By Emma Cueto & Xiumei Dong

Law360 (July 10, 2020, 8:02 PM EDT) -- Law firms accounted for a large portion of the recipients of federal bailout funds designed to save small businesses during the coronavirus pandemic, but some observers speculate that, for a number of those shops, the funds won't be enough to prevent future cuts if COVID-19 continues to drag down the market.

While some firms are better positioned than others to weather the COVID-19 pandemic and associated economic fallout, experts said that for many firms the funds won't solve deeper issues with firm finances and the industry may see a second wave of layoffs once the money runs out.

"Unless there's some dramatic uptick pretty soon in the overall economy, I think the drag on clients is going to continue to put a drag on firms in terms of client payment cycles," said Michael Blanchard, managing director of the Law Firm Advisory Team at Aon. "I don't think they're prepared to ride this out more than three or four months without having to make some deeper cuts to their business."

Overall, more than 14,000 businesses classified as law offices received PPP loans in amounts over $150,000. Among them, more than 170 were law firms in the Law360 400, while nearly 100 received loans between $5 million and $10 million, according to a Law360 review of loan-level data issued by the Small Business Administration on Monday.

Under the rules, BigLaw behemoths with 500 or more employees are ineligible for the loan, but firms seeking PPP funds included well-known shops like Boies Schiller Flexner LLP, McKool Smith PC, Schiff Hardin LLP, Cohen Milstein Sellers & Toll PLLC, and Thompson Coe Cousins & Irons LLP.

The list of PPP recipients also includes some of the nation's best-known plaintiffs firms, including class-action firm Lieff Cabraser Heimann & Bernstein LLP, which received a loan of between $2 million and $5 million, as well as securities law firms Labaton Sucharow LLP, Kessler Topaz Meltzer Check LLP and Bernstein Litowitz Berger & Grossmann LLP.

The maximum PPP loan amount available is $10 million. Businesses now have 24 weeks instead of eight to use those funds, all of which must be spent by Dec. 31. The loans, which carry an interest rate of 1%, are also fully forgivable if recipients use 60% on payroll costs. The rest can be used for rent, insurance and some other expenses.

According to Ian Berkowitz, a former attorney adviser with the Small Business Administration who for the last two decades has helped clients obtain SBA loans in private practice, large law firms often don't operate on "positive cash flow. Instead, they tend to rely on credit lines and bank debts, which is why we see a significant number of firms applied to the PPP loans," he said.

"Most of them operate on lines of credit, they have debt, they have tons of debt, very few law firms don't have debt," Berkowitz said. "So, the bottom line is, the goal of the program and the intention of the program was to keep people employed."

Blanchard echoed this point.

"I don't think [taking PPP loans] necessarily signals financial trouble, per se, but I think it points to the bigger issue in the industry: This industry has been notoriously undercapitalized for a very, very long time."

"I would assume the average firm — small and mid-sized firms — are lucky if they have a month, maybe two months, maybe if you're really strong, three months liquidity on hand," he added.

Firms are loyal, Blanchard explained, meaning clients have less incentive to prioritize paying their attorneys over less forgiving parties.

And when clients delay their payment to the law firms because of the coronavirus pandemic, Berkowitz explained it will impact the firms' ability to pay for their attorneys and staff, leading to uncertainties in the future.

Despite claiming the federal bailout, at least eight of the law firms that received loans between $5 million and $10 million still confirmed to cut salaries or jobs before or after they approved for the loans, according to Law360's report of law firms' austerity measures.

These firms include Day Pitney, Hodgson Russ, Hughes Hubbard & Reed, Kelley Drye & Warren, Pryor Cashman, Rivkin Radler, Schiff Hardin, Stroock & Stroock & Lavan.

However, not all observers considered the PPP loans to be a sign of trouble.

"A lot of that may have just been a safety net in the early days for fear that no one knew how deeply this all was going to cut," said Ronald Wood, Los Angeles-based managing director at Major, Lindsey & Africa. "Now that they've seen that they have managed it ... I think it may be that the firm's either repaid a loan, because they're not using it or to keep people employed, or they get waived."

Robert Brigham, a Bay Area partner at Major, Lindsey & Africa, echoed Wood's sentiment, adding that the fact the law firms took the loan doesn't necessarily mean that they're going to be in trouble if they don't have another round of loans.

"The reality is they took advantage of it because it is liquidity that ... they'd be crazy not to take advantage of it," Brigham said. "Because they've done a lot better than they expected, I don't think things are necessarily in a terrible position."

Several firms also made statements that indicated the loans were a precaution.

"We felt we were in a potentially existential crisis when this happened," Sullivan managing partner Joel Carpenter told Law360 in a statement. "I think it would have verged on managerial negligence not to apply, if you're eligible."

In a statement to Law360, Steven Fineman, the managing partner at Lieff Cabraser, said the firm had applied for a PPP loan to compensate lawyers and staff members and prevent layoffs.

"We applied for a PPP loan at a time when our firm's lawyers and staff were all required to work remotely ... and we had no idea how the pandemic would impact our finances," Fineman said. "We accepted the loan to assure that we would not have to lay off, or reduce the compensation of, any lawyer or staff member during that time of great uncertainty."

Fineman added that Lieff Cabraser has not laid off anyone or reduced the compensation of any lawyer or staff member, and has no plans to do so in the future.

--Editing by Amy Rowe.

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