Legally blue: Even law firms are going under

The Economist ^ | August 7, 2003

[sarcasm]

Law firms

Legally blue

Aug 7th 2003 | CHICAGO, LONDON AND NEW YORK
From The Economist print edition

Even law firms are going under

FOR years, Altheimer and Gray was a pillar of the Chicago law scene. Brobeck, Phleger & Harrison had long been a force on the west coast. What both had in common in recent years besides an established place in their respective legal communities was aggressive expansion plans. This year they shared a common fate: liquidation.

In the past year, several venerable law firms have closed. Others are not in great health. In July, Clifford Chance, a London-based global giant, says it “delayed” its distribution to partners. It has begun talks on increasing its already large debt.

Law firms have traditionally kept their affairs private. Barred from being public firms, they have no incentive to disclose their financial results. In the past they also managed their operations conservatively, with property leases being a rare ongoing obligation and variable compensation paid mainly from accumulated profits, not as pre-determined salary. But in recent years, many law firms launched costly debt-financed expansions. When work turns down, this can become a death spiral. Once a firm begins to weaken, key partners leave, hoping to avoid being stuck with any residual liabilities. Receivables evaporate as clients delay paying bills.

Altheimer and Gray offers a cautionary tale. The 88-year-old firm, based in Chicago with offices in two other American cities and ten foreign countries, is dissolving this summer. The collapse of a firm that once had 350 attorneys around the world is one of the largest in American legal history, and comes after a fruitless search for a merger partner. The fact that its top attorneys were soon snapped up, often at higher salaries than they had been earning, suggests that Altheimer's demise was due to more than a soft economy.

What went wrong? Internal financial reporting was abysmal. Expansion plans added pricey lawyers and new offices (San Francisco and Paris opened most recently). The firm's private equity practice was hurt by the investment slump. The woes of clients such as United Airlines and Montgomery Ward did not help.

Tough times apparently caught many employees by surprise. “We had a distorted view of the firm's business,” says one former partner, who claims that the management committee did not provide a report on the unfolding financial disaster until two months before the crash. Meanwhile, a lease was renewed on the firm's Chicago offices last year, and office renovations were moving ahead.

Yet by late 2002 Altheimer's roster of lawyers was already falling. Collections from clients, which traditionally slow in the early part of the year, were even more of a struggle this year. Offers to law-school graduates were rescinded last spring, and offers to summer associates were cut back.

Partners (who may ultimately bear responsibility for debts) hope there is enough money in accounts receivable to cover its debt to LaSalle Bank, the firm's lender, as well as to its landlord and other creditors, such as the interior-renovation firm that filed a $1.1m lien against Altheimer for work on its downtown offices.

Good luck to them. Wind-ups often turn out to be long and messy. Brobeck was sued by low level employees and by its landlord. Hutchins, Wheeler & Dittmar, one of Boston's oldest law firms, dissolved in December, but its name still survives in court because of litigation between former partners over the terms of the liquidation. It is a fitting finale.

[varon]

Even law firms are going under

Ah, finally some good news on the economic front ;-)

[Threepwood]

How exactly does a law firm rack up debt? The overhead is fairly minimal, a building, 4-5 staffers, and a group of lawyers willing to work for their share of the pie. It's not like they have to invest in new machines or anything. It's all brain work. I'm not trying to mock lawyers, I would really like know where debt could come from.

[Dick Vomer]

Now if only all the Law Schools would go bankrupt for at least 10 years Let's see how loud you scream for help
1. when you've been accused of a crime you didn't commit,
2. had a contract you were a party to breached, or
3. been sued when you did nothing wrong. Law schools, by the way, don't exactly turn a profit.

Barf....1)I don't commit crimes or put myself in position for that,

2)go to arbitration in the contract dispute or destroy whatever the contract was about,

3)bend over and take it like an Episcopalian Democrat if I get sued for something I didn't do.... been there, done that, my lawyer was all smiles and handshakes for my arbitration case opponents.... they can all die for all I care.

[putupon]

when you've been accused of a crime you didn't commit

Yeah, what would have happened to poor ol' O.J. if it hadn't been for those saints known as the Dream Team?

[mlmr]

I have NEVER made fun of a lifeguard....lawyers on the other hand.....

[Tall_Texan]

Not to worry. Once the lawyers get Kobe off, there will be so many lawyers repping raping basketball stars that they'll snap back to economic health.

[CatoRenasci]

Actually, overhead in law firms is not minimal: leases on office space, furnishings, support staff, associates salaries, computers and the like typically run between 35% to 60% of gross billings. One of the largest costs over which attorneys have the least control is the law library: you need the up to date versions that are provided by private serives rather than the sometimes 2-3 years out of date versions of codes etc. that are available free on line. Legal books and computer research services are ferociously expensive and not always billable through. I know plenty of small firms in which the associates actually have salaries higher than junior partners.

[Ben Chad]

Do you know why lawyers can't go to the beach? Because cats cover them with sand. :):):)

[chris1]

Many people try to look at tv and assume all lawyers are like chochran and shapiro, or alred and these other clowns. Most lawyers I know are just hard working people like anyone else and typically don't make a fortune like a small set of personal injury attorneys do.

[StriperSniper]

I love that Green Guy, he never panics. ;-)

[July 4th]

Thanks for being rational, guys. It is a fraction of lawyers who give them all a bad name. Everyone here just needs to remember that for one shyster lawyer, there is always someone on the other side of the courtroom taking the opposite position. For every bottom-feeding ACLU activist, there is a conservative legal scholar working in the exact opposite direction.

[DeFault User]

bend over and take it like an Episcopalian Democrat...

Good one !

Also, God help your heirs if your estate is large and goes into probate.

[putupon]

Most lawyers I know are just hard working people like anyone

Yeah, no slackers would ever be able to overwrite the Constitution to include a Fudgepack Amendment.

[Bluntpoint]

It is not a fraction of lawyers that are making it bad for the rest.

There is a reason that attorneys like myself quit the practice.

Attorneys owe their livings on the reciprocal bad faith of other attorneys.

See comment # 15. That poster was dead on mark.

[Bluntpoint]

Right, but how many times does one need a lawyer because some other lawyer has started cranking up the meter?

The "fine" for the innocent defendant is to pay lawyer fees and expenses.

Fine for any attorney and client bringing an empty suit?

Nothing!

The fine for a frivilous defense?

Nothing!

The lawyers have made the system so complicated with discovery rules so arcane that the average person is kept from any pro se action.

The bar runs a "closed shop" and conspires to keep the average person from practicing in the court.

The lawyers now feel they "own" the courtroom and no one enters without paying their fee.

[Bluntpoint]

Until there is loser pays the profession will have no respect.

The loser-pays rule makes weak cases less attractive to bring but strong cases less attractive to defend against." A plaintiff who has a strong case will get paid all the sooner and at lower cost. The bottom line is that the loser pays rule would make plaintiff's lawyers even better "professional evaluators of claims" before seeking to use the coercive power of the state.

Currently, defendants pay plaintiffs' legal fees when they lose, but they do not collect payment for their legal fees when they win. From the point of view of plaintiff's attorneys this can be summarized as, "heads-I-win, tails-we're-even" which can only encourage the pursuit of marginal lawsuits.

[G L Tirebiter]

Schadenfreude alert!

[LanPB01]

"The grunt work that many new associates performed to get started in law firms, is now being outsourced to India as well."

I'd like to see some reputable source report on this as well, because this sounds like a myth to me. Probably started by the IT whiners who seem upset that they aren't getting paid what they expected.

[Bluntpoint]

Legal research, in today's on line world, can be done from any place there is a computer.