Boom Expected for Bankruptcy Professionals

In recent years, the annual winter gathering of the American Bankruptcy Institute was a rather dreary affair. With the flush economy and strong corporate profits, scores of lawyers, accountants, auctioneers and others who draw their sustenance from troubled companies glumly traded stories of cutbacks in their own departments.

But at this year’s meeting, held over the weekend in this oasis city, the talk among the 450 attendees was not about famine but an incipient feast.

Bankruptcy lawyers from Florida talked excitedly about the impending insolvencies of health maintenance organizations struggling with Medicare budget cuts.

Midwestern creditors were eyeing weakening agricultural firms.

Texas bankruptcy lawyers glowed about renewed work in the sagging oil industry.

And insolvency specialists throughout spoke about deteriorating manufacturers, credit-crunched lenders and overpriced real estate investment trusts.

Likening the mood to riding a slow train gaining speed, Deborah D. Williamson, a San Antonio lawyer and president of the Bankruptcy Institute, a 6,500-member group based in Alexandria, Va., said: “We’re going to be happy next year, but nobody else is.”

Such enthusiasm may seem a bit premature if not misplaced, given the persistent signs that the U.S. economy is holding up well in the face of the Asian economic crisis and its many dangers. Just Friday, the government reported another month of solid job growth and a near-record jobless rate of 4.4%.

But the same economic data also show plenty of trouble spots. And the bankruptcy industry is a street-level barometer.

Mega-dollar bankruptcy filings already have risen notably this year, approaching a level not seen since early this decade. Such failures often tend to presage personal bankruptcy as jobs are wiped out.

In the meantime, personal bankruptcies continue to increase steadily every year.

And almost everyone interviewed here reported huge increases in the volume of calls about new bad-debt cases, as they rattled off a list of ailments that they believe will soon overtake the national economy: the Asian woes, plunging oil prices, faltering HMOs, the year 2000 computer problem.

In the eyes of those trained to anticipate trouble, even the bullish prognosis for holiday retail spending is a harbinger of more bankruptcies ahead--and thus trouble for the whole economy.

“Once the euphoria of this Christmas is over, it’s going to start,” predicted M. Freddie Reiss of PricewaterhouseCoopers in Los Angeles, alluding to a debt hangover that he figures will follow the robust consumer spending for the holidays.

Reiss is one of 32 partners in the firm’s restructuring practice, which he said has nearly doubled its staff in the last couple of years in anticipation of an increased workload. In recent months, some big banks have begun to rebuild their workout departments, which try to head off bankruptcies, and many attorneys said their firms are once again hiring bankruptcy specialists after several years of thinning.

The total number of business bankruptcy filings declined sharply following the nation’s recovery from the 1990-91 recession. But through November, the number of large public companies seeking court refuge this year has already hit 27, compared with 16 for all of last year and 15 the year before, said Lynn M. LoPucki, a Cornell Law School professor who tracks Chapter 11 cases involving at least $100 million in assets. The major filings this year include a pair of steelmakers and several each of finance companies, health care firms and retailers, including, most recently, Colorado-based Boston Chicken.

LoPucki expects the number of big companies entering bankruptcy to climb even higher in the next couple of years, because court filings typically lag the excesses and debt troubles of businesses by a year or two. Corporate debt, while on the whole still moderate thanks partly to low interest rates, has been rising lately as profits have shrunk. With the Asian factor, he said, “the two would probably combine to tip a lot of companies over.”

That is music to the legions of bankruptcy specialists, from turnaround managers to lawyers to auctioneers, some of whom have starved for business after the insolvency industry picked through the bones of the last great feast that began in the late ‘80s and ended with such feeding frenzies as the R.H. Macy & Co. bankruptcy earlier this decade.

A number of boutique bankruptcy firms have since closed up shop or merged into larger firms. Big-firm bankruptcy attorneys kept themselves busy by sliding into other work, such as real estate and acquisitions.

Lawyers at small practices reluctantly switched to consumer bankruptcies, which are far less lucrative, usually generating a one-time small fee, whereas major business bankruptcies can command hourly rates of $250 to $450 or more in New York and stretch for months or years.

Dillon E. Jackson said his bankruptcy department at Seattle’s fifth-largest law firm, Foster, Pepper & Shefelman, went from 15 lawyers in 1991 to eight today. Business was slow enough that Jackson, who heads his firm’s bankruptcy practice, took a three-month sabbatical in 1992, sailing down to California.

But Jackson said he will be adding at least another lawyer next year. With Washington more dependent on Asia than most states, he is expecting a notable jump in his caseload. Even before Boeing’s massive layoff announcement last week, Jackson was working with at least one big troubled company that exports heavily to Asia. His firm represents Boeing suppliers as well as companies that could be hurt by the government’s effort to protect the Chinook salmon.

What’s more, for a year now Jackson and his partners have been studying and preparing for the year 2000 computer problem, which many think could cause major business disruptions and result in more bankruptcies. “The potential is there,” said Jackson.

“We’re probably a little more negative, because we predict the problems and are looking for them,” said Sarah B. Foster, a lawyer in the Austin office of Hayes & Boone, a major Texas firm. But seeing more oil exploration companies filing for bankruptcy this year and the excesses of debt-laden businesses and consumers, Foster said, the economy looks “horribly reminiscent” of Texas before its crash in the ‘80s.

Not everyone at the conference was as openly cheerful. Foster admitted that the Tucson meeting seemed more subdued than another gathering a couple of months ago, before the stock market’s rebound. “I thought people were gleeful then,” she said, laughing.

Even so, there was plenty of cheer this time around. Theodor C. Albert, a partner at Albert, Weiland & Golden, a nine-lawyer bankruptcy boutique in Costa Mesa, opened his two big hands as if he were grabbing a balloon. Spreading his hands farther apart, he described how debt loads today have expanded, ready to burst. “I think it’s max right now,” he said.

“By this time next year, my prediction is we’ll be in a recession,” he said, adding with a smile: “A lot of these people will be too busy to be here.”

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SEASONAL WARNING

Financial experts say those who fail to plan can end up with post-holiday money woes. C2