Richard DiamondDanning, Gill, Diamond & Kollitz, LLP
Sarah: Can you give us just a very brief overview on what bankruptcy attorneys do and what your firm does in particular?
Mr. Diamond: Bankruptcy attorneys represent parties that are involved in either insolvencies or troubled companies representing all different parties and are trying to arrive at solutions that either maximize the return for creditors or permit a company to restructure or both. Those are not inconsistent goals. My firm is a bankruptcy boutique, meaning that we represent parties in insolvencies, reorganizations, and debtor/creditor situations. The firm represents all different kinds of parties. We represent debtors, creditors, creditor committees, buyers and acquirers, and we also serve as bankruptcy trustees and represent bankruptcy trustees and other fiduciaries in bankruptcy cases. We represent parties not only in formal bankruptcy cases but also in out of court negotiations.
Sarah: How often to do you go to court?
Mr. Diamond: I’m in court probably three or four days a month. Maybe more than that. I know that most of the associates in our firm are in court probably several times a week.
Sarah: When you go to trial, is it more trial work or transactional work in general?
Mr. Diamond: It’s somewhere in between. One of the interesting things about being a bankruptcy lawyer is that you’re involved both in the business aspects and documentation of business deals. In bankruptcy cases, either through trials or in hearings, transactions or procedural steps in a bankruptcy need to get approved by a judge. So not all of it is an evidentiary hearing where you are putting on witnesses and presenting evidence. There is a lot of law and motion work in a bankruptcy case.
Kyle: Why does bankruptcy have its own court?
Mr. Diamond: It is a highly specialized field and constitutionally it’s a proceeding that is to be governed by the federal courts. The history of the development of a specialized bankruptcy court is that the bankruptcy act created jurisdiction in the federal district court over bankruptcy cases, and the district courts developed a practice of referring the cases to what were then called bankruptcy referees. The practice became increasingly busy and specialized, and in 1978 Congress created a separate court. The original law made it a completely separate court but as the result of a 1982 Supreme Court decision, it became a branch of the district court and that’s still what it is today.
Sarah: For you as an attorney, does having a separate bankruptcy branch make matters easier to solve?
Mr. Diamond: Certainly, because you’re dealing with judges who are familiar with the legal framework and the process and the specific nuances of the bankruptcy code. Whereas if you didn’t have a specialized court the district court judges would have to become more intimately familiar with each of those areas of specialty as well as all of the other kinds of things that they handle. So yes, it makes it infinitely easier to reach results.
Sarah: Have the bankruptcy laws changed a lot since there has been that separate division of bankruptcy courts?
Mr. Diamond: The last major rewrite of the entire bankruptcy code was in 1978. There have been several amendments that have made some significant changes to the law, particularly with respect to individual consumers but also in business cases. There were changes in 1984 and 1994 and some additional changes along the way, but the major rewrites or changes since 1978 have been the 2005 amendments.
Kyle: Switching over to current times, has your firm benefitted from the bad economy?
Mr. Diamond: The economy has had really two effects on our firm. One, the consumer trustee filings have increased as a result of the economy, the collapse of the residential real estate market and the precipitous rise in unemployment. You see a lot of people with real estate that is under water. You see a lot of people without jobs and that’s increased the volume of that practice. From a bankruptcy firm’s business standpoint, while we are a lot busier under the current circumstances, it is not an area where we are making a lot more money because of the way the trustees get compensated and the way that lawyers end up representing trustees in cases. That kind of work, while it’s keeping a certain segment of our firm busy it’s not generating huge profits. The commercial bankruptcies are also up and my firm is busier than it’s been in the past, or at least the recent past, in connection with business bankruptcies, primarily because of the declines in the commercial real estate market. We are involved in a number of Chapter 11s that that relate to the commercial real estate business.
Sarah: So the way bankruptcy attorneys commonly get paid is through the assets of the companies that are filing bankruptcy?
Mr. Diamond: It depends on what party you represent but if you represent the debtor in a bankruptcy or a court appointed fiduciary or a creditors committee, then generally the answer is yes. You are getting paid from the assets that are administered in the bankruptcy in one sense or another. A Chapter 11 the bankruptcy estate, based on fee applications and fee orders, bears those costs. If you’re representing an individual creditor or a secured creditor in particular, or if you’re representing a buyer of the assets of a bankruptcy then you’re getting paid by the creditor or the buyer, not from the assets of the bankruptcy estate. Most of our work tends to be for work done for the bankruptcy estate as opposed to individual creditors, although we do represent some individual creditors or buyers. But most of our works is representing debtors in possession, trustees, or creditors committees.
Sarah: For debtors that want to restructure, how do you go about restructuring these companies and maintaining a positive reputation? How do they commonly pay for the work you’ve done?
Mr. Diamond: When you’re representing a debtor in a restructuring, one of the things that you as a bankruptcy lawyer have to focus on is preserving the value of the going concern of the business. A major reason to undergo a restructuring is to preserve for the benefit of all of the interested parties that value above the liquidation value of the asset. That is inherent in the goodwill and the going concern. That involves developing a public relations strategy. It involves communicating to customers, creditors, and the public generally. This allows the company to continue to provide or improve the services or products it’s selling. So that is part of how a restructuring is approached.
Sarah: What are common reasons your clients are filing for bankruptcy? What is the common reaction of clients?
Mr. Diamond: There are a lot of reasons that companies find themselves in the need of a restructuring. A lot of companies in the last couple decades, particularly commercial real estate developers or operators, had a business model that anticipated the need to refinance loans, debts, at regular intervals and a number of them have ended up in a bankruptcy restructuring. This is because capital and the ability to refinance ceased to exist, is hard or excessively expensive to come by. Beyond that, the other usual reasons are overexpansion, companies that have grown too fast and cannot retrench in order to meet the market’s shrinking, and if there are management deficiencies, or bad management. Those tend to be the major issues that you see, that bring clients to a bankruptcy.
Kyle: Would you say many businesses are able to successfully recover from bankruptcy?
Mr. Diamond: Depends on what the problem is that brought them into bankruptcy. Historically the success rate in restructurings has been relatively low. If the problem is more a restructuring of a balance sheet, so the company is operating okay but needs to restructure its debt, a bankruptcy can be a very successful, powerful tool for that. If the problem is more systemic and requires a revamping of the companies business structure or management operations, a bankruptcy is a legal process. Other than providing some breathing time, its not going to allow a company to be profitable where its business is simply not profitable. It is going to allow it to become leaner, to shrink if that’s what’s necessary. It’s going to allow it some breathing space to allow it to accomplish a business turn around if there is one that can be accomplished. What’s necessary is that creditors be required to wait a little time while that can happen. It’s also a mechanism that if a restructuring is not possible, provides a way to try and sell the assets in an orderly fashion rather that a fire sale proceeding and get the best value for them. So even when you look at success rate of bankruptcies in terms of whether the company emerged from a bankruptcy as a going concern, you have to measure the bankruptcy success in terms of whether creditors got the best return that they could have, and the assets were transferred in an orderly way that brought the highest price to a new buyer.
Kyle: How long does it usually take for a business to recover?
Mr. Diamond: A typical Chapter 11 runs one year or longer. If it’s not a sale, and if it’s a restructuring, the term will typically take a year or longer.
Sarah: Could you briefly describe your work with hospitals and the health care industry?
Mr. Diamond: I’ve been involved in a number of cases involving both hospitals and health plans, primarily HMOs. I will tell you about two hospital cases.
I represented a creditor’s committee in a hospital in Riverside. Within the month prior to when the bankruptcy case was filed, the licensing authorities had suspended the hospital’s license. There literally were just a handful of patients remaining and, obviously, the hospital was in serious trouble. Through the process of a bankruptcy, the accreditations were restored and through a change of management, the hospital changed its business plan. The hospital replaced existing management with a team that had experience in turning around hospitals. The new team understood how to access and implement profitable strategies in terms of what patient groups to pursue, as well as how to restructure its emergency room and its admission process. Eventually, over a period of a couple years, the hospital confirmed a bankruptcy reorganization plan which paid creditors in full. I represented the creditor’s committee and the committee worked very cooperatively with the management. The committee actually requested, and the board agreed, to allow the committee to attend interviews with potential new management and to provide input as to the selection of the new management. The creditors worked very closely with the hospital, negotiated an acceptable reorganization plan, and a payout period. As the hospital became more profitable, the creditors got paid faster. It resulted in a very successful return for creditors to be paid in full, the preservation of the jobs of the hospital, and from the community’s standpoint, the preservation of the hospital in an area that would have been underserved had this hospital gone out of existence.
In another very different example, I was appointed as a Chapter 7 Trustee in a hospital case in Orange County after a very short, very unsuccessful Chapter 11. When I was appointed, the hospital had essentially no money. It had a payroll due the following Friday of some six figures, less than $10,000 in the bank, and twenty sub-acute patients on life support systems. In that case, what I did was initially negotiate a loan from a potential buyer as a bridge step to see if a sale could be worked out and that enabled me to care for the patients and arrange for a close down plan. The sale did not occur and I closed the hospital. I conducted a sale of the equipment. One of the problems was that there had been a transfer of the real estate to companies controlled by the principals in the year prior to the filing of the bankruptcy. I brought litigation to recover the real estate, which was settled and that formed the basis for a distribution, to creditors, all of which occurred in the bankruptcy court. This formed a basis for a payment of some cents on the dollars for the creditors. That was an example of the way in which a specialized bankruptcy court could administer a sale that generated as much as could be generated from the equipment and permitted the consolidated handling of the litigation that was necessary to recover other assets in a single forum and a focused way.
Kyle: In regards to the first case, the restructuring case, you said the creditors were paid in full. Does that mean they were paid in full before the restructuring or is that a plan that says the hospital will repay the creditors after the hospital makes a profit?
Mr. Diamond: It was a plan that was approved after the restructuring. It was after the business had reorganized itself in terms of new management, operation of the emergency room, and other forms of an operational reorganization. The process in a bankruptcy is that the debtor or, in some circumstances other parties, can file a plan of reorganization, which lays out and becomes an enforceable agreement as to how the debts of the company are going to be paid. This one provided a certain amount of payment as a minimum on a going forward basis following its approval by the court. As the hospital became profitable, the plan provided for an increased payment out of the increased profits.
Kyle: Does your firm struggle to find business when the economy is doing well?
Mr. Diamond: That is a more difficult question. The answer is not necessarily because some of the other causes for clients to file for bankruptcy restructurings exist all the time. In fact, under certain economic conditions, they are more prevalent, and companies tend to over-expand in a rising market. In a market where funds from lending sources are readily available, you get a rise in people who get in over their head, both in terms of management that is not capable and in terms of overexpansion issues. The time that is slow for bankruptcy lawyers, I would describe as a very stable economy that is not expanding and has consistent interest rates, in which everyone is doing well. But that has not happened in a business cycle for as long as I can remember.
Kyle: How do you maintain a consistent client list?
Mr. Diamond: We receive Chapter 7 Trustee appointments, which are a source of consistent clients, but they are random. The Chapter 7 Trustee appointments are simply off a random schedule of cases that get filed. The real source of business for bankruptcy lawyers, not on the creditor’s side, but debtors, creditors committee, etc, are referrals from other professionals: accountants, financial advisors, and other attorneys. Your list, unlike a litigation firm that has a client that always needs a steady stream of defense, is a network of lawyers and other professionals whose clients from time to time experience financial difficulties.
Sarah: Do you do any preventative type work? Do work with any clients on a continuous basis to ensure they do not need to file for bankruptcy?
Mr. Diamond: Not a consistent clientele like that, but we do work in conjunction with transactional lawyers in helping to advise in the structuring of a transaction as to avoid bankruptcy problems.
Kyle: Can you explain what the Chapter 7 Trustee appointment means and how you were appointed?
Mr. Diamond: When a business or individual files for Chapter 7, which is a liquidating bankruptcy, there is a division of the Department of Justice called the United States Trustee Office. They are responsible for appointing and overseeing a panel of Chapter 7 Trustees, to whom the cases are randomly assigned. That appointment process starts when a person or business files a Chapter 7 and the United States Trustee Office is the appointing office that appointments people to be Chapter 7 Trustees. The bankruptcy code permits creditors to elect a Trustee if they want to, but it most instances the appointed trustee becomes the trustee.
Kyle: Did you always know you wanted to be a bankruptcy attorney?
Mr. Diamond: Not at all. I have been doing this for about thirty-four years. When I went to law school, I did not take a bankruptcy class. I took the commercial law classes. I knew that I wanted to practice in an area that combined a business practice and, at least, some litigation courtroom work. I interviewed and got hired by this firm. I was the fifth lawyer here, and I have been here ever since.
Sarah: What kinds of characteristics and experiences does your firm look for during the hiring process?
Mr. Diamond: Our field is such a specialized field that when we are looking for people who are just coming out of school, we are not really as focused on what their experience is, but we do look at what their interest is. We look at whether they have clerked or been an intern with a bankruptcy judge. I think that would be of interest to us. If they have taken the classes in secured transaction or commercial finance or something that indicates they are interested in this field, that would be of interest to us. Generally, we are looking for people who are bright, energetic, and interested in our field. When we are hiring at a more senior level, even if we are looking for someone who is a couple years out of law school, again, someone who has clerked for a bankruptcy judge is going to be attractive to us for the same reasons. They will have acquired the experience working in the field and will be able to demonstrate an interest.
Kyle: Does your firm have a summer associate program?
Mr. Diamond: We are small enough that our program is on a year by year basis. We do not have a large, established summer program. In some years we have not hired any, but we typically hire one and, on some occasions, two summer associates.
Kyle: Did you do any legal work during your summers in law school?
Mr. Diamond: I was a summer associate every year except for the summer after my first year, and, for a period, I was a part-time clerk during school, but never for a bankruptcy firm.