Discussion of Firms and Life in SF/SV

[Tyrone Slothrop]

Not Tower Snow, unless you mean that he took lots of work with him when he left. The debt came under the new regime, apparently.

Brobeckonomics

Susan Beck
The American Lawyer
04-01-2003


While Brobeck, Phleger & Harrison's tangled affairs continue to be sorted out, many have assumed that its fatal attraction to debt triggered its downfall, and have pointed the finger at former chairman Tower Snow, Jr. But some internal documents provided to The American Lawyer show that Brobeck's borrowing increased dramatically under chairman Richard Odom, not under Snow. And what appeared to have doomed Brobeck was not so much its level of debt, but its sinking revenues.

At the end of 2001, when Snow stepped down as chairman, Brobeck was not saddled with massive debt. According to a memo to partners from Odom and managing partner Richard Parker dated Jan. 11, 2002, Brobeck had $43 million in term debt at the end of 2001. It also had an additional $12.8 million in letters of credit. (Letters of credit are contingent obligations that are often required by a landlord as a form of security.)

That level of debt, on a per-partner basis, was not extraordinary, according to confidential surveys done by Citibank, N.A. According to one survey, Brobeck's debt (including letters of credit) at the end of 2001 was $277,000 per equity partner. The average for so-called peer group firms in Silicon Valley (which weren't identified) was $272,000 per equity partner. And for a collection of unidentified New York firms, the number was $409,000.

Brobeck substantially increased its borrowing after Odom and Parker took over, their memo shows. Near the start of 2002 Brobeck signed a $40 million term loan to reimburse partners for capital expenses incurred the previous year. That included $11.8 million for tenant improvements to the new building in East Palo Alto, Calif., $9.9 million for San Francisco office renovations, and $9.4 million for technology improvements.

Snow's management team had funded these 2001 costs out of revenue, not debt, according to the memo. Odom and Parker decided to give partners the cash back for those expenses by borrowing the money. (The firm had followed that practice in some prior years, too.) The new $40 million loan almost doubled the firm's term debt, kicking it up to $83 million. Odom, now a partner with Philadelphia-based Morgan, Lewis & Bockius, did not return a call.

The memo also outlines partners' personal liability obligations and provides a page for them to sign to consent to that liability. (Since Brobeck was a limited liability partnership, the bank would need consent.) Average liability could be as much as $324,000 per partner in 2002, the memo says. By the end of the year, the firm owed an additional $10 million for revolving credit, bringing total debt up to $92 million.

As 2002 progressed, Brobeck fell woefully short of its revenue and profit projections. At the start of the year, the firm budgeted for revenue of $439 million, but by year's end it brought in only $352 million. Income dropped even more sharply. It had projected income of $159 million, but at the end of 2002 Brobeck could squeeze out only $87.5 million, more than 40 percent below its original projection.

The decline was likely due in part to the exodus of Snow and the 54 lawyers who followed him to Clifford Chance. But more significantly, billable hours for the remaining lawyers had plummeted. Brobeck had budgeted for 1,844 hours for each attorney in 2002. By September, the firm had downgraded its year-end projection to 1,519 hours, according to an internal document. It's not clear where the actual year-end number landed.

Citibank knew Brobeck needed help. Near the end of last year, bank officials started renegotiating Brobeck's debt, reducing its obligation to $56 million. That was accomplished in large part by Brobeck taking $26 million of the year's undistributed income that would normally have gone to partners and giving it to the bank.

Citibank was apparently as shocked as others to learn that Brobeck planned to dissolve. According to Stephen Snyder, the former Brobeck chairman who heads the firm's liquidation committee, bank officials weren't expecting Odom's stunning January 30 announcement. "They've said they were surprised," he says. That led to a "pretty tense" relationship between the firm and its lender in the following weeks, Snyder says. The bank declined to comment.

Snyder -- who has worked at Brobeck for his entire 31-year legal career and came out of semiretirement to wind up the firm's affairs -- faces an enormously difficult and heartbreaking task. He's one of only four partners who has committed to trying to tie up the loose ends. In early March they were focusing on collecting bills, liquidating assets, and paying debt. Says Snyder: "We're trying to keep our heads above water."