FILING Finally, dot-coms have filed for bankruptcy protection where their sale as going concerns are worth more than if they simply shut their doors, Gottesman said. The bankruptcy code’s automatic stay can keep creditors at bay while a company lines up a buyer. Traditionally, Chapter 11 is used to reorganize, rather than liquidate, a troubled company. But as of now, “there are no reorganization success stories” in the industry, Nashelsky said. Silicon Alley’s APBnews filed under Chapter 11 in July in part hoping to attract new investors. But the tactic did not work, and it sold its business a month later to SafetyTips.com for the bargain basement price of $950,000. Whatever the impetus for filing, dot-com bankruptcies are comparatively clean. That is because they have few assets or liabilities to sort through. “There are far fewer moving parts in dot-com bankruptcies,” Shapiro said. Assets such as intellectual property, customer lists, office furniture, perhaps some inventory, and the lease generally amount to little more than pocket change. “Typically, the venture capitalists just walk away because there’s nothing there,” Gottesman said. On the other side of the balance sheet, debt is usually limited to “trade debt” owed to the day-to-day vendors that provide them with services. Venture funding has been mostly in exchange for equity, so few Internet companies have significant outstanding loans. Thus, a handful of bare-bones dot-com bankruptcies has not generated much work for bankruptcy lawyers around town. Most estimated that no more than 10 to 20 percent of their practice was devoted to representing dot-coms, either in bankruptcy or in workouts, negotiating with creditors to settle claims. “It’s not that lucrative,” Nashelsky said. “They barely have any money,” he added. Yet this may soon change. Industry-wide declines usually follow a pattern, Nashelsky explained. “The first failings are usually the least financially successful,” he said. “In the next wave, as bigger, more mature companies go into Chapter 11,” he said, “you see something closer” to traditional bankruptcy reorganizations. Of course, the future landscape will depend largely on the economy. If the capital markets do not improve, well-established Internet companies with significant public debt, such as Amazon.com or CDnow.com, could topple. In such cases, the bankruptcies will look much more complex, Gottesman said.

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