With an economy hard-hit by the recession, Oregon’s financial lawyers are burning the midnight oil
Published in 2009 Oregon Super Lawyers magazine
By Jennifer Margulis on November 12, 2009
The economic news in Oregon was so grim this summer that local economists and business leaders actually celebrated when the June unemployment rates dropped to the third highest in the nation. For several months prior, Oregon was clocking in with the second highest, after Michigan.
A large part of Oregon’s economy is based on durable-goods manufacturing—aircraft parts, trucks and RVs—which has taken a huge hit from outsourcing and the recession. In addition, being a nice place to live, Oregon has an unusually high number of recent college grads and young people who move to the state without securing employment and are looking to get into the work force. Pundits theorize that the higher-than-average number of job seekers pushes the unemployment rate up.
There have also been high-tech company closures, like Hynix, a Korean-owned computer semiconductor company that closed its plant in Eugene. Lumber mill closures have led to scores of layoffs, and massive restructurings from large Oregon corporations like Nike—which let 1,750 employees go nationwide, including 500 at its Beaverton-based headquarters in May—have put the state into an economic tailspin.
The sour economy, of course, has kept financial lawyers busy—particularly those who focus on insolvency and bankruptcy. While some firms have frozen hiring, bankruptcy firms report having more work than they can handle. We asked three Portland-based lawyers about their practices, their most interesting cases, and what’s in store for Oregon’s economic future. Though the lawyers represent very different clients, they have one thing in common: an ability to understand several areas of the law, as well as business and economics.
“It’s the broadest of all specialties,” says bankruptcy and commercial litigation attorney Albert Kennedy. “In insolvency, you’re doing corporate law, real estate law, secured transactions and commercial transactions. … It’s fascinating because of the level of involvement that you get as a lawyer doing more than simply lawyering.”
Albert Kennedy: Looking at the big picture
Al Kennedy can go for weeks without getting into his car. He lives in the historic Pearl District in Portland and walks the mile to his office on Southwest Fifth Avenue every morning. He likes to downhill ski and bike-ride, but the way things have been lately, walking to and from work is his only outdoor time.
“Our practice is busier now than it’s ever been, including the late ’80s and early ’90s,” Kennedy says at an early-morning interview. The blue eyes behind his wire-rim glasses look a bit tired, but he talks with the intensity of a man who cares about his job. For 24 years he’s been a partner at Tonkon Torp, a general business firm with about 80 lawyers and the only remaining full-service business firm based solely in Oregon. Kennedy, 58, wearing a tweed jacket over a blue button-down shirt, sits in Tonkon Torp’s offices on the 16th floor of Pioneer Tower, with its expansive view of Portland’s economically troubled skyline.
The bulk of his clients are corporations unable to pay debt.
“I categorize our practice as insolvency, not bankruptcy,” Kennedy says. “My group gets involved with distressed businesses that don’t have enough money to pay obligations as they come due—that may or may not ultimately involve a Chapter 11 proceeding. Quite often it does not. It involves out-of-court negotiations and restructurings with the parties and interests, which almost always includes a bank, other key creditors, maybe landlords.”
Kennedy tries to see the bigger picture. “The goal is always to maximize value for all constituents,” he says. “So when you represent a company in an insolvency situation, you are acting not just for the ownership—although the ownership is certainly a constituency and it’s the people who hire you—but the object is to maximize the enterprise value for the benefit of creditors, owners, everyone.”
Sometimes the best option is to sell the business. That’s what happened last year when Kennedy was representing Columbia Aircraft Manufacturing, based in Bend.
“Columbia made four-seater composite aircraft … described as the Porsche of aircraft because they were the fastest and had the best range of any four-seater in the world,” Kennedy says. “We used Chapter 11 to sell the company to Cessna Aircraft, who bought it in late 2007 … We were able to generate sufficient money to pay the secured creditors and to generate a significant distribution to unsecured creditors.”
The sale was a success for all interested parties, but Kennedy says the solution didn’t have his client jumping for joy: “Every once in a while you make people happy, but usually you are in a position where saving them from more unhappiness is the goal,” he says.
These days, the case that’s keeping Kennedy at the office long hours involves his client Sunwest Management Inc., which oversees approximately 240 senior-living facilities throughout the United States, each organized as a separate limited liability corporation. The many entities and varying interest groups within them make the case very complicated.
“The goal is to keep the enterprise going so that it can continue to generate revenue, maintain jobs, pay creditors and ultimately make distributions to owners. If you can do that, that’s almost always the greatest value for the greatest number. The challenge in Sunwest is to continue to do that and avoid fire sales and foreclosure sales for all these individual facilities,” Kennedy says. “If we can do that, it can have significant value that will be available to ultimately distribute to investors, many of whom have put their life’s savings into this company.”
Kennedy admits it’s a daunting task: “We’re cautiously optimistic that this can be done,” he says.
Originally from Dixon, Ill., and a graduate of Vanderbilt University Law School, Kennedy has focused on insolvency since the 1980s. He believes Oregon’s reputation as a great place to live is well-deserved and thinks the economy will turn around soon. “I have little doubt that we will find the bottom [of this recession] this year,” he says, then asks pensively, “but what’s the growth going to look like after that?”
Steven Hedberg: Steering clients clear of bankruptcy
A partner at the 700-plus-lawyer firm Perkins Coie for 18 years, Steven Hedberg has put in 60-70 hours a week over the last several years, representing clients ranging from Enron to parishioners of the Catholic Archdiocese in Portland. Hedberg, 50, who has spent years handling bankruptcy cases, says the work still keeps him on his toes. “Although people think of bankruptcy as a specialized area, it’s actually a really general practice,” Hedberg says. “There are so many different issues that can come up that it makes it really challenging, and a really interesting area of law.”
Hedberg sees bankruptcy as a last resort. “It’s very expensive to go into bankruptcy, and the first preference is almost always to try to work out a deal outside of bankruptcy.” When a company files for Chapter 11, a third-party decision maker—the bankruptcy judge—becomes an integral part of the process, and then, Hedberg says, “unintended things can happen.”
An unexpected thing—but in this case, a positive one for his client—did happen in 2003 when Hedberg was representing aircraft manufacturer Boeing after Hawaiian Airlines, which owed Boeing a large sum of money, filed for bankruptcy in 2003. Before the Chapter 11 filing, Hawaiian Airlines’ board of directors transferred a large sum of money to shareholders in an unusual move that led Hedberg and his team to file a lawsuit on behalf of Boeing, asking the bankruptcy judge to take control of the company away from the board and appoint a trustee to oversee the business.
“The court agreed, after a trial, that the way to get the healthiest company was to have the board replaced with a trustee who was really looking out for the whole company,” Hedberg says. It was an unforeseen win. “This was a big bankruptcy case, and to replace management this early on in such a big bankruptcy case is incredibly rare,” he says. “That was a big success for Boeing in that context, and for the creditors and employees of Hawaiian Airlines.”
Hawaiian Airlines, which is still in business and operates several direct flights to Hawaii from Oregon, successfully reorganized and fully repaid creditors. “For me, it was a wonderfully satisfying opportunity to represent a client that was focused on doing the right thing for the right reasons. Plus, beating the odds was also very satisfying.”
When the Archdiocese of Portland in 2004 became the first Catholic diocese in the U.S. to file for bankruptcy, Hedberg represented parishioners who didn’t want their donations used to settle lawsuits alleging sexual abuse by priests. There were 124 parishes, consisting of 390,000 Catholics who had given donations to the largest charity in Portland in order to build parishes and support the church. Hedberg put together a deal that fully paid hundreds of millions of dollars to the claimants, but using money from such sources as trust funds and insurance.
In addition to his caseload, Hedberg serves on Perkins Coie’s firmwide management and executive committees. “It’s common to see bankruptcy lawyers in management, because we deal with economic issues all the time,” says Hedberg, an amateur art collector who sits on the board of directors of Portland Center Stage. People who choose this area of law, he says, do so “because they like to deal with thorny issues.”
With two children in college and one at home, Hedberg says family life also keeps him busy. His 12-year-old daughter runs track, swims, and plays soccer and softball. He attends as many of her activities as he can. Hedberg and his wife also attend all the theater productions at Portland Center Stage. He loves to pick up oil paintings, ceramic, glass and fabric art when he and his wife have the chance to travel, and he collects works by local artists such as oil and pastel painter Marla Baggetta.
Hedberg hopes Oregon’s economy will pick up soon and says his firm will still have plenty of work when it does. “There are always problems to resolve,” he notes with a laugh. “Companies expand too fast or have solvency issues, troubled mergers and assets sales. In good times, you deal more with equity. In bad times the equity is completely gone. … The most wonderful thing about the practice is you never know from day to day what you are going to bump into.”
Mark Wada: Banks bank on him
Corporate law attorney Mark Wada represents the banking industry, which has had more than its share of headaches lately. When the sun starts to set and he’s still at the office—which has been happening a lot lately—Wada turns on piano music by songwriter Jim Brickman to keep him going. “I like all kinds of music except rap and grunge,” says Wada, 56. A soft-spoken man of Japanese descent with a law degree from Cornell University, Wada is a partner at Farleigh Wada Witt, a Portland-based firm with 22 attorneys.
He advises banks on corporate lending for commercial projects and loans. He’s also the point person when things go wrong and banks find themselves with debtors unable to pay up. “I try to protect them from what would happen in the event of a bankruptcy,” says Wada, seated in the rotunda of the Bank of America financial building on Southwest Morrison where Farleigh Wada Witt is headquartered. “I’m involved in the deals when they go bad, and I help work out restructuring from borrowers,” he says. His clients include JPMorgan Chase, Pacific Continental Bank, Silicon Valley Bank and US Bancorp Equipment Finance.
The economic downswing in Oregon, where 80 percent of Wada’s clients are based, has resulted in myriad difficulties for banks, which are trying to stay solvent. “There is still some commercial loan-origination activity out there and even a little bit of real estate work,” Wada says, “but about half of what I do is restructuring, forbearances and loan work-outs, and some that go into bankruptcy and collection litigation.”
Wada believes the financial difficulties in Oregon and the rest of the nation are dragging on because lines of credit have dried up and people’s net worth has dropped along with the value of their homes and other real estate. The infamous downfall of Seattle-based bank Washington Mutual was part of a chain reaction that brought down a number of banks. “After that, people couldn’t get credit, they couldn’t refinance their way out of problems, and the banks have been getting more and more problem loans and becoming more conservative in how they deal with their problem loans. Now what you’re seeing is that revenues at companies [owing money to the banks] are down. All of these things coming together at the same time has made it very difficult here in Oregon.”
Some of Wada’s clients are in financial quagmires similar to those his clients faced during the economic downturn in the 1980s. “I represented commercial lenders who financed condominium developments and got them back half-finished because it made no sense for the developer to finish them,” he says. “They would never be able to sell the condominiums at a price that would pay off the loan … then they are coming to me and saying, ‘What do we do here?’”
Wada grew up in Eastern Oregon, pitching in since elementary school to help his father grow potatoes, corn, sugar beets, wheat and other crops. He recalls, “I’ve had every crummy job on a farm,” including irrigating vegetables through aluminum siphon tubes, planting, harvesting, truck driving and weeding.
He hasn’t forgotten those humble beginnings. Wada won the President’s Public Service Award from the Oregon State Bar in 2007, mainly for his service to the Oregon Law Foundation, which awards grants primarily to fund legal services to the poor, and other law-related organizations. He is also a board member of the Campaign for Equal Justice, a nonprofit that raises money for legal services to the poor and one of the most successful such fundraising campaigns in the country.
Wada is also on the board of the Children’s Healing Art Project, which provides art programs for kids in the children’s hospitals in Portland. Wada and his wife, Robin, have two teenage daughters, one of whom is wheelchair-bound with cerebral palsy.
Wada speaks in sober terms about the hard financial times. “I never thought I would see it be as bad as it got in the ’80s,” he says. “It’s sad to see, it really is. While we are busy at our firm … you just hate to see what’s happening out there, not just to the commercial developers and the people with sub-prime mortgages, but everybody else in between.
“It’s very difficult out there for a lot of companies; it’s difficult on individuals trying to make their house payments. … I just hope that we come out of this sooner than we have in some past downturns. It always seems to me that in Oregon we hit bottom later than the rest of the country and we come out later than the rest of the country.”
Though his schedule is crammed, Wada insists on leaving room for his charity work. “I still try to make the time, but I’ve had to miss a meeting or two in the past few months. I am pretty committed to these organizations, and I want to stay involved as long as I can make a positive contribution. It’s part of adding some balance to my life.”
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