|Oregon State Bar Bulletin JUNE 2008|
The troubled mortgage and financial services markets that have taken their toll on the American economy are having effects on law firms, too.
Some analysts are predicting that the era of double-digit growth in firm profitability, along with ever-increasing starting salaries for associates, may come to an end this year because of the economic slowdown.
And some firms — from New York City to Atlanta to Charlotte — already have taken the dire course of laying off lawyers or rescinding job offers for new attorneys. By March, some 100 attorneys nationwide had been let go, according to the law journal The Legal Intelligencer. In addition, paralegals have been laid off, and some firms have bought out partners or stripped them of their equity.
Particularly hard hit are attorneys who specialize in commercial mortgage-backed securities and other real estate investment deals, as well as those handling structured finance and mergers and acquisitions.
Hildebrandt International reported in January in its 2008 Client Advisory that the current downturn, which began in the third quarter of last year, so far had differed from that of the early 2000s:
"Unlike previous downturns in the legal market, the present slowing of economic activity has not (yet) been accompanied by upturns in litigation or bankruptcy or reorganization work. …Finance, transactional, and litigation work have all trended downward at the same time, with no offsetting surge in work related to the economic downturn itself."
Although that may have been true at the end of 2007, by spring 2008 conditions were changing, at least in Oregon law firms: Attorneys who work in litigation and bankruptcy have seen an upswing.
The slowdown in the national economy has had "a significant effect on the litigation field" in local firms over the last six to nine months, says Keith A. Ketterling, managing shareholder of Stoll Berne. "We are absolutely swamped with work, which is great."
The 15-lawyer Stoll Berne, which recently shortened its name, handles complex and intellectual property litigation, as well as financial and real estate matters.
Financial issues, business contracts and lawsuits by securities customers all come into play when conditions worsen, Ketterling points out. "If the economy goes bad, companies look at contracts from four years ago and may be more willing to breach those contracts."
Stoll Berne is in a hiring mode, he adds. "We hired a lawyer in March, and we’re looking for another," he says.
Markowitz, Herbold, Glade & Mehlhaf, a 15-attorney specialty litigation firm, also has seen a big upturn in business, and soon probably will add more lawyers to its ranks. Shareholder Paul S. Bierly calls the current situation "countercyclical," by which he means complex commercial litigation is increasing as the economy declines.
"When the economy is roaring, a lot of deals happen," says Matthew A. Levin, another shareholder with the firm. "As things slow down, a higher percentage of those deals go sour. So complex litigation increases as the economy contracts."
However, this effect doesn’t last forever, he notes, if there is a protracted decline.
"Sometimes shocks to the economy will create massive litigation related to those shocks," says Levin, pointing to the recent shareholder and mortgage litigation, and before that, the Enron-type corporate disclosure issues.
As public consciousness focuses on certain areas where people feel they are being taken advantage of, litigation increases in those areas, he maintains.
Chapter 11 cases — and Chapter 11 avoidance attempts — also are on the upswing as the economy is on the downswing.
Oregon real estate developers have suffered as development "has been hit," observes Howard M. Levine, a partner with Sussman Shank. "In the construction and development area there has been an increase in the number of troubled businesses," says Levine, who specializes in bankruptcy and creditors’ rights. "In the last couple of months, the work activity has picked up, with more cases and more calls."
There is a lot more litigation; foreclosure work, both commercial and residential, is up; and more activity is evident in debt restructuring. "The market conditions are a problem for both the borrower and the seller," says Levine.
When national companies such as Hollywood Video and Sharper Image Corp. go under, the impact can be felt by local landlords who lease space for outlets of those businesses, he explains.
Firms that represent small businesses may be receiving fewer calls now, Levine speculates, because some small businesses may decide they no longer can afford to pay for legal services.
About a dozen individual lawyers, at firms both large and small, chose not to accept the opportunity to discuss for this article whether or how the economy has affected their business. However, more than one firm stated an interest in the topic and acknowledged its timeliness.
Analysts say law firms want to know how their competitors are doing — even if they don’t want to describe their own situation. Firms may remain mum about discussing lack of business or billings falling off.
Lawyer recruiter Linda Green Pierce says that, at least as of early May, she has not heard of any layoffs in Oregon firms.
Nor has she heard of business attorneys being asked to do litigation or other work to compensate for the lost corporate work. "This typically doesn’t happen unless things are really, really bad and there are layoffs. I think we’re a long way from business lawyers having to retool into other practice areas.
"If things stay murky but don’t head into a steep recession, firms probably won’t lay off here," says Green Pierce, president of Northwest Legal Search Inc.
Part of the reason is that even in good times, Oregon firms always are conservative in hiring, so that when the market turns, the firms don’t usually have a lot of excess talent and thus do not have to lay off lawyers. During and after the boom and bust in the 1990s, "that philosophy served them well," she adds.
"On the other hand, I find that tough economic times accelerate any internal review process on lawyers who aren’t doing as well as they could or should. So you may hear about lawyers who are more quickly addressed as far as nonperformance issues. In good times, partners and firms might ignore that problem a little longer; in bad times people get moved along faster if they aren’t performing."
Green Pierce says she has seen a shift in the needs of larger Portland firms and specialty boutiques.
"There is much less expressed need on the corporate practice side, especially on high-end work such as private equity, which has tanked," she says. "The opposite side of this is that litigation starts to pick up."
Companies may be looking for more of their legal needs to be met internally. "The recruiting we do for company legal departments has increased in Portland in the last two years, and that work remains active for us," she says.
In general, Oregon law firms tend to be more cautious in hiring during slow economic times than do, for example, firms in neighboring Washington. Oregon firms are proceeding on filling positions, she says, but at the same time voicing the question about whether there will be continuing work, such as saying, "At this point we’re assuming this will still be an ongoing need, but it’s subject to the economy."
Borrowed Money Scarce
"There are fewer deals," says Sussman Shank’s Levine. "It’s simply tough to do deals without money." But he adds that if a firm’s work is broad-based enough, as is 29-lawyer Sussman Shank’s, the work shifts from one area to another, so that overall firm business is not hurt.
"There’s always going to be an impact (on firms) if there are changes in the economy, even in good times."
His firm added a member in March, but Levine says many factors determine staffing considerations, including good management. However, he adds, firms’ reduction in staff is a more likely result of changes in the economy than is adding new lawyers.
Real estate markets have slowed down on the eastern side of the state, so those attorneys handling transactional matters have experienced a reduction in business, observes Carol DeHaven Skerjanec, a sole practitioner in Vale and a member of the OSB Board of Governors.
Real estate foreclosures, although reaching unprecedented numbers, provide little, if any, legal business for attorneys in private practice, because they are handled almost exclusively in-house by lawyers of the financial institutions, she notes.
"For the most part, foreclosures do not get contested, so there is little involvement by civil defense lawyers in these matters."
Skerjanec, whose practice focuses heavily on administrative issues and litigation surrounding natural resource areas such as water, mining and grazing, has not been affected personally yet.
Her practice also includes estate planning, probate and general litigation, which "are all continuing at the same level they were at three or four years ago. The business law matters I handle are all related to small, closely held companies and so far, thank heavens, those businesses continue to do well; therefore, their legal needs remain constant," she says. "I have experienced no slowdown in work."
Development Law Affected
Attorneys who specialize in construction law are seeing big impacts from the loan crunch.
Lawyers who specialize in the field concentrate on different areas, such as planning projects, drafting contracts and working with developers when they need financing. Those who handle the early stages of construction "have seen their work dry up," says Alan L. Mitchell, who chairs the Oregon State Bar Construction Law Section.
But lawyers who help at the stage when "people are scrambling for money" have seen a big "uptick" in business, he says.
Builders, even some with decades of experience, are walking away from projects, turning over empty houses to the banks, he says. "I’ve been doing this stuff for 12 to 13 years, and I’ve never seen so many subdivision projects go so badly."
Mitchell, who is in sole practice, specializes in doing construction liens for lumber and materials suppliers. He has seen his business soar, starting last July and continuing into this year.
"I don’t think I’ve ever filed so many lien foreclosures," meaning that many suppliers and subcontractors are going unpaid and filing liens against property owners. "Business is booming (for me), but I’m not happy about the reasons for it, because my clients aren’t getting paid," he says.
The Portland area also is experiencing lawsuits related to commercial condominium and mixed-use projects "that have gone sideways," Mitchell adds.
As for how long the upheaval will last, he predicts, "I don’t think we’ve seen the bottom yet."
Oregon’s largest firm, Stoel Rives, is knocking on wood but at this point has "not noticed any change we could tie to" a downturn in the economy, says E. Walter Van Valkenburg, managing partner.
Some of Stoel Rives’ clients such as Nike and Precision Castparts have "large operations all over the world. ... Like most firms our size, we are pretty diversified," he says. "There are always some practice areas slower than others, but not at the same time."
Last year was a good year for the firm, as was the first quarter of 2008, Van Valkenburg says. "Here in Oregon, the economy is doing pretty well. New companies are starting up, and companies here are doing pretty good. I feel pretty good about the prospects for the Oregon market."
He doesn’t expect any staff reductions, still anticipates offering positions to its upcoming summer associates, and is "always looking for strong lawyers looking to move laterally (to the firm)," he says. "We’re still hiring."
Even so, Van Valkenburg, who has practiced law in Portland since 1979, adds that one can’t help but worry a little bit when economic news is grim in many parts of the nation. "I’ve seen some ups and downs (here)."
ABOUT THE AUTHOR
Cliff Collins is a Portland-area freelance writer and a frequent contributor to the Bulletin.
© 2008 Cliff Collins