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The San Francisco Cannery was counting on Coudert Brothers. Although the firm had moved out of its brick complex about three years ago, it was still paying rent, and the landlord was banking on continued payments to cover the Cannery’s massive loan. So when Coudert announced last month that it will be breaking up, the Cannery quickly wrote to ask about its rent. And when the response came back that the firm “will not be in a position” to make its September payment, the Cannery quickly sued, seeking more than $200,000 for this month — plus another $15 million in the event the firm defaults on the rest of its 10-year lease. Coudert Brothers declined through a spokesman to comment on the litigation, and would not answer questions Thursday about how it will manage a dissolution. Chances are the Cannery won’t be the only landlord knocking at the firm’s door. According to its Web site, Coudert has more than 20 offices around the world. And according to at least one consultant who has worked on other firm dissolutions, creditors who act fast stand a better chance of getting paid. In the suit filed in San Francisco Superior Court last week, the owner of the former peach canning plant near San Francisco’s touristy waterfront claims it relied on Coudert as an anchor tenant when it obtained its $20 million mortgage. Despite signing a 10-year lease in 2001, the firm announced just the following year that it would move to the city’s financial district. David Huebner, then a partner and member of Coudert’s executive committee, told The Recorder at the time, “If you’re not selling T-shirts, you really want to be where your clients are and where you’re comfortable being.” Still, the firm continued to pay all of its rent until this month, subletting at least part of its space, said the Cannery’s lawyer, Richard Johns of Kipperman & Johns. But when he heard about Coudert’s decision to break up, he sent a letter asking about plans for the lease. The response from Coudert Executive Director Pat Kane was not reassuring. “Please be advised,” Kane wrote, “that we will not be in a position to make our rental payment due on Sept. 1, 2005, but have made no final determination as to our ability to continue the rental payments under the lease.” Johns says the firm doesn’t have a choice, because there’s no provision in the agreement to back out. “This whole deal was done with Coudert knowing that the strength of its reputation was what, I think, convinced [Salomon Brothers Realty Corp.] to lend $20 million,” Johns said, echoing some of the allegations the company has made in its suit. The complaint also accuses firm management of breaching its fiduciary duty by essentially being too picky in merger discussions. Such talks failed, the suit asserts, because managers “sought to impose conditions such as requiring such firms to accept all partners of Coudert Brothers that put their individual interests before those of creditors.” Bradford Hildebrandt, chairman of consulting firm Hildebrandt International, declined to comment on any aspects of Coudert’s situation, noting that the firm has been a client. But generally, said Hildebrandt, whose company has worked on firm dissolutions, “you make every effort to keep a firm out of bankruptcy.” Instead, he said, a liquidation committee of partners can work on collecting assets, satisfying creditors and helping partners relocate. While Hildebrandt maintains that dissolutions minus the litigation will recover more for creditors, Peter Zeughauser, a Newport Beach consultant with the Zeughauser Group, says the squeakiest wheels tend to get paid first. A partnership will usually look to satisfy the most aggressive or sophisticated creditors — typically landlords and banks — in order to fend off litigation that might be aimed at individual partners, he said. Plus, he added, such creditors typically have more potential to band together to force a debtor into bankruptcy. Something like that happened to Brobeck, Phleger & Harrison. In 2003, three of its landlords petitioned to put the remnants of the recently defunct San Francisco-based firm into involuntary Chapter 7 bankruptcy. While bankruptcy court can have advantages for creditors, Latham & Watkins partner Peter Gilhuly notes that some landlords may do worse there, where damages are capped for long-term leases. In bankruptcy court, with less than about eight years left on a lease, a landlord would only get paid for a year, said Gilhuly, an insolvency lawyer who worked on Brobeck’s pre-bankruptcy restructuring plan. That may play a role even if there’s no bankruptcy, he added. “Even though you don’t file a bankruptcy, a lot of people negotiate against a bankruptcy.”

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