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Lessons Learned: Citi Loaned Cash to Five Law Firms Before Bankruptcies

Posted Apr 30, 2012 6:54 AM CDT
By Debra Cassens Weiss

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At one time, banks encouraged law firms to increase their debt, partly in hopes of winning wealth management services from the lawyers who worked for the firms.

The banks are learning that law firm loans are no longer as safe as believed, the Wall Street Journal (sub. req.) reports. “An industry that has historically been perceived as a low credit risk, attractive to banks, is starting to see cracks in that facade,” the story says. Now firms that looked like good risks in a good economy are suffering in the economic downturn.

As a result, banks are becoming more exacting. Many are looking at financial information, performance and even partner agreements, the story says. Loan provisions are also more likely to be enforced, including a requirement that uncollected client bills serving as collateral be no more than three or four months old.

The story cites Dewey & LeBoeuf’s problems as an example. It opened new offices around the world and acquired big-name partners with income guarantees that had to be paid even when revenues are down. The firm has lost more than 70 partners since the beginning of the year and is contemplating a prepackaged bankruptcy. One of its lenders, Citi Private Bank, has loaned money to at least five law firms that sought bankruptcy protection: Howrey, Thelen, Heller Ehrman, Coudert Brothers and Brobeck, Phleger & Harrison.

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