Editor: Would each of you tell our readers something about your professional experience?
Marks: I have been practicing law in New Jersey for 30 years. After a judicial clerkship and several years with a general practice firm in Elizabeth, I joined what was then Ravin, Greenberg & Zackin, in Roseland, a premier Chapter 11 boutique firm in the metropolitan area. At Ravin, I was fortunate enough to work on some of the biggest and more interesting Chapter 11 cases that were filed in New Jersey - Regina Vacumn, Bevill, Bresler & Schmulman AMC, Kiwi Airlines and Celentano Foods are some examples. I even represented Kool, from Kool and the Gang. In 2001, after 18 years with what was then Ravin, Greenberg & Marks, I had the opportunity to join Norris McLaughlin, which at the time was looking to start up a Chapter 11 practice on the debtor's side. Coming to Norris represented a great opportunity for me - a full service firm that would really allow me to spread my wings. One measure of that opportunity lies in the fact that I joined the firm as its 65th attorney. Today, we are at 115 attorneys with offices in New Jersey and Manhattan, a dynamic and diverse firm.
Bauer: My first job after law school, just short of 20 years ago, was with Arthur Andersen & Company. I was able to develop a good financial background there, but I did wish to enter the legal arena. In 1990, I joined Ravin Greenberg and became a partner approximately eight years ago. My experience there was exceptional, but when Howard Greenberg, my mentor, became ill the firm's future became uncertain. Many of us began to look around for other opportunities. When Ravin Greenberg disbanded, several of us - with the encouragement of Gary Marks - came to Norris McLaughlin. I have been here for the past seven months.
Editor: Has the dramatic increase in the number of lawyers in New Jersey in recent years affected your practice?
Marks: When I came to the Ravin firm in 1983, the bankruptcy bar was fairly small and everyone knew one another. By the mid- to late 1980s, however, not only was the number of lawyers being admitted to the New Jersey bar increasing, but, especially in the Chapter 11 field, we were facing competition from the larger firms in New York and Philadelphia. They saw New Jersey as a prime source for top-of-the-line Chapter 11 work.
Bauer: I recall a New Jersey bankruptcy bar 20 years ago that was pretty closely knit and less litigious than it is today. In the late 1980s, with the collapse of the real estate market and a dramatic rise in the volume of work, the larger firms began to swallow up some of the profitable boutiques. Until recently, out-of-state firms were required to retain local counsel unless they had an office in New Jersey, but that requirement is now gone. There was a time when an 800-person firm would not bother with a company doing $50 million or a $100 million worth of business, but today they are vigorously pitching for the work. Practice in this area is much more competitive than it was in the past.
Editor: Would you give us an overview of the Bankruptcy & Creditors' Rights Group at Norris McLaughlin?
Marks: Looking at the big picture, there are about 20 attorneys practicing in the group, both on the debtor and creditor side. There are six of us at present that are purely Chapter 11 practitioners. From top to bottom, we have some of the strongest experience in the state, about 80 years in the aggregate. When issues arise in a specialized area we have the full resources of the firm at our disposal, including transactional, environmental, labor and employment, intellectual property and health care. Mo and I are hands on. When a client retains us we are actively involved in moving the case through the system.
Editor: Who are the clients? Are there particular sectors of the economy that you see on a regular basis?
Bauer: The market is constantly changing, and we see a wide range of clients, including companies with too much debt on the books, a second generation business where the children have not been taught how to run an enterprise, a business impacted by economic conditions beyond its control, and so on.
With respect to sectors, a few years ago manufacturing concerns seemed to be coming to us in substantial numbers. Retailers, and particularly the smaller ones, predictably arrive at our doorstep after the Christmas season. Certainly there is no secret about hospitals and the healthcare industry generally having fallen upon hard times in recent years. I suspect, in addition, that New Jersey's pharmaceutical industry is going to have problems in the near future. Merck has been able to handle the Vioxx litigation, but there are middle-tier pharmaceutical companies that do not possess the resources of Merck to address the pressure of a class action lawsuit.
Marks: We have represented all of the players in the Chapter 11 arena - debtors, creditors' committees, chapter 11 and liquidating trustees. And we have certainly seen a variety of industries and industry sectors over the years. In the late 1980s and early 1990s it was real estate. After that it was retail. Today we see a lot of hospitals and health care businesses, and most recently we are seeing companies that are victims of the downturn in the residential real estate and home building industries.
Several of the big subprime mortgage lenders have filed in Delaware, and eventually that will have an impact in New Jersey. Many homeowners will unfortunately default and see their homes go into foreclosure. Consumer spending will decline as a result, which will put pressure on the retail sector, which in turn will purchase less from their suppliers. This ripple effect will continue throughout the economy. The ultimate impact of the subprime mess is yet to be seen, but barring some significant legislative relief for homeowners, it's going to be a rocky road.
Bauer: Every seminar I have attended recently comments on the coming wave of bankruptcies. It has not happened yet because consumer spending has been holding its own, but I think the subprime mortgage fallout is going to change that. In addition, there are a lot of distressed companies which have not declared bankruptcy but rather have gone to private equity or hedge funds for restructuring help. That usually results in the company taking on considerable debt, and at some point that debt must be paid. When that point is reached, I suspect we are going to be looking at a great deal of Chapter 11 work.
Editor: Please tell us about the services that the group provides to its clients.
Bauer: One of my current projects is a Corporate Bankruptcy 101 seminar designed to alert in-house counsel to the things they need to be aware of and to help them address the issues without necessarily having to seek out specialized law firm expertise. For example, what is a creditors' committee? How does my company get to sit on such a committee? What are the benefits?
Another issue facing corporate counsel concerns reclamations. If the company has shipped goods to the debtor within 20 days of the bankruptcy filing, what should in-house counsel do on receiving notice of a Chapter 11? How does the company reclaim its goods?
There are many rather simple issues - at least simple to those of us who practice in this area - that need to be demystified for in-house counsel. Not every issue must be outsourced to outside counsel. The seminar we will be offering to in-house counsel will address these issues.
Marks: Following from Mo's thought, Trustees and DIP's suing to recover pre-petition preferences has become something of a cottage industry in Chapter 11. We have educated some of our clients to the point that in-house counsel can now analyze the usual defenses and negotiate a settlement without the need to call us in. If the matter can't be resolved quickly, then we assist the client in the defense of the action. Maintaining open lines of communication with the client, and building confidence and trust by not insisting on handling every aspect of a given matter, is a way in which to build client loyalty. Giving up some rather short-term gains is, in my view, a sure way to build very worthwhile long term relationships.
Editor: Are there any particular pitfalls that we should be calling to the attention of our corporate readership in this area?
Bauer: From a creditor's perspective, corporate counsel should work closely with their accounts receivable people and their salespeople to determine which among the company's customers are credit risks. It is important to have some sense of what the company is willing to lose if a particular customer goes into bankruptcy. An active account management is the only way to obtain that information.
From a debtor's perspective, one of the biggest pitfalls is a lack of accounting controls. It is crucial to attend to the company's accounting statements and to closely analyze margins and profits. Very often we will see prospective debtors with cash on hand but no cash profit actually being generated, a liquidity crisis in the making. If they are willing to negotiate a workout with their creditors, at that point something is usually salvageable. If they deny the need for a restructuring or ignore the financial crisis signals - and usually this is the consequence of having at least some money on hand to solve some of the immediate problems - invariably they are going to return in a few months looking for Chapter 11 relief. Smaller companies are notorious for waiting too long to seek help.
Editor: Where would you like to see this practice in five years?
Marks: I would like us to increase our presence in New York. As I said earlier, with the expansion of the firm's bankruptcy practice this past year, we now are a top tier New Jersey Chapter 11 firm. We believe we can take advantage of that reputation in the Southern and Eastern Districts. Not only are we successful, but we deliver our services at a reasonable price. We believe it is important to get the word out to corporate counsel. The cost of Chapter 11 today has become tremendously high. Chapter 11 lawyers run the risk of killing the golden goose. It needn't be that way. In-house counsel should know that there is an alternative. They can receive quality representation at a reasonable cost. Norris McLaughlin reflects a very different law firm culture.
Bauer: In addition to New York, I see opportunities for us to increase our presence in Pennsylvania and Delaware. Some of the leading firms in New Jersey have followed their clients to these markets, and I believe there is room for us to bring our expertise, in representing Chapter 11 debtors in particular, to these markets as well.