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March 24, 2003 Supplement to the Los Angeles Daily Journal and San Francisco Daily Journal Trials, transactions and the insider’s guide to the practice of law. Going for Broke Managing one of the nation’s largest and most success- ful bankruptcy boutiques, Los Angeles attorneys Richard Pachulski, left, Marc Beilinson and Dean Ziehl prove that saving collapsed companies is lucrative business. Photo by Hugh Williams
Transcript

March 24, 2003

Supplement to the Los Angeles Daily Journaland San Francisco Daily Journal

Trials, transactions and theinsider’s guide to the

practice of law.

Going for BrokeManaging one of the nation’s largest and most success-ful bankruptcy boutiques, Los Angeles attorneys RichardPachulski, left, Marc Beilinson and Dean Ziehl prove thatsaving collapsed companies is lucrative business.

Photo by Hugh Williams

PoorerRicher

In early January, Marc Beilinson received atip that Wherehouse Entertainment Inc. hadhired a bankruptcy lawyer and likely wouldfile for Chapter 11 protection.

Beilinson got cracking immediately.The Los Angeles bankruptcy lawyer began

researching the problems facing music retailerssuch as Torrance-based Wherehouse, which isstruggling because of fierce competition andgrowing online piracy. For three weeks, hepored over financial reports and news articlesabout the company and spoke with industryexperts.

The hard work paid off. Shortly after themusic retailer f i led for Chapter 11reorganization Jan. 21, Beilinson won thelucrative position of counsel to the unsecuredcreditors’ committee.

“By the time Wherehouse filed forbankruptcy, I was well-versed in the problemswithin the industry,” says Beilinson, a partnerat Pachulski, Stang, Ziehl, Young, Jones &Weintraub.

“I could be intelligent when talking tocreditors who were calling me up rather thanbeing one of 50 lawyers who had just learnedof the filing and had no knowledge of theindustry,” he adds.

The case reflects a trait the Los Angeles-based bankruptcy boutique has demonstratedtime and time again: getting a jump-start on thecompetition through plenty of advanceplanning. It’s one of the traits that has catapultedthe firm into a bankruptcy powerhouse.

COVER STORY

RicherPoorer

For

For

With broke companies nation-wide seeking its services, LosAngeles-based Pachulski, Stang,Ziehl, Young, Jones & Weintraubhas turned a bankruptcy nicheinto a money-making machine.

By Toni Vranjes

Since its founding two decades ago, PachulskiStang has evolved from a two-man shop into thenation’s largest bankruptcy firm. Today, it boasts80 attorneys spread across the Pacific and Atlanticcoastlines.

“Their growth has been slow and deliberate,”San Diego-based legal recruiter Bill Nason says.“And their turnover has been almost nonexistent,which is rare among law firms.”

The boutique also boasts some of the highestprofits in the state, far surpassing many of itsfull-service competitors. Annual per-partnerprofits hit $900,000, according to several industryexperts.

Pachulski Stang won’t confirm those numbers.But, if on mark, the firm’s profits outpace largefirms such as Los Angeles’ Irell & Manella andPalo Alto’s Wilson Sonsini Goodrich & Rosati— with 2002 per-partner profits of $887,000 and$800,000, respectively.

Although Pachulski Stang offers litigation,corporate and real estate services, it focusesprimarily on traditional bankruptcy work —

especially big-ticket cases.Pachulski Stang has a reputation for deftly

handling some of the largest and most complexbankruptcy reorganizations in the country,usually representing corporate debtors butsometimes advising creditors’ committees orother parties. Its bread and butter are cases inwhich the debtor has $100 million to $1 billionin revenues, assets or debts, although the firmdoes some work above and below that range.

Its client roster has included softwarecompany Peregrine Systems Inc.,telecommunications company CovadCommunications Group Inc., food chain SizzlerInternational Inc. and the creditors’ committeeof life insurance company First Executive Corp.

Pachulski Stang also has counseled failedlaw firms, including San Francisco’s LandelsRipley & Diamond, which filed for Chapter 11bankruptcy in 2000. And the liquidationcommittee of Brobeck, Phleger & Harrison —which closed its doors in February with $90million in debt — recently selected PachulskiStang partners Henry Kevane and KennethBrown in San Francisco as insolvency advisers.

In another measure of its prominence, thefirm served as debtor’s counsel in four of the20 largest bankruptcy filings by Californiacompanies last year. Topping that list wasPeregrine, with $2 billion in assets.

“They’re one of the best firms in the country,”says Orange County bankruptcy attorney EvanSmiley of Albert, Weiland & Golden. “They dotop-notch work, and they do it nationwide.”

The bankruptcy giant began 20 years agoas the dream of two young associateswho left large law firm life to be their

own bosses. In the spring of 1983, RichardPachulski and James Stang left Sidley & Austin’sLos Angeles office and founded Pachulski &Stang. The bankruptcy and litigation firm servedsmall to midmarket companies, which was amarket they considered underserved.

At the outset, Pachulski was a litigationspecialist, while Stang focused on restructuringwork. Six months after the founding of theboutique, the firm recruited litigator Dean Ziehlfrom Sidley & Austin.

With the firm’s letterhead expanding to threename partners, Pachulski began handling morerestructuring work.

“There were other boutiques that were doinginsolvency but didn’t have strong litigationcapabilities,” Ziehl recalls. “And there were manylitigation firms that didn’t have insolvencyexpertise. It was a good way to differentiateourselves and do two complementary practices.”

In 1987, the firm landed its first significantcase outside of California. It was selected ascounsel to the trustee administering the estate ofbankrupt Utah conglomerate Triad America Corp.,the U.S. holding company of Saudi Arabian armsdealer Adnan Khashoggi. That case raised thefirm’s profile on the national bankruptcy scene.

During the first six years of its existence, thefirm relied on word of mouth to get new cases.But the firm modified its strategy in 1989, whenit brought in bankruptcy specialist ThomsenYoung from the law firm Dennis, Juarez, Reeser,Shafer & Young in Los Angeles. Young beganexpanding the firm’s creditor-committee work,and he also started focusing on marketing thefirm’s capabilities.

“He knew coming into the firm that we wantedhim to come up with a marketing plan,” Pachulskisays. “We wanted to grow and get better cases,and we didn’t want to just rely on word of mouth.”

Then in 1991, Pachulski Stang was tapped torepresent the creditors’ committee in thebankruptcy case of Los Angeles’ First ExecutiveCorp., which faced billions of dollars in lossesfrom its junk-bond and other investments.

“In some respects, it was a milestone for thefirm,” Pachulski says. “We were demonstratingthat we could do significant creditor-committeework.”

Young became a name partner in 1992. In thesame year, the boutique added three more lateralpartners. Beilinson, who focused on middle-market debtor cases, came from the Los Angelesoffice of Buchalter, Nemer, Fields & Younger.Another expatriate from Buchalter Nemer’s localoffice was Larry Gabriel, whose focus wasinsurance insolvencies. The third attorney wasBrad Godshall, a specialist in secured creditorwork who joined from Latham & Watkins in LosAngeles.

While it was gaining significant cases andadding lateral partners, Pachulski Stang beganconsidering whether to expand into new markets.

In the early 1990s, the firmconsidered opening an officein San Francisco but decidedagainst that course of actionbecause it hadn’t found theright leader for a Bay Areaoutpost, Pachulski says.

“San Francisco remindedus a lot of Los Angeles in theearly 1980s, in that it didn’thave that many law firms thatwere doing restructuringwork, particularly in thedebtor area,” he says. “So wethought there was a marketthat was still open to newcompetition. But you had tofind the talent in SanFrancisco.”

The boutique firm soonfound that elusive talent.

During a lunch meeting, aLos Angeles accountant toldPachulski that he knew alawyer who would be a goodleader for the firm in SanFrancisco. That lawyer wasBill Weintraub, a formerpartner at Bay Areabankruptcy house Murphy,Weir & Butler who happenedto be on a short list of peoplePachulski would consider toopen a San Francisco office.

The boutique insisted onhiring an experienced, top-notch, native San Franciscolawyer to head such an office, and Weintraub fitthat category perfectly, Pachulski says.

Weintraub, who practiced at the Bay Arealitigation and real estate boutique Ruben,Weintraub & Cera after leaving Murphy Weir,knew he was on that short list. And he was excitedabout the prospect of joining Pachulski Stangbecause he realized that the small Ruben Weintraubfirm wasn’t the right fit for him.

“I wasn’t able to attract some of the lateralpartners that I wanted to attract,” Weintraub saysof his experience at the 10-attorney RubenWeintraub.

He added that his partners wanted him to focuson litigation, but he preferred bankruptcy.

Pachulski Stang was a better match for hispractice and his aspirations, and Weintraub soonmet with Pachulski and Ziehl to discuss the plansfor the new office.

Pachulski and Ziehl were gung-ho aboutopening the Northern California outpost, althoughsome of the other lawyers in the boutique didn’tshare that view.

“There were people in the firm who wereskeptical about opening a branch officeanywhere,” Pachulski says. “It had nothing to dowith Bill. It was more of the theory of a branchoffice they were opposed to.”

But Pachulski and Ziehl won over their

partners. In July 1996, the firm launched a SanFrancisco office staffed by Weintraub and anassociate from Ruben Weintraub.

Within six months of the grand opening, theSan Francisco office lured Kevane from MurphyWeir.

“We became so busy that we had to havepartners from our Los Angeles office help usbecause we had more work than we could handle,”Weintraub says.

Over the next several years, Weintraubcontinued to be reunited with attorneys from histwo previous firms. Among the attorneys joiningthe San Francisco post were David Bertenthalfrom Ruben Weintraub and Brown and TobiasKeller from Murphy Weir.

Another attorney came from one of theboutique’s bankrupt clients: the Landels Ripleylaw firm. John Fiero, a litigator and bankruptcyattorney at the failed firm, initially joined on atwo-year trial basis and later became a partner.

One of the Los Angeles partners, DebraGrassgreen, spent so much time in San Franciscothat she fell in love with the city and decided torelocate there.

Today, the office at 3 Embarcadero in theFinancial District has 17 attorneys.

“I think the San Francisco experiment wasvery successful, and the firm learned a lot about

Richard Pachulski says his firm is a tough competitorbut he insists that it always acts ethically. “Somepeople think we’re too aggressive, but we’re doing whatwe need to for our clients within the ethical guide-lines we need to live by,” he says. “If eveyone liked us,I’d be really concerned.”

Photo by Hugh Williams

how to open an office, in terms of the logisticsand the cost and the support needed to do it,”Weintraub remarks.

But it wasn’t just the West Coast thatbeckoned the boutique firm. Starting inthe 1990s, more and more Chapter 11

cases were being filed in Delaware because ofthe perception that the U.S. Bankruptcy judgesthere were efficient and predictable in their rulings.

After opening the San Francisco site, the firmconsidered starting a Delaware office. The rightopportunity didn’t arise until late 1999, whenprominent bankruptcy attorney Laura DavisJones announced she was leaving her law firm.

Jones of Delaware’s Young Conaway Stargatt& Taylor gained nationwide prominence byserving as Continental Airlines’ counsel in its1990 bankruptcy filing. Her other major cases inthe 1990s included the bankruptcy of TransWorld Airlines, in which she advised the creditors’committee, and the bankruptcy of ZenithElectronics, where she represented the debtor.

Her work on these and other cases built herreputation as a top bankruptcy lawyer, and shewas in demand. Jones says that 75 law firmsexpressed interest in her but that she met withjust a fraction of them, including Pachulski Stang.

Weintraub says, “Two events were coinciding:the realization of the need to be in Delaware andthe fortuity of Laura being available. It was kindof like lightning striking.”

Pachulski arranged to meet Jones in New York,and after that meeting, she flew to California tomeet the rest of the attorneys. They wereimpressed and soon asked her to join the firm.She accepted on Christmas Eve.

Her personality and practice meshed with thoseat Pachulski Stang, she notes.

“I was attracted by the depth of experience atthe firm, and its willingness and ability to donational cases,” Jones says.

Jones, a workaholic who often plugs away atcases at two or three in the morning, wanted thenew Delaware office to open immediately to avoidinterruption in serving her clients.

Pachulski Stang was eager to accommodateher request, and it leased 12,000 square feet ofspace.

On Jan. 1, 2000, Jones opened the firm’sDelaware office, providing the much desired EastCoast presence.

Jones brought along most of her existingclients, including Zenith and mining companyHarnischfeger Industries Inc. Within the firstcouple months, she picked up several new cases.Among them are Ameriserve Food DistributionInc., serving as debtor’s co-counsel, and apparelmanufacturer Fruit of the Loom, serving ascounsel to the note holders’ committee. To helpJones with the hefty workload, the firm sent ateam of its lawyers from Los Angeles to Delawarefor 90 days.

The outpost, handling high-end cases on behalfof debtors and creditors’ committees, instantlyenhanced Pachulski Stang’s national profile.

‘There always is a pocket of the economy oran industry group that is in trouble. We canalways count on bad management and onlending cycles where money gets loose andpeople overborrow.’

Dean Ziehl

Photo by Hugh Williams

With its success in Delaware,the firm began considering abroader presence on the EastCoast. Bankruptcy cases werebeginning to flow to Manhattan,a trend driven in part by theincreased predictability of thejudge’s rulings there. However,the surge of big-ticket filings —Enron, Global Crossing andWorldCom — was yet to come.

“We came to the conclusionthat, to complete the circle of beinga full-service restructuringboutique on the West Coast andEast Coast, you need a New Yorkoffice,” Pachulski says. “We sawthat it was becoming a venue ofchoice for a lot of people.”

T he firm’s Manhattanoutpost — its fourthoffice — opened in

October 2001. The boutiquerecruited bankruptcy lawyerRobert Feinstein from NewYork’s Kronish Lieb Weiner &Hellman to lead the office.

Within the next few months,the nation’s most high-profilebankruptcy cases landed in NewYork. First came Enron Corp. inDecember 2001, followed inJanuary 2002 by Global CrossingLtd. and WorldCom Inc. in July2002. Although Pachulski Stangdidn’t handle these filings, thecases demonstrated the increasingimportance of a New Yorkpresence.

In late 2002, the firm’s partnersasked Weintraub whether hewould relocate to the New Yorkoffice. As it happened, Weintraubhad been kicking the idea around,too.

The New York native started his legal career in1979 as an associate at New York’s Weil, Gotshal& Manges, and he remained friends with manymembers of the local legal community. Weintraubcraved the excitement and challenge of workingon the high-profile cases that the city attracted, sothe move made sense on many levels.

After Weintraub decided to relocate, the firmmade him a name partner.

At the end of 2002, Weintraub packed his bagsand moved to the Big Apple, giving the firm aneven larger presence on the East Coast.

As Pachulski Stang has broadened itsnationwide reach, it has continued to build itsreferral network.

“In the bankruptcy business, you get most ofyour cases from referrals from otherprofessionals,” notes Los Angeles bankruptcylawyer Jeffrey Krause of Stutman, Treister &Glatt. “They have worked at establishing and

maintaining constructive relationships with otherlaw firms and accounting firms.”

It’s a theme one hears again and again aboutthe boutique: It’s an aggressive, marketing-oriented firm that works extremely hard to getnew business.

The key, Beilinson says, is anticipating industrytrends and building contacts in the bankruptcycommunity.

“When an industry is having difficulty, we willencourage a lawyer from the firm to spend asmuch time as necessary to do research on theindustry, its problems and potential solutions, sothat when a case is filed, we will have someonein-house who is way ahead of the curve,”Beilinson says.

Pachulski Stang used this strategy in theWherehouse bankruptcy, which Beilinson predictswill be the first in a string of filings by musicretailers.

Similarly, the firm used this strategy in 1999,when the creditors’ committee in the MannTheatres bankruptcy selected Pachulski Stangas counsel. It was the first major movie-theaterchain to declare bankruptcy, and within the nextcouple years, most large theater chains followedMann’s lead.

“By getting the creditors’ committee in theMann case, it opened the door to my ability to getthe creditors’ committee in the Loews Cinemasand General Cinemas cases,” Beilinson says.

The firm also served as co-counsel, along withKirkland & Ellis, to the debtor in the United Artiststheater-chain bankruptcy.

Such strategies are crucial, in both good andbad economic times.

“There always is a pocket of the economy oran industry group that is in trouble,” Ziehl says.“We can always count on bad management andon lending cycles where money gets loose andpeople overborrow.”

But the firm’s style has ruffled some feathers.Some local bankruptcy lawyers, who requested

anonymity, say the firm is too pushy in its pursuitand handling of cases.

When dealing with opposing counsel on a case,“they will be overly aggressive in their lawyeringwith the other boutiques,” one lawyer says.

Another lawyer adds, “Generally, they’re notedby many of their competitors as being overlyaggressive in the way they solicit creditors’committee work. They are the most overlyaggressive of all the bankruptcy firms.”

In response, Pachulski says the firm is a toughcompetitor, but he insists that it always actsethically.

“Some people think we’re too aggressive, butwe’re doing what we need to for our clients withinthe ethical guidelines we need to live by,” he says.“If everyone liked us, I’d be really concerned.”

A lthough winning a popularity contestisn’t one of the firm’s goals, beating theheavy competition is.

Pachulski Stang competes not only withnational full-service firms — such as Skadden,Arps, Slate, Meagher & Flom; Weil Gotshal;Kirkland & Ellis; and Jones, Day — but alsowith regional bankruptcy boutiques such asLevene, Neale, Bender, Rankin & Brill andStutman Treister in Los Angeles.

One way Pachulski Stang differentiates itselfis by declining to represent secured creditors,thereby avoiding conflicts of interest.

“One of our clients potentially could be a majorsecured creditor in one of our debtor cases, andthat was a risk we just didn’t think we couldtake,” Pachulski explains.

“A lot of the big firms represent banks, andthey just get conflict waivers,” he adds. “We justthink that gets too hard, and sometimes, theyrefuse to give them to you. We try to avoid havingto need any conflict waivers.”

‘When an industry is having difficulty, we willencourage a lawyer from the firm to spendas much time as necessary to do research onthe industry, its problems and potential solu-tions, so that when a case is filed, we willhave someone in-house who is way ahead ofthe curve.’

Marc Beilinson

Photo by Hugh Williams

As Pachulski Stang looksahead, the firm is groom-ing a second generation

of leaders. One way it’s doingthis is by designating some of theyounger partners to sit on firmcommittees for one-year stints.The firm has no managing partneror chairman.

Last year, a junior partner heldone of the seven seats on thefirm’s management committee,and another junior partner filledone of the eight seats on its case-intake committee.

This year, two other juniorpartners are filling those positions,and in 2004, another pair will holdthose seats.

In total, six junior partners willhave rotated in and out of thesemanagement roles by 2004. Thepartners are Keller, Bertenthal,Grassgreen and Kevane, alongwith Jeffrey Pomerantz and LindaCantor.

This kind of forward thinkingis critical, Pachulski, 46, says.

“Most of the senior people inthe firm are now in their 40s,” hesays. “The second generationprobably won’t start taking overuntil about 10 years from now,but we believe we need to startgrooming those people now.”

Bankruptcy lawyer Karl Blockof Greenberg Glusker FieldsClaman Machtinger & Kinsellain Los Angeles says the firm hasa deep bench of young talent, anadvantage in the bankruptcyfield.

“They have a lot of capablelawyers in their mid 30s and early40s, which helps when dealingwith a high-energy practice,”Block says.

Meanwhile, Pachulski says the firm has noimmediate plans to open up any more offices. Hesays that the current office locations are sufficientto serve the firm’s clients and that it will hire newlawyers in its existing offices as needed, with afocus on the East Coast.

The New York office, with five lawyers, willmove from its 6,000-square-foot office on FifthAvenue to a new 10,000-square-foot site onMadison Avenue in October. That will give itroom to grow to 21 lawyers.

“We intend to fill that up over the next four orfive years,” Weintraub says. “We’ll grow, but wewon’t grow in an unprincipled way. We’ll growslowly.”

The Delaware office also has continued to

Reprinted with permission from the Daily Journal EXTRA. ©2003 Daily Journal Corporation. All rights reserved.Reprinted by Scoop ReprintSource 1-800-767-3263

grow. Today, the 25,000-square-foot facility has13 attorneys.

Orange County bankruptcy lawyer WilliamLobel says he expects the boutique to dominatethe national market in coming years.

“Their acquisition of Laura Jones was a strokeof genius,” Lobel of Irell & Manella says. “Nowto open a small office in New York, that I’m surewill grow, positions them on the ground floor intwo of the most significant bankruptcy venues inthe country.”

When it comes down to it, three factors havehelped the firm get to this position, Young says.

“Some of it is strategic planning. Some of it istaking advantage of situations once they occur.And some of it is just good fortune,” he says.


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