Going for Broke

March 24, 2003 Trials, transactions and the insider’s guide to the practice of law.

Supplement to the Los Angeles Daily Journal and San Francisco Daily Journal

Photo by Hugh Williams

ManagingGoing one of thefor nation’s largestBroke and most successful bankruptcy boutiques, Los Angeles attorneys Richard Pachulski, left, Marc Beilinson and Dean Ziehl prove that saving collapsed companies is lucrative business. COVER STORY For RicherRicher For PoorerPoorer In early January, Marc Beilinson received a With broke companies nation- especially big-ticket cases. tip that Wherehouse Entertainment Inc. had Pachulski Stang has a reputation for deftly hired a bankruptcy lawyer and likely would wide seeking its services, Los handling some of the largest and most complex file for Chapter 11 protection. Angeles-based Pachulski, Stang, bankruptcy reorganizations in the country, Beilinson got cracking immediately. Ziehl, Young, Jones & Weintraub usually representing corporate debtors but The Los Angeles bankruptcy lawyer began sometimes advising creditors’ committees or researching the problems facing music retailers has turned a bankruptcy niche other parties. Its bread and butter are cases in such as Torrance-based Wherehouse, which is into a money-making machine. which the debtor has $100 million to $1 billion struggling because of fierce competition and in revenues, assets or debts, although the firm growing online piracy. For three weeks, he By Toni Vranjes does some work above and below that range. pored over financial reports and news articles Its client roster has included software about the company and spoke with industry Since its founding two decades ago, Pachulski company Peregrine Systems Inc., experts. Stang has evolved from a two-man shop into the telecommunications company Covad The hard work paid off. Shortly after the nation’s largest bankruptcy firm. Today, it boasts Communications Group Inc., food chain Sizzler music retailer filed for Chapter 11 80 attorneys spread across the Pacific and Atlantic International Inc. and the creditors’ committee reorganization Jan. 21, Beilinson won the coastlines. of life insurance company First Executive Corp. lucrative position of counsel to the unsecured “Their growth has been slow and deliberate,” Pachulski Stang also has counseled failed creditors’ committee. San Diego-based legal recruiter Bill Nason says. law firms, including San Francisco’s Landels “By the time Wherehouse filed for “And their turnover has been almost nonexistent, Ripley & Diamond, which filed for Chapter 11 bankruptcy, I was well-versed in the problems which is rare among law firms.” bankruptcy in 2000. And the liquidation within the industry,” says Beilinson, a partner The boutique also boasts some of the highest committee of Brobeck, Phleger & Harrison — at Pachulski, Stang, Ziehl, Young, Jones & profits in the state, far surpassing many of its which closed its doors in February with $90 Weintraub. full-service competitors. Annual per-partner million in debt — recently selected Pachulski “I could be intelligent when talking to profits hit $900,000, according to several industry Stang partners Henry Kevane and Kenneth creditors who were calling me up rather than experts. Brown in San Francisco as insolvency advisers. being one of 50 lawyers who had just learned Pachulski Stang won’t confirm those numbers. In another measure of its prominence, the of the filing and had no knowledge of the But, if on mark, the firm’s profits outpace large firm served as debtor’s counsel in four of the industry,” he adds. firms such as Los Angeles’ Irell & Manella and 20 largest bankruptcy filings by California The case reflects a trait the Los Angeles- Palo Alto’s Wilson Sonsini Goodrich & Rosati companies last year. Topping that list was based bankruptcy boutique has demonstrated — with 2002 per-partner profits of $887,000 and Peregrine, with $2 billion in assets. time and time again: getting a jump-start on the $800,000, respectively. “They’re one of the best firms in the country,” competition through plenty of advance Although Pachulski Stang offers litigation, says Orange County bankruptcy attorney Evan planning. It’s one of the traits that has catapulted corporate and real estate services, it focuses Smiley of Albert, Weiland & Golden. “They do the firm into a bankruptcy powerhouse. primarily on traditional bankruptcy work — top-notch work, and they do it nationwide.” he bankruptcy giant began 20 years ago In the early 1990s, the firm as the dream of two young associates considered opening an office who left large law firm life to be their in San Francisco but decided ownT bosses. In the spring of 1983, Richard against that course of action Pachulski and James Stang left Sidley & Austin’s because it hadn’t found the Los Angeles office and founded Pachulski & right leader for a Bay Area Stang. The bankruptcy and litigation firm served outpost, Pachulski says. small to midmarket companies, which was a “San Francisco reminded market they considered underserved. us a lot of Los Angeles in the At the outset, Pachulski was a litigation early 1980s, in that it didn’t specialist, while Stang focused on restructuring have that many law firms that work. Six months after the founding of the were doing restructuring boutique, the firm recruited litigator Dean Ziehl work, particularly in the from Sidley & Austin. debtor area,” he says. “So we With the firm’s letterhead expanding to three thought there was a market name partners, Pachulski began handling more that was still open to new restructuring work. competition. But you had to “There were other boutiques that were doing find the talent in San insolvency but didn’t have strong litigation Francisco.” capabilities,” Ziehl recalls. “And there were many The boutique firm soon litigation firms that didn’t have insolvency found that elusive talent. expertise. It was a good way to differentiate During a lunch meeting, a ourselves and do two complementary practices.” Los Angeles accountant told In 1987, the firm landed its first significant Pachulski that he knew a case outside of California. It was selected as lawyer who would be a good counsel to the trustee administering the estate of leader for the firm in San bankrupt Utah conglomerate Triad America Corp., Francisco. That lawyer was the U.S. holding company of Saudi Arabian arms Bill Weintraub, a former dealer Adnan Khashoggi. That case raised the partner at Bay Area firm’s profile on the national bankruptcy scene. bankruptcy house Murphy, During the first six years of its existence, the Weir & Butler who happened Photo by Hugh Williams Richard Pachulski says his firm is a tough competitor firm relied on word of mouth to get new cases. to be on a short list of people but he insists that it always acts ethically. “Some But the firm modified its strategy in 1989, when Pachulski would consider to people think we’re too aggressive, but we’re doing what it brought in bankruptcy specialist Thomsen open a San Francisco office. we need to for our clients within the ethical guide- Young from the law firm Dennis, Juarez, Reeser, The boutique insisted on lines we need to live by,” he says. “If eveyone liked us, Shafer & Young in Los Angeles. Young began hiring an experienced, top- I’d be really concerned.” expanding the firm’s creditor-committee work, notch, native San Francisco and he also started focusing on marketing the lawyer to head such an office, and Weintraub fit partners. In July 1996, the firm launched a San firm’s capabilities. that category perfectly, Pachulski says. Francisco office staffed by Weintraub and an “He knew coming into the firm that we wanted Weintraub, who practiced at the Bay Area associate from Ruben Weintraub. him to come up with a marketing plan,” Pachulski litigation and real estate boutique Ruben, Within six months of the grand opening, the says. “We wanted to grow and get better cases, Weintraub & Cera after leaving Murphy Weir, San Francisco office lured Kevane from Murphy and we didn’t want to just rely on word of mouth.” knew he was on that short list. And he was excited Weir. Then in 1991, Pachulski Stang was tapped to about the prospect of joining Pachulski Stang “We became so busy that we had to have represent the creditors’ committee in the because he realized that the small Ruben Weintraub partners from our Los Angeles office help us bankruptcy case of Los Angeles’ First Executive firm wasn’t the right fit for him. because we had more work than we could handle,” Corp., which faced billions of dollars in losses “I wasn’t able to attract some of the lateral Weintraub says. from its junk-bond and other investments. partners that I wanted to attract,” Weintraub says Over the next several years, Weintraub “In some respects, it was a milestone for the of his experience at the 10-attorney Ruben continued to be reunited with attorneys from his firm,” Pachulski says. “We were demonstrating Weintraub. two previous firms. Among the attorneys joining that we could do significant creditor-committee He added that his partners wanted him to focus the San Francisco post were David Bertenthal work.” on litigation, but he preferred bankruptcy. from Ruben Weintraub and Brown and Tobias Young became a name partner in 1992. In the Pachulski Stang was a better match for his Keller from Murphy Weir. same year, the boutique added three more lateral practice and his aspirations, and Weintraub soon Another attorney came from one of the partners. Beilinson, who focused on middle- met with Pachulski and Ziehl to discuss the plans boutique’s bankrupt clients: the Landels Ripley market debtor cases, came from the Los Angeles for the new office. law firm. John Fiero, a litigator and bankruptcy office of Buchalter, Nemer, Fields & Younger. Pachulski and Ziehl were gung-ho about attorney at the failed firm, initially joined on a Another expatriate from Buchalter Nemer’s local opening the Northern California outpost, although two-year trial basis and later became a partner. office was Larry Gabriel, whose focus was some of the other lawyers in the boutique didn’t One of the Los Angeles partners, Debra insurance insolvencies. The third attorney was share that view. Grassgreen, spent so much time in San Francisco Brad Godshall, a specialist in secured creditor “There were people in the firm who were that she fell in love with the city and decided to work who joined from Latham & Watkins in Los skeptical about opening a branch office relocate there. Angeles. anywhere,” Pachulski says. “It had nothing to do Today, the office at 3 Embarcadero in the While it was gaining significant cases and with Bill. It was more of the theory of a branch Financial District has 17 attorneys. adding lateral partners, Pachulski Stang began office they were opposed to.” “I think the San Francisco experiment was considering whether to expand into new markets. But Pachulski and Ziehl won over their very successful, and the firm learned a lot about how to open an office, in terms of the logistics With its success in Delaware, and the cost and the support needed to do it,” the firm began considering a Weintraub remarks. broader presence on the East Coast. Bankruptcy cases were ut it wasn’t just the West Coast that beginning to flow to Manhattan, beckoned the boutique firm. Starting in a trend driven in part by the the 1990s, more and more Chapter 11 increased predictability of the Bcases were being filed in Delaware because of judge’s rulings there. However, the perception that the U.S. Bankruptcy judges the surge of big-ticket filings — there were efficient and predictable in their rulings. Enron, Global Crossing and After opening the San Francisco site, the firm WorldCom — was yet to come. considered starting a Delaware office. The right “We came to the conclusion opportunity didn’t arise until late 1999, when that, to complete the circle of being prominent bankruptcy attorney Laura Davis a full-service restructuring Jones announced she was leaving her law firm. boutique on the West Coast and Jones of Delaware’s Young Conaway Stargatt East Coast, you need a New York & Taylor gained nationwide prominence by office,” Pachulski says. “We saw serving as Continental Airlines’ counsel in its that it was becoming a venue of 1990 bankruptcy filing. Her other major cases in choice for a lot of people.” the 1990s included the bankruptcy of Trans World Airlines, in which she advised the creditors’ he firm’s Manhattan committee, and the bankruptcy of Zenith outpost — its fourth Electronics, where she represented the debtor. office — opened in Her work on these and other cases built her TOctober 2001. The boutique reputation as a top bankruptcy lawyer, and she recruited bankruptcy lawyer was in demand. Jones says that 75 law firms Robert Feinstein from New expressed interest in her but that she met with York’s Kronish Lieb Weiner & just a fraction of them, including Pachulski Stang. Hellman to lead the office. Weintraub says, “Two events were coinciding: Within the next few months, the realization of the need to be in Delaware and the nation’s most high-profile the fortuity of Laura being available. It was kind bankruptcy cases landed in New of like lightning striking.” York. First came Enron Corp. in Pachulski arranged to meet Jones in New York, December 2001, followed in and after that meeting, she flew to California to January 2002 by Global Crossing meet the rest of the attorneys. They were Ltd. and WorldCom Inc. in July impressed and soon asked her to join the firm. 2002. Although Pachulski Stang She accepted on Christmas Eve. didn’t handle these filings, the Photo by Hugh Williams Her personality and practice meshed with those cases demonstrated the increasing ‘There always is a pocket of the economy or at Pachulski Stang, she notes. importance of a New York an industry group that is in trouble. We can “I was attracted by the depth of experience at presence. the firm, and its willingness and ability to do In late 2002, the firm’s partners always count on bad management and on national cases,” Jones says. asked Weintraub whether he lending cycles where money gets loose and Jones, a workaholic who often plugs away at would relocate to the New York people overborrow.’ cases at two or three in the morning, wanted the office. As it happened, Weintraub new Delaware office to open immediately to avoid had been kicking the idea around, Dean Ziehl interruption in serving her clients. too. Pachulski Stang was eager to accommodate The New York native started his legal career in maintaining constructive relationships with other her request, and it leased 12,000 square feet of 1979 as an associate at New York’s Weil, Gotshal law firms and accounting firms.” space. & Manges, and he remained friends with many It’s a theme one hears again and again about On Jan. 1, 2000, Jones opened the firm’s members of the local legal community. Weintraub the boutique: It’s an aggressive, marketing- Delaware office, providing the much desired East craved the excitement and challenge of working oriented firm that works extremely hard to get Coast presence. on the high-profile cases that the city attracted, so new business. Jones brought along most of her existing the move made sense on many levels. The key, Beilinson says, is anticipating industry clients, including Zenith and mining company After Weintraub decided to relocate, the firm trends and building contacts in the bankruptcy Harnischfeger Industries Inc. Within the first made him a name partner. community. couple months, she picked up several new cases. At the end of 2002, Weintraub packed his bags “When an industry is having difficulty, we will Among them are Ameriserve Food Distribution and moved to the Big Apple, giving the firm an encourage a lawyer from the firm to spend as Inc., serving as debtor’s co-counsel, and apparel even larger presence on the East Coast. much time as necessary to do research on the manufacturer Fruit of the Loom, serving as As Pachulski Stang has broadened its industry, its problems and potential solutions, so counsel to the note holders’ committee. To help nationwide reach, it has continued to build its that when a case is filed, we will have someone Jones with the hefty workload, the firm sent a referral network. in-house who is way ahead of the curve,” team of its lawyers from Los Angeles to Delaware “In the bankruptcy business, you get most of Beilinson says. for 90 days. your cases from referrals from other Pachulski Stang used this strategy in the The outpost, handling high-end cases on behalf professionals,” notes Los Angeles bankruptcy Wherehouse bankruptcy, which Beilinson predicts of debtors and creditors’ committees, instantly lawyer Jeffrey Krause of Stutman, Treister & will be the first in a string of filings by music enhanced Pachulski Stang’s national profile. Glatt. “They have worked at establishing and retailers. Similarly, the firm used this strategy in 1999, s Pachulski Stang looks when the creditors’ committee in the Mann ahead, the firm is groom- Theatres bankruptcy selected Pachulski Stang ing a second generation as counsel. It was the first major movie-theater Aof leaders. One way it’s doing chain to declare bankruptcy, and within the next this is by designating some of the couple years, most large theater chains followed younger partners to sit on firm Mann’s lead. committees for one-year stints. “By getting the creditors’ committee in the The firm has no managing partner Mann case, it opened the door to my ability to get or chairman. the creditors’ committee in the Loews Cinemas Last year, a junior partner held and General Cinemas cases,” Beilinson says. one of the seven seats on the The firm also served as co-counsel, along with firm’s management committee, Kirkland & Ellis, to the debtor in the United Artists and another junior partner filled theater-chain bankruptcy. one of the eight seats on its case- Such strategies are crucial, in both good and intake committee. bad economic times. This year, two other junior “There always is a pocket of the economy or partners are filling those positions, an industry group that is in trouble,” Ziehl says. and in 2004, another pair will hold “We can always count on bad management and those seats. on lending cycles where money gets loose and In total, six junior partners will people overborrow.” have rotated in and out of these But the firm’s style has ruffled some feathers. management roles by 2004. The Some local bankruptcy lawyers, who requested partners are Keller, Bertenthal, anonymity, say the firm is too pushy in its pursuit Grassgreen and Kevane, along and handling of cases. with Jeffrey Pomerantz and Linda When dealing with opposing counsel on a case, Cantor. “they will be overly aggressive in their lawyering This kind of forward thinking with the other boutiques,” one lawyer says. is critical, Pachulski, 46, says. Another lawyer adds, “Generally, they’re noted “Most of the senior people in by many of their competitors as being overly the firm are now in their 40s,” he aggressive in the way they solicit creditors’ says. “The second generation committee work. They are the most overly probably won’t start taking over aggressive of all the bankruptcy firms.” until about 10 years from now, In response, Pachulski says the firm is a tough but we believe we need to start competitor, but he insists that it always acts grooming those people now.” ethically. Bankruptcy lawyer Karl Block “Some people think we’re too aggressive, but of Greenberg Glusker Fields Photo by Hugh Williams we’re doing what we need to for our clients within Claman Machtinger & Kinsella ‘When an industry is having difficulty, we will the ethical guidelines we need to live by,” he says. in Los Angeles says the firm has encourage a lawyer from the firm to spend “If everyone liked us, I’d be really concerned.” a deep bench of young talent, an as much time as necessary to do research on advantage in the bankruptcy lthough winning a popularity contest field. the industry, its problems and potential solu- isn’t one of the firm’s goals, beating the “They have a lot of capable tions, so that when a case is filed, we will heavy competition is. lawyers in their mid 30s and early have someone in-house who is way ahead of APachulski Stang competes not only with 40s, which helps when dealing the curve.’ national full-service firms — such as Skadden, with a high-energy practice,” Marc Beilinson Arps, Slate, Meagher & Flom; Weil Gotshal; Block says. Kirkland & Ellis; and Jones, Day — but also Meanwhile, Pachulski says the firm has no grow. Today, the 25,000-square-foot facility has with regional bankruptcy boutiques such as immediate plans to open up any more offices. He 13 attorneys. Levene, Neale, Bender, Rankin & Brill and says that the current office locations are sufficient Orange County bankruptcy lawyer William Stutman Treister in Los Angeles. to serve the firm’s clients and that it will hire new Lobel says he expects the boutique to dominate One way Pachulski Stang differentiates itself lawyers in its existing offices as needed, with a the national market in coming years. is by declining to represent secured creditors, focus on the East Coast. “Their acquisition of Laura Jones was a stroke thereby avoiding conflicts of interest. The New York office, with five lawyers, will of genius,” Lobel of Irell & Manella says. “Now “One of our clients potentially could be a major move from its 6,000-square-foot office on Fifth to open a small office in New York, that I’m sure secured creditor in one of our debtor cases, and Avenue to a new 10,000-square-foot site on will grow, positions them on the ground floor in that was a risk we just didn’t think we could Madison Avenue in October. That will give it two of the most significant bankruptcy venues in take,” Pachulski explains. room to grow to 21 lawyers. the country.” “A lot of the big firms represent banks, and “We intend to fill that up over the next four or When it comes down to it, three factors have they just get conflict waivers,” he adds. “We just five years,” Weintraub says. “We’ll grow, but we helped the firm get to this position, Young says. think that gets too hard, and sometimes, they won’t grow in an unprincipled way. We’ll grow “Some of it is strategic planning. Some of it is refuse to give them to you. We try to avoid having slowly.” taking advantage of situations once they occur. to need any conflict waivers.” The Delaware office also has continued to And some of it is just good fortune,” he says.