Legally blue: 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.

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.

Long term debt comes from acquiring office space, building out the space and equipping the offices with furniture, computers, and the like. These costs can be very substantial, as office space is not cheap, good office furniture is also quite expensive, and law firms tend to have well-appointed and decorated offices.

Furthermore, the tax laws encourage firms to have a revolving line of debt. At the end of the year, each partner gets a report on his share of the pie and has to pay taxes on it, even if that money is left in the firm as working capital. Therefore law firms generally distribute all of their cash at the end of each year. This means that during the early part of the year, firms generally draw on a line of credit to pay employee salaries and expenses in the first part of the year. Then, toward the end of the year, there is a big effort to get clients to pay bills so that the line of credit is paid off and there is a net pie for the partners to split.

Obviously, if a firm expands too rapidly, both types of debt pile up.

I don't commit crimes or put myself in position for that,

Neither did a teacher I represented once who was accused of not reporting child abuse. Unfortunately for your shortsighted comment, there are statutes out there you are surely unaware of that apply when someone decides to pick you as the fall guy.

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

Fine. Arbitration fees start at about $4500 just for the proceeding, and if you go unrepresented, you WILL lose. I do have some arbitration experience. Unlike taking on a pro se in court, where the proceeding can get out of hand easily (which favors the pro se), you WILL get bitch slapped by the arbitrator if you try to create a circus. This is one of the more naive and dumb ideas I've read on here lately.

been there, done that, my lawyer was all smiles and handshakes for my arbitration case opponents.... they can all die for all I care.

That was YOUR problem for not hiring a good lawyer. And I suspect you didn't tell us the complete story. Either way, if you are in Texas and need a good (civil) defense litigation attorney, call me. I'll be completely honest with you, charge you fairly, and argue like hell on your behalf. Contrary to popular myth, most attorneys are like me. The ones that aren't are usually that way for a reason. Judges don't like making criminal appointments to lawyers who are going to clog their docket or screw with their conviction rating (i.e. win); too many folks hire the attorney who got their kid off a drug charge to handle their company's affairs; and insurance companies won't let attorneys completely do their job sometimes because the cost of defense -- paid by the insurer -- is something the insurance company just doesn't want to pay for.

You can bitch about attorneys all you want, but what you are bitching about are symptoms. The causes of most of our problems are by common folks who 1) don't give a rip enough about our judicial system to research and vote for the right judges (in states like Texas where judges are elected), but complain like hell when one of them lets someone off -- like that idiot who, with his son, beat up the Royals' first base coach; 2) behave as if contracts they sign don't apply to them; 3) want to sue the hell out of someone when they get their feelings hurt or when medical science wasn't 100% certain (as if it ever were or ever could be); 4) bitch about jury awards, but try to get out of jury service every time they get the card in the mail. Does any of this cause you or anyone else here to take a close look in the mirror?

Does any of this cause you or anyone else here to take a close look in the mirror?

nope.... cause I'm not a lawyer.

As far as the legal profession is concerned.... (excuse me while I wipe the barf from my shoes). I'm an ER doc that's been "named" in 3 suits in 20 years of work. All over the last 3 years due to "poor outcome" after the patient was admitted and treated by the attending and the hospital.

The deal is if a patient dies every doctor with a name on the chart gets named in the suit money- mining excavation ..... all the nurses (agents of the hospital=deep pockets), pharmacy, anesthesia, everybody.... then after you get a LAWYER, you may or may not get your dismissal.... Meanwhile lawyer still getting your billable legal hourly fee....

or go on to deposition, obtaining expert witnesses, presenting records... meanwhile your LAWYER bills per hour... guess what?

No EMTALA law mandates that he or you has to take pro-bono work, whether I pay or not. So even if I get "off" I get "billed"... by a LAWYER and the insurance rates go up.... so kiss my a@#.

My defense lawyer in the last case wanted me to say something for getting an arbitration of "only $35,000.00". like "thank-you" or "I'm grateful....!"..... cause he and the med-mal insurance company number cruncher figured a cost-benefit ratio that I was on the wrong side of .... I just told him that if I ever saw him or his family in the ER, they'd have a nice 12 hour wait in the ER while I ordered every test I could think of, consulted every specialist on call, and referred all my med orders including Tylenol for pharmacology consultation, consider air transfer to a teaching or training institution with appropriate consult and then I would take care of the life threatening "problem" but wouldn't think of giving him or his rat wife or his little rodent kids pain meds.... you know why..... as a fine attorney explained to me in my last deposition.... "you don't die of pain.....".. lesson learned.

By the way... are you one of the Lawyers that puts "self-employed" when listing occupation so that nobody knows your a lawyer when you visit the doc? ;-)

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