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With many dot-coms and technology businesses in distress, the San Francisco Bay Area’s bankruptcy lawyers are seeing the busiest workloads in years. But with flailing click-and-mortar companies driving the deluge, the issues are all new. The companies often have minimal assets beyond intellectual property and routinely hold under-market real estate leases. That means lawyers are finding creative — and often out-of-court — ways to handle their clients’ failures. “All bankruptcy lawyers right now are busy, and we’re all gearing up for more business,” said Marc Levinson, Bankruptcy Forum president and Orrick, Herrington & Sutcliffe partner. In 2000, 48 Bay Area Internet companies, including Pets.com and MVP.com, closed, according to San Francisco-based Internet company analysts WebMergers. And tech infrastructure companies, such as Lucent and World.com, are laying off staff and showing other signs of struggle. Attorneys at Cupertino-based Murray & Murray, Silicon Valley’s largest bankruptcy boutique, say they started fielding daily phone calls from tech and dot-com businesses in November. Lawyers agree that the boom of insolvencies comes from businesses that all fit the same general profile: They’ve failed to get an additional round of venture capital funding, their employees are already on their way to new jobs, and they have some servers and computer equipment to be sold. Bankruptcy lawyers are conferring with intellectual property lawyers to try to draw value out of the companies’ Web sites or technology. But most often, the greatest source of cash can be found in one place: the value milked from leases, which in many cases are under market or are worth more than their paper value. For example, space leased by a dot-com in 1998 or early 1999 for $1 per square foot could now fetch $2 in today’s market. The excess is what landlords and tenants are wrangling over. While most commercial leases contain a clause that requires the excess caused by market shifts to be recaptured by or shared with the landlord, lawyers representing tenants apparently have the law on their side. They are relying almost solely on 1991′s South Coast Plaza v. Standor Jewelers West (CC-90-2127-JPV), a 1991 case that affirmed that an excess-sharing or lease-recapture clause constitutes a lease restriction, which is invalid under bankruptcy code. Bankruptcy lawyers are using Standor to negotiate settlements with landlords, who are often eager to wash their hands of the tenant and rent the space to the highest bidder. For now, Standor is the favored card of bankruptcy lawyers. “Anybody in this business uses the threat of that case and the threat of a bankruptcy to try to negotiate a deal,” said Craig Prim, the Murray & Murray lawyer who Forbes magazine recently called the dot-com “undertaker.” Recently, Prim struck a $465,000 lease settlement for a midsized e-commerce company that went out of business last spring with five years remaining on its under-market SOMA lease. Thelen, Reid & Priest bankruptcy partner Richard Lapping, who in January alone brought on 12 new insolvent dot-com clients, says five of them were struggling to maintain control over an under-market lease. Randy Michelson, a bankruptcy lawyer at McCutchen, Doyle, Brown & Enersen, is representing Pets.com, which had about six San Francisco Bay Area leases when it shuttered in the fall. “Most were under market, so we either sublet the properties or negotiated a satisfactory resolution with the landlord,” Michelson said. Earlier this year, the shuttered law firm of Landels, Ripley & Diamond settled with landlord Shorenstein Co. to reap $5 million to give back the lease on its Embarcadero space. The firm’s lawyers used Standor to argue that the share provision on their under-market Embarcadero lease was invalidated by their Chapter 11 bankruptcy status. Mike Buckley, a bankruptcy lawyer from Crosby, Heafey, Roach & May who represented landlord Shorenstein Co., failed to convince a judge that the bankruptcy filing was done in bad faith as a maneuver to sell the lease to his client. Murray & Murray partner Janice Murray said she has about 10 clients who are haggling over under-market leases. She said they want to avoid bankruptcy “at all costs” and that landlords fare best when they help their insolvent tenants do so. “It’s not a bluff,” she said about the looming threat of bankruptcy. “It’s an alternative and a negotiating tool.” But Aron Oliner, from San Francisco’s Buchalter, Nemer, Fields & Younger, who is representing four dot-com clients in under-market lease negotiations, warns not to push landlords too far. “We don’t want to go to trial,” he says. “Meanwhile, the (lease) clock is ticking at $120,000 a month.” Lawyers who represent landlords say Standor is somewhat of a nuisance and that it uses an overly broad stroke to leave insolvent tenants with too much leverage over their landlords. Lapping says he spends his time thinking of ways around Standor, but hasn’t yet found “the perfect fix.” And Pillsbury Winthrop bankruptcy partner M. David Minnick said he longs for a client that would retain him to challenge Standor in court. “ Standor reaches too far because it establishes a black-and-white rule which Congress probably did not intend,” said Buckley, who said the case takes away the bankruptcy court’s power to make decisions, and that “the bankruptcy code particularly abhors black-and-white rules.” Prim acknowledges that Standor rankles landlords. “The landlords all take the position that Standor is bad law and doesn’t apply out of bankruptcy.” With bankruptcy law relatively consistent in its handling of leases, lawyers are finding work in counseling landlords in dealing with insolvent tenants. “My first question to a landlord is usually: ‘How are you going to disengage from the lease?’ ” Murray said. Farella Braun & Martel partner Dean Gloster, former vice president of the Bar Association of San Francisco’s bankruptcy section, lectures on how landlords can best position themselves when they fear a tenant is nearing insolvency. “They are typically in denial and unrealistic about how bad their problems are,” he said about struggling tenants. Gloster says landlords can often anticipate troubles before the tenants, and he advises them to find ways to entice struggling lessees into reducing their space or shortening their lease. “I would bet most tenants — if you approach them early enough — would jump at that,” he said.

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