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O’Mally

Thoughts from the top rung

By Olivia Clarke

Many blogs, websites, and news reports describe the impact the troubling economy has had on the legal community. But who knows better than those who lead the law firms?

Chicago Lawyer sat down with four law firm leaders to talk about the effect the economy currently has on law firms, and what the future holds for the legal industry.

The following lawyers participated:

Jeffrey E. Stone, chair-designate of the management committee of McDermott Will & Emery.

Donald L. Mrozek, chair of Hinshaw & Culbertson.

Jerry H. Biederman, managing partner of Neal, Gerber & Eisenberg.

Bradley J. Andreozzi, a member of Drinker Biddle & Reath’s value task force. He leads the firm’s appellate group and accounting litigation group steering committee.

Here is a portion of the discussion:

What are the biggest challenges facing law firm leaders today, due to the economy?

Biederman: One of the challenges that firms are facing is what I would describe as an assault to their culture. I don’t think any of us have ever faced a situation where we really had to ask people to leave for economic reasons, maybe economic reasons as related to the individual, but not reasons as related to the general economy.

I think, particularly in Chicago and really most cities other than New York, the expectation of most law firms and most lawyers in law firms has been that absent a lack of performance or failure to meet standards people more or less are guaranteed employment. I think this has been quite a shock to the culture of most firms.

Andreozzi: I think it’s very easy to focus on the negatives of the situation, and obviously there are lots of negatives out there and an unprecedented period of economic stress for law firms. But I think it’s also a period of opportunity to rethink the attorney/client relationship. A lot of clients are doing that, and we, as law firms, have do that as well.

Clients are rethinking whether the traditional model of the billable hour really makes sense for them and whether that delivers value. And it’s an opportunity for law firms to be engaged in very intensive discussions with their clients about how to rethink the relationship, how the clients define value, and how we, as law firms, can better deliver the value.

I think that firms that hope for the economy to turn for the better, and we all do, and then think we will be able to go back to business as usual, may be missing an opportunity because I’m not sure it will go back to business as usual. I think there may be a paradigm shift. Obviously there are stresses and some difficult days ahead, but it’s also an opportunity that may lead to a really better future.

Stone: I think that our biggest challenges are two-fold.

I think the external challenge for law firms is understanding the stresses that our clients are under, and making sure that the services that we deliver and the manner in which we deliver them makes sense to our clients, because, as Brad said, things are very different today than what they were 12 or 18 months ago. And that’s particularly true for the gamut of clients that we service. McDermott deals across the international platform and therefore we see clients in different places geographically, and substantively, and from a size perspective … so there is no one-size-fits all in terms of how the economic downturn is hitting our clients.

The second component for us is understanding how the shape and structure of the law firm and the legal business is going to change as a result of it. … Whether it’s lowered expectations, whether it’s a change in the way we provide services, whether it’s a change in the way we price our services — all of those factor into how the legal business is going to be different from the perspective of the law firm. We think about it both outward and inward in terms of how well we are responding to a different environment.

Mrozek: I supplement what everyone has said and generally agree with what everyone has said.

I think there are some short-term issues, though, that are not so global. As we wind our way through 2009, I’m pretty sure our firm is not the only one that’s seen some accounts receivable issues that we never had before. A slight drop in productivity, but with margins as tight as ours are, a slight drop is going to be serious. We think with different cost-cutting measures and so on that we’ve put into place, we think the year will work out well. But we’re also mindful that this cost-cutting thing only works once. There is a 2010, and it’s on the horizon. I think my challenge, our challenge at our firm, is in part a pretty short-term look at, “Okay, it looks like we’re going to make it through 2009 in reasonably good shape. Are we prepared to face economically the pressures of 2010?”

Not disagreeing as much as somewhat questioning how much the paradigm really will change — I’m not sure. I’ve been at this job a long time and it seems as if I’ve heard about how we’re going to be off the billable hour; firms want to do it and clients want to do different things. And, indeed, there’s been some of that as long ago as 15 years ago. But we’re not seeing a whole lot of pressure in that arena. …

Andreozzi: I don’t see it going away. I think it would be premature to announce the demise of the billable hour. I do think, though, that clients are fundamentally rethinking whether the model gives them value. I don’t think there’s a one-size-fits-all answer. I’m not one of those people who argue that the billable hour fundamentally and always misaligns the incentives of the client and the lawyer. I don’t think that’s true. I think there are a lot of engagements in which the billable hour aligns [well]. Large litigations, for example, where the amount in dispute is in the hundreds of millions or billions and you want the lawyers to have an incentive to do everything that’s reasonably necessary … the billable hour may be the best model.

For other types of engagements it might not. What I do think we’re seeing, certainly our firm is seeing, is an increased willingness for clients to have that discussion. I think that alternative fee arrangements are still very much a minority of what we do. But there is an increased willingness to discuss those types of alternatives. Sometimes you have the discussion and the client says, “Well, actually I want a billable-hour arrangement.”

It depends on what the client is interested in, particularly today where you have in-house legal departments that have their budgets cut. Sometimes what they’re interested in is a payment plan where they can defer some payments into the future. Sometimes what they’re interested in is predictability, so a flat monthly fee arrangement may make sense to them. Sometimes what they’re interested in is a discounted rate upfront with incentive payments that largely give the law firm more than they would have earned on a billable-hour basis if they achieve a result that the firm and the client together define as successful.

We love those arrangements because we’re confident that we’re going to hit those targets and wind up actually making more money than we might have. There is just a whole spectrum of possibilities, and I think that this is a time when there’s a greater willingness to have those discussions.

Responding to economic shifts

By Sherry Karabin

Once thought to be immune to the ups and downs of the economy, law firms have not been able to escape the latest and perhaps worst downturn to hit in years.

Taking hold in the third quarter of 2007, the drastic shift in fortunes caused some firms to lay off both attorneys and non-legal staff, and some to close up shop altogether.

Individual practice areas are also being affected; in some cases it has simply reduced the volume of work; in others it’s changing the types of transactions getting done or blurring the lines between practice areas. Chicago Lawyer spoke to local attorneys in three groups — real estate, bankruptcy and corporate restructuring, and M&A — to see how the economy has impacted their business.

Real estate

Perhaps no single practice area has been hit harder or undergone more changes as a result of the economic crisis than real estate.

“A large percentage of real estate development loans made in the last five years are now in default,” said Brian Meltzer, managing partner of Meltzer, Purtill & Stelle, which focuses on real estate development and construction lending.

“Just about every transaction we are working on involves a troubled loan and that means there are bankruptcy issues.”

Meltzer said he first noticed a slowdown in the Chicago home-building market in late 2006. Since then, the firm has become increasingly more involved in handling bankruptcy-related issues for developer and lender clients, which often requires real estate and bankruptcy attorneys to work hand-in-hand.

He said the firm anticipated the changes, and, although many lawyers are experienced in handling workouts, foreclosures, and loan restructurings, over the last couple of years the firm added two bankruptcy attorneys.

“When this first happened, we were representing banks on the lender side,” Meltzer said. “More recently, we are getting involved with developer/borrowers going into bankruptcy. It started with home builders, but now it is quickly spreading to our industrial, commercial, and retail real estate clients.”

Things aren’t much different at Mayer Brown, where Robert Gordon and Jeff Usow also find themselves busier helping clients with troubled real estate transactions.

“For example,” said Gordon, a partner in the real estate group, “loan extensions have become more difficult to consummate and clients are relying on counsel to assist them. Clients are also concerned about avoiding personal liability on their non-recourse carve-out guaranties and so, are more careful in their dealings with lenders.”

Gordon works closely with the bankruptcy department to better advise clients on how to avoid liability.

While there have been a few layoffs in the firm’s real estate practice, other groups like litigation and bankruptcy are hiring attorneys.

“Most of my clients are institutional equity investors that were either buying properties or supplying capital to operators and developers through joint ventures,” said Usow, Mayer Brown’s real estate practice group leader. “Some clients have switched from a large number of acquisitions to dispositions to reduce debt and meet redemption demands.”

Usow pointed out that the firm’s international diversification has helped to provide work during the downturn. “We do some work in Mexico and Latin America out of our Chicago office, and our institutional clients continue to see some opportunities in those markets.”

Over at Levenfeld Pearlstein, real estate partner Thomas Jaros said transaction volume is down by about 60 percent from the heyday of 2003 to 2007.

The deals that are getting done are different in nature and scope.

“Right now we are seeing smaller deals that can get bank financing, as opposed to the large portfolio deals that were fueled by Wall Street mortgage financing. Wall Street-generated funding has dried up, and is being replaced by local and regional bank financing,” Jaros said.

The terms of the loans that are available have changed as well. “You are not able to borrow as much against a piece of real estate as before,” he said. “Several years ago you could borrow up to 85 percent of a property’s value, but now, depending on the type of deal, you are looking at between 50 and 65 percent leverage.”

Perhaps most notably, Jaros said, is that the non-recourse financing that was widely available in the past has disappeared.

“Real estate borrowers are now seeing some level of personal recourse as a required loan term,” he said.

Real estate groups are also witnessing the revival of the secondary mortgage market. Meltzer said access to this market had become a “non-issue” in the early 2000s when the demand for securitized loans exploded.

“When the subprime mess hit,” Meltzer said, “the loans dried up and my home-builder clients looking to sell houses were forced to look to the Federal Housing Authority for insurance or sell to Fannie Mae or Freddie Mac.

“Now we spend a lot of time helping builders, mortgage bankers, and lenders revise or modify documents to help them qualify for FHA insurance so the properties can be packaged into Ginnie Mae securities or sold to Fannie Mae or Freddie Mac,” he said.

Since the rules governing the secondary mortgage market are now changing almost daily, Meltzer said it can be a challenge to keep up with developments or plan for the future.

With a number of large high-rise condominium buildings nearing completion, he expects to be busy in the coming months helping builders or their lenders qualify for secondary mortgage market approvals and creating ways to attract and hold onto sales until presale requirements are met and buyers can qualify for loans.

The changing environmental law practice

By Olivia Clarke

In high school, James Brusslan’s French teacher asked him what he wanted to be when he grew up.

He didn’t know how to say in French that he wanted to become an environmental law lawyer — but that was his goal.

“There weren’t a lot of environmental lawyers that existed at that time,” said Brusslan, now head of the environmental law service group at Levenfeld Pearlstein. “But from early on I felt as though my biggest social priority was preserving the environment.”

“My father is a lawyer and when I told him I wanted to be an environmental lawyer he said, ‘I don’t think that type of law exists.’ It didn’t matter. For me, my interest was to help the environment.”

Before “going green” was the popular thing to do, many lawyers, like Brusslan, made the choice to pursue environmental law as a career path. Maybe working on an interesting landfill or water case influenced their decision, or maybe they chose to do this because of a personal quest. Regardless, they made the decision to practice in a very specialized area — a practice that has ebbed and flowed in terms of the type and amount of work available.

With a new president in office, local environmental lawyers predict more discussion involving the environment. While Superfund cases provided a lot of work in the ’80s and ’90s for lawyers, many people anticipate a resurgence of the practice in the coming years with a slew of new environmental law issues involving such areas as climate change.

These new issues will not only affect the environmental law practice, but also other practices where clients will look to their lawyers for guidance on meeting compliance requirements and starting green initiatives.

A sea change

Many lawyers say the environmental practice has evolved over the years — with some years providing a great deal of work.

Between about 1986 and 2000, Superfund matters monopolized environmental lawyers’ time, Brusslan said.

Superfund is the name given to the environmental program that addresses abandoned hazardous waste sites. It’s also the fund established by the Comprehensive Environmental Response, Compensation and Liability Act of 1980 (CERCLA).

Many companies faced potential liability because of their waste sites, so they hired outside lawyers to educate, defend, and guide them, he said. Today many companies handle these issues in-house.

Brusslan said another way he became actively involved in environmental issues starting in the ’80s was by representing citizen groups fighting for companies to uphold environmental and zoning laws.

He played a role in cases involving radioactive thorium in West Chicago and groundwater contamination in DuPage County. He continues to represent developers and homeowners in matters involving Illinois lakes and the Chicago River.

The amount of environmental work has decreased since early 2002 or 2003, he said. Many law firms want their real estate or transactional lawyers to also handle environmental matters, so fewer pure environmental lawyers are needed today, Brusslan said.

“Levenfeld does a lot of real estate and corporate work and I counsel their clients on [environmental] issues that come up,” he said. “For instance, at 10:30, I’m going to talk to a potential buyer of property that is very contaminated. The question is, ‘Do we want to buy it, and what are the potential risks involved?’ There is substantial transactional work where environmental issues come up.”

Sidley Austin’s Rob Olian, head of the Chicago office’s environmental practice group and co-head of the firm’s national environmental practice, said he likes how the environmental practice mutates over time.

When he started practicing law in 1977 at Sidley Austin, there was one environmental lawyer. Olian worked on the governmental side of matters, but environmental issues often overlapped.

The first environmental matter he assisted on involved getting a sanitary district ordinance changed for a client, and because he liked the project, he asked for more environmental work. He soon became involved in hazardous waste regulations, which was a new area for all lawyers at that time.

There was a dramatic increase in the need for environmental lawyers in the ’80s due to Superfund, Olian said.

But not only companies facing regulations required environmental lawyers. Banks lending, for example, to buy real estate or fund a leveraged buyout needed to do due diligence, he said.

At the peak of Superfund, the environmental practice was one-third transactional, one-third regulatory, and one-third litigation, Olian said. The environmental group was 10 percent of the whole firm at the peak of Superfund.

“What happened is, as clients got more comfortable with it, and realized it wasn’t the horrific thing some people were painting it to be, they did a little less due diligence,” he said. “For the first time there was an in-house environmental person. We had a number of our associates get hired away to clients. The same person is doing the work, but they are just doing it in-house.”

Today his practice is 70 to 80 percent litigation or contested matters as opposed to regulatory work and lobbying, he said.

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