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Monday, Mar 18, 2024
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Risk-Takers’ Bankruptcy Counsel Busier Than Ever

William Lobel has made a nice living helping other people out of trouble.

A bankruptcy lawyer focused on working on the debtor’s side of the table, Lobel has consulted with and represented many of Orange County’s big business names, including William Lyon, John Lusk and Carl Karcher. From Baldwin Builders to Bramalea Homes, Lobel has been involved in most of the big OC bankruptcy cases. Currently, his roster of clients includes companies such as subprime lender First Alliance Corp. and themed-restaurant Medieval Times.

In the early 1990s, Lobel had a steady line of people seeking his advice, especially during the real estate downturn that felled so many homebuilders and developers. Even in today’s booming economy and the hot real estate market, business remains brisk, and that will continue unabated for the foreseeable future, he predicts.

Lobel has taken advantage of the diversification of OC’s economy, expanding his practice to handle more finance and technology bankruptcies and reorganizations. To be sure, the county’s burgeoning technology companies are a steady source of business, given the industry’s fast pace of change.

Now Lobel is taking his name off of the Lobel & Opera LLP door and becoming a smaller cog in a bigger legal machine, Irell & Manella LLP. He recently sat down in his Newport Beach offices with Nidal M. Ibrahim to discuss his career and the lessons gleaned from the battles he has undertaken on behalf of clients.

In a wide-ranging interview, Lobel talked about the OC economy, how he became a debtor lawyer and why he is now deciding to make a change. Among his observations are that real estate people, by nature, are narcissists and that this sector of the economy may shortly be in for another slowdown and adjustment.

Is there one constant aspect to the businesspeople that have come to see you?

Sure, they’re all risk-takers. They’ve solved their problems in life with sheer perseverance and determination. They’re the ram that hit the dam until it broke. They’ve been successful at doing that over and over again. That’s how they’ve accumulated their wealth and their business. The problem is, by the time they get to (my office), the dam didn’t break, maybe for the first time in their life, and they don’t know what to do. Which is the reason they’ll pay $525 per hour. If you’ve accumulated a lot of stuff and I say I’m going to be able to help you,but I’m going to be more expensive than anybody else,are you really going to go to someone else when it’s a desperate business situation you’re in?

Were you busier during the recession?

Yes, although we’re very busy now.

Doing what? There’s a booming economy out there.

Yeah, but you had a fundamental change in this county in the past three years called high-tech. Think about this county three to five years ago compared to now. High-tech, by its nature, is a very volatile sector. I make a widget, I get a lot of money for it and I create this big company around my widget. Then somebody creates a better, cheaper widget and all of a sudden I’m in trouble. In order to get new capital to do some research and development to make my widget better or quicker or cheaper than the other guy, I need to restructure my balance sheet because I’ve waited too long to deal with the fact that someone has a better, cheaper widget.

Bankruptcies and restructurings in the high-tech area are not governed by the state of the economy. They’re governed by the state of R & D; in technology, and it won’t stop. When I drive home,I live in Laguna Beach,I go down MacArthur and I look out to the left and I see all those joint ventures between the University of California, Irvine, and private industry. I see lots of business for me because they’re going to make better and cheaper widgets. And they’re going to cause the guy in Irvine to have to come see me.

(Also, in high-tech) you have businesses run by non-businesspeople. Almost the only thing better than having a doctor go into a business is having some computer person go into business, someone who has no idea about cash flows. Look at Premier Laser, a company that just filed. Premier Laser spent $60 million to $80 million creating wonderful products. All scientists, with no sense at all for how to get it to market or make money. They’re not the only ones.

What’s the outlook for bankruptcy law here in OC?

As this county grows, and as we go (deeper) into the tech area, the bankruptcy business here on a constant deal-flow basis is going to be busy. We have a lot of healthcare work. And there always are segments of the economy that are having trouble without regard to the rest of the economy. A year ago it was printers. For whatever reason, they had to consolidate, they were merging, they were filing bankruptcies. And we had to deal with that.

Now, I filed a case about a month ago for a company called First Alliance, a subprime lender. That industry’s in trouble. Rightly or wrongly, the public perception and the legislative perception of that industry is it needs to be regulated. When you let politicians come in and try to regulate a business, they will screw it up. So there will be business for a while in subprime.

Now, the real busy time is real estate. It’s always been that way in Southern California. I don’t think we’ll ever see a repeat of the real estate recession that we had in the early ’90s. The market has changed. You don’t have so many small independent homebuilders; they’ve been bought up by the Centexes and the Lennars. The REITs are trading below book, they’ve got some trouble, but they’re basically low leverage.

But here’s what we do see. Most of the time things start in the West and go East. The last real estate recession, started in the East, came to Texas, Phoenix and then came here. The recovery started in the East and came West. Guess what’s happening in the East right now to real estate? It’s all in trouble. Those (bankruptcy) guys back there are as busy as they can be. The bankruptcy courts in Delaware can’t keep up with the work they have. At the same time, (Federal Reserve Chairman Alan) Greenspan decides he’s going to control the excesses in the (stock) market by raising interest rates. What segment of our economy is most sensitive to interest rates? Real estate. Is the trouble in the East in real estate going to come west? There are no guarantees in life, but it is more likely than not.

What about the way homebuilders and others in real estate are currently conducting their businesses?

The homebuilders are doing two things wrong, in my opinion They’re paying way too much for the dirt, and they’ll all tell you that. They’re paying a number, based on the assumption that the upward spiral of prices is going to continue.

And the second thing they should know better is they’re stocking up on (land). When you get hurt as a homebuilder is when you have a lot of inventory, so you’re highly leveraged and there’s a downturn in your market. So the things that could create a problem for the homebuilding business in Southern California, if there is something that triggers that downward spiral, are there. Now, whether you’ll have the thing that triggers the downward spiral or not remains to be seen. And you’re not going to be seeing restructurings at the Lennar level, or the (Kaufman & Broad) level or the Centex level. But you will for the smaller builders.

How did you get involved in the bankruptcy business to begin with?

I went to undergraduate school at Miami of Florida. I wanted to be a marine biologist and that meant Scripps (College) or Miami. I went to Miami and I was one of these nerdy kids in high school who got great grades and did lots of things,head of the science club and stuff. Miami at that time had only one full scholarship given by General Motors to one kid in each class. And I got it.

So I went to Miami and met someone who was a lawyer down there who lived on the water and he said, “Don’t be foolish. Don’t be a marine biologist, be a lawyer. That way you can dive when the water temperature’s what you want it to be.” And he was right. So I switched over to law, stayed at Miami to go to law school, and eventually started up with the equivalent of a Gibson Dunn & Crutcher LLP, but in Miami.

It wasn’t a bankruptcy firm, but we got involved in a bankruptcy case early and I did it and I loved it. It was a real estate case. I loved it because I’m at heart a businessman, not a lawyer. And bankruptcy is a discipline that combines business and law, more than any other discipline. So I really liked it.

I then left that big firm to go out to a little firm that represented the largest independent real estate investment trust in the country at that time (in the early ’70s). So my beginning in the bankruptcy arena involved representing a lender, this REIT that was going all over the country into bankruptcy courts and getting properties back that were in bankruptcy. In ’74 there were so many borrowers not paying that the REIT itself went bankrupt, and so I learned (the business) from the debtor side, which I liked more.

I came west in 1980. When I was in the East I developed relationships with the money-center banks,Citibank, Chase, Chemical when it existed. So when I came West I could have gone to Northern California or southern. A lawyer with money-center banks as clients can go anywhere. The money was double down here what it was in San Francisco, so I joined a firm down here.

I met a lawyer named Mark Winthrop who was at Rutan & Tucker LLP, and he wasn’t happy with the situation there and he wanted to move so he came over to join me. Then in 1986, a good friend of ours at a firm that’s no longer in existence sent a big case to Los Angeles and we said to him, “Why did you do that? Why didn’t you send to us?” He said, “Because my firm said I was not allowed to send that client to a full-service law firm because they were afraid the clients may like that firm better.”

So that caused Mark and I to begin to think and we decided the county was ready for a boutique (Chapter) 11 firm that just did 11s on the debtor side, nothing else. And so we formed what was then Lobel & Winthrop.

We created an environment where a debtor no longer had to go to LA to get a bankruptcy boutique firm that could compete with the Gibson Dunns and Latham & Watkins of the world.

Why didn’t the big firms come out and work for the creditors?

Conflict. If you represent Bank of America, you can’t represent the borrowers of Bank of America. So the big firms were the bank firms, and the little firms were the borrower firms. And so we presented what we believed to be the first opportunity in Orange County for someone who was a borrower/debtor to get the same quality representation as the creditors were getting.

Was that risky, branching out on your own to create the first debtor firm?

I’m an entrepreneur. My clients are male, type A narcissists who judge themselves by what they own, not what they are. I’m a risk taker and the reason my clients like me is because I understand, I really sincerely understand, how they got to where they are and what they’re going through.

You said your clients are narcissists. How does that play out?

It’s almost impossible to find someone successful in this business,the financial real estate realm,who isn’t a narcissist. Narcissism is what causes people to be willing to have the drive and take the risks and prioritize their lives in a way that allows them to become successful in that arena.

It may be different with the dot-coms, I don’t know. Those are younger kids that just have a knack for something and get an idea and all of a sudden they’re a billionaire. Maybe they still pay attention to their wife and family, but my guess is they don’t. I’d guess they prioritize work.

Why have you decided to sell your prac-tice and join a bigger firm?

I made a decision that I wanted to change what I do in the next six years of my life. I’m 56. I will retire at 62.

I believe firmly that you are totally responsible for what your life is, with exceptions being only illness,you get cancer, those types of things. But in terms of the way you live, and what you do and how your prioritize your time and who your friends are, you control it. I’ve tried to take control of my life.

I’ve been financially successful, I have status and reputation in the community, I have been the letterhead partner of the bankruptcy firm in the county for a long time, but it’s very stressful. Now I’m the primary originator, I’m the manager, I deal with the bank, I deal with personnel issues, I deal with client issues and it requires me to spend far more time and energy at my law practice than I want to.

How many hours do you put in?

About 60 hours a week. At 56 that’s way too many.

It’s not what we should be doing with our lives, in my opinion. So I decided to change the way my last six years will be. I looked around to see what I could do differently, I talked to a number of different law firms and finally decided that I would take this route and join a firm called Irell & Manella.

I chose them in part because they are the lawyer’s law firm. They’re very elite. A good number of their lawyers come from Harvard, Yale, Stanford and Chicago.

The fact that they draw from the top schools, that was attractive to you?

Yes, for the following reasons. I am an originator. I’ve always been able to originate work. But there’s two parts to origination. One is getting the client. The other is doing the work and servicing the client in a way that the client is happy, pays the bill and comes back again. The reason I’m doing what I’m doing is that I have the ability to generate a lot of work that has nothing to do with bankruptcy.

I’ve never been able to use that gift here. If I go to lunch with somebody and they like me, and they want to give me some work, what are the odds that they happen to have something for a Chapter 11 boutique at the moment? Not much.

So I looked for a firm that I felt most comfortable with giving me the quality of lawyer that I needed so when I bring in the work and turn it over to the securities guy, the tax guy or the real estate guy, that the work will be done, done well, the client will pay and the client will come back.

So you’re going to go out, get business and then turn around and give it to somebody else to execute.

Right. Except that it can’t work, for this reason: You generate work because of what you do for the clients you represent. I try to go to Europe. I go a lot. I go to a Europe for a month, and when I come back my origination is down. I don’t know how (the clients) know I’m not here, but they do.

You get work in the marketplace when you’re out there doing things. So there’s a minimum number of hours, probably 1,200 to 1,500 hours billable a year, you must spend in order to effectively originate.

I want to work fewer hours, I want to become more of a legal adviser than a lawyer within a law firm setting. But I want to be able to put clients together where there’s synergy. I want to be able to problem solve.

One of the reasons I’ve been successful as a lawyer is I never look at a client as having a legal issue. The client has a problem. The solution may be legal, it may be business, usually it’s both. But I never lose focus on the fact that the client has a problem. Whatever the solution to that problem is, we find it.

I just left a meeting, for a Chapter 11 debtor I have, and the meeting had to do all with an entity that I found that’s going to come in and help solve his problems by injecting money and other things. Not what a lawyer normally does, but that’s what I did.

No finder’s fee or anything?

No. I find it as part of what I do for my client.

How many hours do you bill?

Over here I’m probably doing 1,500 to 1,800 per year. But it’s not about my billable hours. My money is not about my hours, it’s about everyone else’s hours (referring to other lawyers in his firm). When I leave here at 7 at night and there’s four or five lawyers still working I say, “God bless America.” (Laughs.) They’re making me money. I mean, what a great world.

I need to bring in that work. Now here’s what’s going to happen. This guy’s a developer. If I solve his business problem, he goes to the next meeting of developers and talks about how good I am.

What qualities have allowed you to succeed as a debtor lawyer?

I’m very good at putting myself in the other guy’s shoes. Many of my close friends are bankers, especially at Wells and BofA. I know exactly where they’re coming from. I know what their day is like.

When the bank says, “I want this or I want that,” I say to the bankers, “Put yourself in my shoes, here’s my situation. Pretend you just heard me (as my banker) say what you just said.” So I force them into a situation where they really have to think about what’s going on from my side, and not just be banker, banker and say “No. No. No.” You get a lot of posturing among the businesspeople, but the lawyers, we all know each other. We basically just have to deal with it. Because I can say to the bank lawyer, “Where are your hot spots? What buttons do you care about in this one as opposed to the other one, and how do we get there?”

But can you do it with the businesspeople sitting there?

No. You have to go away.

The other thing is I think I use Chapter 11 as a tool to keep people out of an 11 better than most. The problem is that the banker takes the attitude that he loaned the money, he’s entitled to be paid back and if he isn’t paid back, he’s entitled to take the property. Morally, that’s probably right. (Laughs.) But in our world, that’s not right, and it isn’t right because Congress decided that there’s a social benefit to retaining the good will or enterprise value of a business,keeping jobs. Things are worth more together from a societal standpoint. So the bankruptcy code is really an attempt by Congress to decide how far they’re going to allow a debtor to go infringing on the rights of others to achieve a social good. That’s what it’s all about.

We have a set of rules that are in many ways, debtor-oriented. When I have a meeting with a banker, I insist they bring a bankruptcy lawyer, not just a regular lawyer. And the first thing I say at a meeting is, “We do not want a Chapter 11, and we will give you in a settlement more than you will ever get in an 11. Let me tell you what I think happens in an 11 ” and I lay it all out. And I say, “Before we talk further, do me a favor, go out with your lawyer and let him or her tell you whether what I said is right. And if you don’t agree with me that that’s what’s going to happen, let’s talk about that first. Because if we come to some sort of an agreement within certain risk parameters of what’s going to happen in the 11, then that will be the thing we start with and I will give you more than that.” And that has worked for me.

Because what happens to them in an 11 is far different than just giving them the collateral back. But it’s really just getting them on the same page. If you and I understand each other’s beliefs and assumptions, about any subject, we can have a very clear conversation that doesn’t get mixed up or confused. Whereas if we don’t have shared beliefs and assumptions and we don’t communicate them, we’ll have the kind of communication that hurts a lot of people.

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