Law firms await to capitalize on rise in bankruptcy cases.

When it comes to fluctuations in the economy, attorneys aren't quite the canaries in the coal mine, but changes in the legal industry nonetheless provide an early indication.

During the onset of a boom, law firms tend to expand their mergers and acquisitions practices because those transactions dominate during times when capital is readily accessible.

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And when the economy takes a turn south and capital becomes more scarce--as it is now--law firms adjust by growing their bankruptcies practices in response to the inevitable rise in that activity.

With the widespread credit crunch resulting from rising numbers of bad subprime loans, several Los Angeles-based bankruptcy firms are indeed reporting an increased number of bankruptcy cases--some directly and some indirectly related to the crisis.

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But with it still unclear how far the economic pain will spread, they're not quite ready bulk up their practices.

"Our firm has been very busy the past several months. And I expect it to be busier starting as soon as next week. (But) we don't want to staff up for a temporary bump in business," said Kenneth Klee, a name partner at the bankruptcy boutique Klee Tuchin Bogdanoff & Stern LLP.

In the first six months of the year, there was almost a 90 percent increase to 5,671 in the number of personal and corporate bankruptcies filed or reopened in the Los Angeles area, according to statistics released by the U.S. Bankruptcy Court.

But while overall bankruptcies were up through June, there was actually a nearly 14 percent decline in the number of corporate bankruptcies in Los Angeles. For that period there were 50 companies that filed for bankruptcy.

However, declines in corporate bankruptcies filed in Los Angeles doesn't provide a true measure of the business of local bankruptcy lawyers because many practice in U.S. Bankruptcy courts around the country, especially Delaware, where a number of companies are incorporated

Los Angeles is home to more than 200 lawyers at boutique firms and large national firms who practice exclusively in the area of corporate bankruptcies, but the city's informal bankruptcy bar can expand dramatically once lawyers who devote only a portion of their practice to bankruptcy matters and lawyers who focus on personal bankruptcies are factored in.

Historically, when business related to corporate bankruptcies and restructuring increases, national law firms respond by steering their readily available crop of young associates, which can total in the hundreds, to bankruptcy matters while also pulling more senior transactional lawyers into the practice.

Usually as bankruptcy work increases, corporate work declines, which means there are a lot of lawyers with free time on their hand to handle the increased bankruptcy work load.

The LOs Angeles office of Milbank Tweed Hadley & McCloy LLP is currently involved in the bankruptcy proceedings surrounding American Home Mortgage Investment Corp., a mortgage company which filed for bankruptcy last month.

Robert Moore, a Los Angeles-based bankruptcy partner, said he also recently represented the buyer of the bankrupt chain of stores, Tweeter Home Entertain merit Group Inc. Moore contends that home electronics is one of those industries that are immediately impacted by downturns in the economy.

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"We have many engagements ongoing that are specifically related to the mortgage and construction industries," Moore said, "and we have some engagements that relate to these 'tip of the icebergs' industries."

All cylinders

However, Moore said, there has been no slacking in the general corporate work, and so far the bankruptcy group has been able to handie the increased business without bulking up.

"Within a firm like Milbank, which is a full service finn," he said, "if restructuring work is on the rise we tend to grow the group and we can bring in the mergers and acquisitions group to help. We will expand our group to meet demand."

Bankruptcy boutique firms, who might have no more than 40 attorneys, have no such ready pool of internal recruits and they usually respond by hiring more lawyers to meet the increased business demands.

But Frank Merola, a partner at the Century City bankruptcy boutique Stutman Treister & Glatt PC, said that even if his firm saw a sustained up-tick in activity it would not be adding personnel like some others.

"We personally do not bulk-up. In slow bankruptcy market we take more calls and when bankruptcies increase we are more selective," he said.