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Adam Paul is quoted in this article.

While most of the Am Law 100 reveled in a year of M&A and real estate-driven profits, spare a thought for the bankruptcy lawyers, who didn’t have such a great 2021.

Commercial Chapter 11 bankruptcy filings fell by nearly 50% last year compared to 2020, according to legal data firm Epiq Global. Relatedly, bankruptcy practices saw their demand shrink by 7.8% versus 2020, a recent Thomson Reuters report stated.

In interviews, bankruptcy practice leaders insisted that out-of-court restructurings and other insolvency matters have filled gaps left by the Chapter 11 lull. But they also admittedly have some time on their hands, which they’re using to sniff out insolvency in distressed sectors and market their services to existing and potential clients.

Mayer Brown’s bankruptcy practice created a “restructuring products” group during the pandemic that expanded the restructuring practice to include lawyers who specialize in distressed finance, distressed M&A, tax and litigation, totaling more than 300 attorneys.

“In a market where the restructuring activity is relatively flat, we have the ability to tap into that products group if and when restructuring returns to a more normalized distressed market,” said Mayer Brown global restructuring practice co-lead Adam Paul.

Focusing on areas of firm expertise—such as health care, automotive and real estate—Nelson Mullins Riley & Scarborough bankruptcy and financial restructuring chair Gary Freedman said his team is putting together “triage groups” to snap into action at the first sign of distress among existing clients or potential new clients.

“While everybody has this downtime, we are taking an opportunity to look at and have conversations with folks in anticipation of various regions becoming busier as well as industries needing service,” said Freedman. “We have a team, between insolvency attorneys, regulatory attorneys and transactional attorneys, who can parachute into a situation and hit the ground running to provide immediate service and relief to clients.”

McDermott Will & Emery’s bankruptcy practice is checking in with private equity clients about their portfolio companies to find out who’s struggling as interest rates and inflation increase, said Miami bankruptcy partner Craig Rasile.

“What we’re doing from a marketing approach is talking to clients, looking for troubled situations in their portfolios, like a private equity fund,” Rasile said. “Every now and then they make a mistake and there’s a problem child in that portfolio, and they’re making the tough decision to keep, liquidate, sell, or run through bankruptcy and clean up that balance sheet. We get them thinking about cleaning up their portfolio.”

Some private equity clients lend to portfolio companies owned by other private equity firms, so McDermott may also offer to do a preliminary analysis of problem loans to lay out a client’s options for restructuring, Rasile added.

Out-of-Court Restructurings Sustain Practices

Although bankruptcy courts in Texas, Delaware and New York lack the major corporate Chapter 11s that typically feed Big Law bankruptcy practices, there’s enough insolvency and adjacent work in the market to sustain the lawyers until the next uptick.

In the wake of the stimulus-fueled investment boom, Rasile is working on multiple federal court receiverships tied to Ponzi schemes that went bust. The cryptocurrency space is also generating work: McDermott is counseling the creditors committee in the Delaware bankruptcy of cryptocurrency lender Cred.

“People were looking for a place to park their cash,” Rasile said. “The usual, sophisticated investors went to private equity funds and hedge funds, and others went into more speculative investments.”

Paul said vibrant capital markets have allowed companies that would normally be characterized as distressed to restructure out of court instead of filing under Chapter 11.

“What we’ve found at Mayer Brown is that our distressed finance, distressed M&A, and our capital markets teams are all very busy,” Paul said. “And frankly, our company sponsor-side practice is busy as well. But you wouldn’t realize it from the outside looking in because a lot of these deals are out-of-court deals.”

And outside of restructuring altogether, bankruptcy lawyers are transferring their skills to more in-demand practices. Freedman said he’s using his business litigation background to work on business-related disputes during the bankruptcy slowdown. Meanwhile, his colleagues are aiding the firm’s transactional practice.

“One of our attorneys who pivoted to transactional work billed 300 hours in December because of how busy they were,” he said.

This Is (Probably) the Year

Like many of his peers, Freedman didn’t foresee the conditions that shaped 2021. In October 2020, Freedman said he thought that insolvency-related demand would increase after government stimulus funds ran out.

The funds did not run out. Instead, the March 2021 American Rescue Plan injected another $1.9 trillion into the economy, including $402 billion in stimulus checks. Interest rates stayed low and capital markets kept propping up companies that—Freedman said in this week’s interview—would have gone bankrupt by the end of 2020 if COVID-19 hadn’t happened.

“I think we already saw some softening of the economy in 2019 into 2020, and if not for the pandemic we would’ve already had a depression in the economy,” Freedman said. “I think the pandemic and the money propped the system up artificially and it’s going to catch up at some point.”

Freedman said he thinks filings will start to pick up by mid-2022, and he’s not alone in that forecast.

The current level of liquidity, as well as eviction and foreclosure moratoriums, has afforded lenders time to find buyers for distressed assets—particularly in sectors like hospitality that continue to struggle amid COVID-19 restrictions and labor shortages, Rasile said.

“That created this perfect storm of circumstances where there was basically a flat standstill around the country,” Rasile continued. “You saw very few highly problematic companies that were filing bankruptcies or formal insolvency proceedings because there was no hope. Even if things turned around tomorrow, there was no hope because there was no market for their products or services.”

But as the federal government signals multiple interest rate hikes in 2022, and as the remaining foreclosure and eviction moratoriums expire, Rasile said he predicts a liquidity crisis to force struggling companies to restructure by the second half of 2022.

“Those are the telltale signs,” he said, “that there’s going to be trouble in the valley.”

Reprinted with permission from the January 13, 2021 edition of The American Lawyer © 2021 ALM Properties, Inc. All rights reserved. Further duplication without permission is prohibited.