When written in Chinese, the word ‘crisis’ is composed of two characters. One represents danger and the other represents opportunity.

John F. Kennedy


The Crisis at Kaye Scholer

I was sitting reviewing law business related articles recently. As the stories of doom and gloom and struggling law firms big and small continue to occupy print-space, I reflected back on a law firm crisis story which had a happy ending. The story, although a little dated, is interesting and instructive for law firm leaders facing crisis today.

Kaye Scholer is a New York based law firm that has an interesting history dating back to its formation in 1917. From the earliest days up to 1992 the firm developed a great reputation as a premier law firm in the area of bankruptcy and reorganization.

In the spring of 1992, Kaye Scholer found itself in as precarious a position as any law firm had ever been. In the mid 80s, the firm had begun representing a California based S&L — Lincoln Savings. They had been retained to assist the S&L with a government investigation into its lending practices. The S & L ultimately failed, costing the government and taxpayers more than $3 billion.

In addition to pursuing the owners and managers of the failed S & L, the government went after Kaye Scholer like no law firm had been pursued before or since. The government accused the law firm of providing unsound advice and misleading statements contributing to the S&L’s demise..

Frustrated by a perceived lack of cooperation from the law firm the Federal Office of Thrift Supervision and the Securities and Exchange Commission decided to turn up the heat. They demanded an immediate payment of $275 million in damages for misleading the government, and took the unprecedented step of freezing the firm’s assets as well as some of the assets of individual partners. The firm couldn’t pay rent, payroll or even the light bill – signs of serious trouble.

A Crisis Indeed!

At this point, nothing short of prompt decisive action could save Kaye Scholer. Fortunately, bankruptcy partner Michael Crames, a relatively new addition to the firm, stepped forward. Crames offered an aggressive plan to immediately reach an agreement with the government and the firm’s bankers. Crames’s plan was successful in not only reaching the necessary agreements, but in convincing partners to stay the course during the turnaround. For handling the difficulties in such an impressive manner, Crames was elected the firm’s new Managing Partner and served in that capacity for five years.

A crisis that would have killed most firms became a successful turnaround. Kaye Scholer not only survived, but has grown, becoming very profitable and establishing itself as one of the leading firms in the world.

Anatomy of Kaye Scholer’s Success

Successful transition doesn’t just happen. In fact, in our increasingly volatile environment they seem infrequent and more difficult. We’ve shared thoughts based on our experience working with law firm leaders here, and here; and the Kaye Scholer case confirms at least three elements that are critical to a successful turnaround:

Early Recognition. When crisis looms there is a tendency (perhaps natural) to suspend recognition and acknowledgement that real trouble looms. Time is not on your side. Know the signs and the odds of a successful transition shift dramatically in your favor.
Leadership. In the moment of crisis a successful turnaround rests almost solely on the shoulders of visionary and decisive leaders who are able to put an actionable plan in play.
Communication. Successful turnarounds don’t occur behind the closed doors of private conference rooms. As the Kaye Scholer example demonstrates, timely transparency with partners and critical allies like lenders and landlords can result in important continuity.
These days, we all benefit from examples of timely transition and successful law firm turnarounds. Do you know of one?