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Four years ago, when the economy was running at full throttle, Geraldine Ann Freeman probably felt a little lonely. A bankruptcy attorney, she watched as many of her underworked fellow practitioners drifted off to greener pastures. “Some people retired, maybe earlier than they might have. Some people retooled, emphasizing more litigation or transaction work,” says Freeman, a partner with Los Angeles’ Sheppard, Mullin, Richter & Hampton. This exodus has turned the San Francisco Bay Area’s remaining bankruptcy lawyers into valuable commodities. As the ailing economy has swelled the court dockets with Chapter 7 and Chapter 11 cases, the supply of experienced bankruptcy attorneys is being stretched thin. And the prices for these attorneys are going up. According to court documents, billing rates for the top bankruptcy attorneys in several firms with Bay Area offices have increased 15 to 30 percent over the past two years. “The supply and demand kicks in, and you would expect to see them [billing rates] change,” says Linda Stanley, the former U.S. Trustee for the Northern District of California. While it’s not unusual for law firms to re-assess, and often raise, their rates every year, says Stanley, the current market has had a material impact on bankruptcy billing rates. The demand for bankruptcy specialists is not just in the courtroom, where the nation’s business filings rose by 13 percent from 2000 to 2001, but in alternative forms of restructuring like out-of-court workouts and so-called assignments for the benefit of creditors. “I don’t think there’s any question that the supply of experienced bankruptcy lawyers is outstripped by the demand,” says Peter Benvenutti, who heads the bankruptcy practice at San Francisco’s Heller Ehrman White & McAuliffe. To take on all the work, firms like Heller Ehrman and Sheppard Mullin have started drafting lawyers from other departments. “We took some of our first-years who were slated to be in business groups last year and slotted them into the bankruptcy group if they wanted to,” says Freeman. While firms may be short on bankruptcy bodies, the rates for their most seasoned bankruptcy practitioners are on the rise. According to court filings in the Pacific Gas & Electric Co. Chapter 11 case, Heller Ehrman’s billing rates for partners working on PG&E matters increased about $90 an hour between 2000 and 2002. (The firm had a relationship with PG&E that predated the utility’s 2001 bankruptcy filing.) Benvenutti points out that the bulk of Heller Ehrman lawyers assigned to PG&E matters are not bankruptcy attorneys, but litigators doing regulatory and civil litigation work. Changes in billing rates at Heller Ehrman are made on a regional and national level, not just for individual practices like the bankruptcy department, says Benvenutti. But even at firms that focus on bankruptcy work, billing rates have headed north. At L.A.-based Pachulski, Stang, Ziehl, Young & Jones, a 71-lawyer firm that has played a role in Chapter 11 cases such as At Home Corp. and Yipes Communications Inc., the hourly rate for a few of its senior partners jumped $80 this year, with the top people pulling in $595 and $550 an hour. And at McNutt & Litteneker, a San Francisco-based bankruptcy boutique, the top rates increased by $100 this year, from $325 an hour to $425 an hour. Scott McNutt says he increased his rates because the firm had kept them static for two years and found that they were about half of what others were charging. “Billing rates have increased substantially over the past two years, primarily because of a shortage of experienced bankruptcy lawyers,” says McNutt. Of course, San Francisco billing rates have still not reached the heights seen in New York, where it’s not unusual for the top bankruptcy attorneys to charge $700 an hour. The disparity in regional rates was especially evident at the start of the PG&E case, where Milbank, Tweed, Hadley & McCloy, a New York firm representing the committee of unsecured creditors, billed its most senior attorneys at $595 an hour (a $130 per hour reduction from their normal rates, according to Milbank Tweed’s filings). By contrast, the two top guns at San Francisco’s Howard, Rice, Nemerovski, Canady, Falk & Rabkin, which is representing debtor PG&E, started off charging $475 an hour. In later applications for compensation, the firm bumped its standard rates for the pair to $550 an hour. According to James Lopes, the chair of Howard Rice’s bankruptcy department, the increases were “consistent with what we perceived the market to be for senior attorneys, not just senior bankruptcy attorneys.” “There is no effort to add a premium for bankruptcy attorneys in our firm,” says Lopes. But some people believe the presence of higher-priced out-of-town firms like Milbank Tweed can drive up the local billing rates. “When people see other people billing high, then they look at it too,” says former U.S. Trustee Stanley. The rates have to stay within what the community economics will bear, notes Northern District of California Bankruptcy Court Judge Randall Newsome. So local attorneys can’t automatically jack up their rates to match what the attorneys at an out-of-town firm are billing. “But I do think it does have an inflationary effect to some degree when you have out-of-towners,” says Newsome. It’s a phenomenon that could become more evident in the months to come, especially if the demand for bankruptcy experts holds up. Given the scarcity of local bankruptcy lawyers, large national firms might increasingly step in to fill the void — and further drive up the local billing rates in the process. “Once you set a precedent for what somebody in San Francisco can charge,” says Newsome, “then you’ve laid a base for going forward.”

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