Bruce Claugus, of the law firm of Claugus & Mitchell LLP and DeForest Global Partners LLP has been a student of the process of innovation for the entirety of his professional life. He believes that innovation is the driving force behind all prosperity. He incorporates innovation as one of the principal values of his firm in all of its disciplines, ranging from corporate to litigation, emerging markets, and intellectual property. In fact, the formation of DeForest Global Partners LLP exemplifies the inclusion of his values in an innovative business decision. Mr. Claugus gives no interviews, but was persuaded to give a few examples of innovations he and his firm have brought into being. These are his words.

Ordinarily, we do little direct marketing to clients or prospective clients. We rely primarily on word of mouth. On the other hand, several weekends ago, I was thinking about a few of the developments in my practice and began to realize that, with the support of my associates and clients, a fair number of very creative solutions have been developed that often solved or avoided intractable problems or changed paradigms. On this basis, I decided to commit them to writing before they were forgotten. I hope they interest you.

        1. Engaged to document and close the sale of the assets of a small cable television company, I asked for the latest financials for the company to examine over the weekend. The then agreed price was $1,800,000. Of course, there are several ways to value such a company and using two of these, I calculated the value. The following Monday, I visited the client and said, “If you want to sell your company for $1,800,000, you can, but I think you can sell it for more like $2,400,000.” That idea appealed to him, so he authorized me to renegotiate to sale. I did and the company sold for $3,200,000. I am sure that a lot of different law firms could have documented and closed the sale of the assets in question on immaculate documentation. I do not know any that could have done that, thought to value the company, and then improved the price by nearly 80%.

        2. In order to encourage fleet purchasers of automobiles to buy its automobiles, an automobile company agreed to subsidize the interest rate paid to a lender by the fleet purchaser to the extent of 300 basis points. The fleet purchaser would get funding at the applicable lending rate minus 150 basis points, while the lender would get the lending rate plus 150 basis points. An important client asked for form documentation to present to the fleet purchasers that would take advantage of this subsidy and went out on the road to market the “new” product. He came back a week later very dejected. “Everyone knows about this product. They already have their relationships.” They say, “Don’t call us, we’ll call you. What should I do?” I said, “Don’t be so greedy. Give the customer some of your subsidy.” “Can I do that,” he asked? I said, “Of course you can do that. It’s your money isn’t it?” In short, he did as I suggested, went back out on the road to market the truly new product, a subsidy of 175 basis points to the fleet purchaser and 125 to the lender, and came back from his trip with a big smile on his face. He looked at me and said, “For the first time in my career I don’t have any competition.” And he didn’t. We went on to market the new product all over the United States and my client became the most profitable office of the lender in the United States. I know of a lot of law firms that could have prepared the form documentation the client first used, but I do not know of any law firm that could have created an entirely new product that could so completely change the paradigm.

        3. As an adjunct to new product for fleet purchasers, a need developed to distribute risk. Using the new product described above, the direct lender enjoyed a subsidy of 125 basis points; however, we sold participations that carried a subsidy of only 25 basis points, keeping a risk free subsidy of 100 basis points for my client.

        4. In many ways, the most complicated creation involved what I call a pooled credit secured by pooled assets. The need was to provide secured funding for the construction by a particular developer of a series of industrial facilities to be leased to foreign end users. The construction was planned to proceed on almost a manufactured basis, which is to say, one installation after another in rapid succession. Rather than fund and secure each installation as it was built, the financing and securitization was, in a sense, automated. The facility was established on the basis of a series of installations by the developer and was secured automatically by the asset comprising the installation. This allowed for faster development and vastly reduced transaction costs.

        5. Similarly complex documentation was required for a series of financings I developed, primarily for privatizations. While the documentation was complex, the concept was simple. At root, the financings were one of the oldest forms of financing: factoring. We simply adapted the old form to the new need. If an entity seeking to privatize a property had an established production and delivery record and sold to a creditworthy customer, its receivables could pay into a lock box and provide the security for the financing needed. While these financings were given elaborate names, they simply were factoring, even though each financing was in the hundreds of millions of dollars.

        6. In another situation, we represented a clothing designer and manufacturer whose employees had absconded with its designs, products, and employees. We brought an action for trademark infringement and sought a temporary restraining order. The original application was heard in chambers and was granted. After an evidentiary hearing, it was continued. To this extent, no particular creativity was required. The creativity arose from the way we obtained the TROTRO. A friend agreed to help and, masquerading as a potential buyer, entered defendant’s showroom and photographed the infringing garment on sale. In the ensuing motion for contempt, we were able to show the judge vivid proof of the defendants’ contempt obtained directly from their showroom. The decision on this motion for contempt sealed the outcome against these defendants.

        7. In another dispute, we again changed the paradigm for a whole class of transactions. A consortium of lenders entered into what amounted to a credit enhancement facility in favor of a utility company. Each bank stood as the account party of a letter of credit in favor of the bank holding the ultimate asset. There could be no story unless the utility developed credit problems, so that is exactly what happened. A close examination of the facility, the letters of credit, and the conduct of the bank holding the asset revealed a gaping hole in the banks’ obligations, allowing them to avoid honoring any drafts presented against the letters of credit for payment. In the aftermath of this development, the content of the relevant documentation and the conduct of the lending bank were completely restructured. The gaping hole became known as the Sunflower breakout.

        8. Another paradigm shift occurred when I created the first real estate mortgage denominated in a foreign currency. One of the buildings is on Fifth Avenue, the other on East Fifty-Seventh Street. The buyer was Japanese, the currency Yen. There were two problems. First, the government professed to be unable to calculate the fees and taxes payable on the transaction if it were denominated in a foreign currency. Second, the government posed nearly impenetrable political problems. To solve the first, we developed a formulaic methodology that even a governmental official could follow. To solve the second, we persuaded the officials that the allowance and recordation of mortgages denominated in foreign currencies would materially increase the volume and revenue flow of their office. The first solution worked and our persuasion proved sound. The paradigm changed – at least in New York. Foreign currency mortgages now are common.

        9. The paradigm did not change, but the results were especially satisfying when we co-chaired the joint defense group in an adversarial proceeding brought against a bankrupt company that had been publicly traded. There were some twenty-five defendants variously involved in the operation of the company who, in simple terms, were charged with corporate looting. There were approximately eighteen law firms, including some that were very large. As co-chairs, we were charged with preparing a joint defense statement. Our co-chair went first and produced a statement that really did not explain just how defective the charges were. We went second and began at the end of the story. I called the last of the witnesses in first and said, “Charley isn’t the reason the bankrupt went bankrupt because its bank and primary source of liquidity failed?” “Yeah,” he said. From this point, we worked our way to the beginning of the story and developed a comprehensive and ultimately persuasive version of what happened. In the end, all defendants walked away unscathed. I always say that the best place to begin is at the beginning, but, in this case, the beginning was at the end, where the problem had its genesis. This recognition proved to be profoundly insightful and dispositive.

        10. In another problem that was creatively solved, we faced a mess made by lawyers at one of the largest law firms in existence. In representing a developmental corporation in the employment contract of its chief executive officer, this firm neglected to notice that, for tax purposes, all executives of corporations are considered employees so that withholding taxes must be paid. Because of this failure, some $500,000 in withholding taxes had gone unpaid. The large law firm also created violations of broker dealer regulations so that the shareholders could demand that their investments be returned. The tax problem was not so serious. It could be solved with a manageable sum of money. The broker dealer problem was extremely serious. It could have extinguished the company. To solve these problems, we broke the employment agreement into two agreements. One phased out the tax problem; the other restructured the role of the chief executive officer to eliminate the broker dealer violations. There was plenty of push back from the large law firm, but my presentation to the board of directors carried the day, our solutions were implemented, and the problems no longer exist.

        11. Another creative solution arose out of a distribution agreement that had been maliciously terminated. A remarkably capable and very successful young entrepreneur came to us on referral from the man who happened to be our tailor, complaining that a distribution agreement he had from a manufacturer had been terminated. This manufacturer had forced our client to sign a new distribution agreement that was terminable on thirty days notice and that required disputes to be arbitrated. The client had consulted a number of other lawyers before he came to us and all had failed to look beyond bringing an arbitration and alleging some violation of the distribution agreement or allowable trade practices. I took one look at the agreement and told the client that an arbitration alleging violation of the distribution agreement would be a waste of time. This agreement was a death trap. Instead, based on the intentions of the client for the future and previous publications of policy by the manufacturer, I advised bringing a declaratory judgement action to have the intellectual property of the manufacturer declared invalid. He authorized us to proceed; we did proceed; and six weeks later, the client had a new and much more liberal, fixed term and renewable distribution agreement. We were completely successful on the basis of an approach no one else had thought to consider.

        12. Another bold idea arose from problems a project company, building a governmental project in Central America, had with a large, American manufacturer of equipment. This manufacturer wrongly thought that it was entitled to supply certain equipment to the project. The project company thought otherwise, but that did not stop the manufacturer and an element of the U.S. government from threatening the country involved. This unsettled the government which had just formed following a coup d’état just a few months earlier. The project company proposed a litigation against the manufacturer, but our advice was forcefully against that approach. I told the project company, “You are in the project business, not the litigation business. Concentrate on the project. Forget the litigation. You want to reassure the government, I will render an opinion of counsel regarding the legalities.” “Would you do that?” the company asked. I said, “Of course.” I did as I proposed, rendered the opinion to the president of the country, and the opinion quieted the entire situation. For purposes of the opinion, the law was simple. The hard part was to give a simple opinion deep gravamen and to do so in language busy people working in a second language could read and be comforted. It worked. The government was reassured and we never heard from the manufacturer again.

        13. Another situation really called more for a sense of touch than any creativity, though creativity in the application of this “touch” was required. A close friend and longtime client engaged us to collect a $50,000 fee from an especially large financial institution. He said, “Bruce, collect this fee for me. The institution has not paid me and the officers do not return my telephone calls or acknowledge my statements.” I thought, “My God! How am I going to do this? If I get into a pushing contest with this institution over $50,000, we may get ten cents on the dollar some time in the next century.” In the face of this quandary, I simply called the officers involved and talked with them about their obligation to my client. A colleague of mine has told me that I am the only person they ever have met that can be charming and menacing, all at the same time. Somehow I think that is the ultimate compliment for a lawyer and I guess I used it on these officers, because very quickly, my client had his money. In fact, inasmuch as he was paid in soft money, they paid him twice what they owed. Of course, my client did not tell me that until years later.

        14. An important litigation that we handled called for a solution that was both creative and bold. Two Caribbean entities brought a special proceeding against our client, a financial institution based in the Mediterranean Sea, alleging that it had laundered money indirectly stolen from these entities. As the proceeding progressed, motion practice took place, considerable time passed, and the officials of the institution, including members of the board of directors swore that they had not laundered any money – ever. On the basis of the time that had passed and the word of the officials, I told opposing counsel that he really should serve a restraining notice on the financial institution. My analysis was that the officials had sworn they did not have any of the money. If they were truthful, the restraining notice would be of no effect. On the other hand, if they actually had had the money, they certainly had moved it during the time that had elapsed since the proceeding had begun. Opposing counsel served the notice and the judge found for the financial institution, saying that they had had the money, but had not had it by the time the restraining notice had been served. This gambit was creative and bold and it worked. Though guilty, the financial institution walked away untouched.

        15. A creative representation that proved to be particularly constructive involved an estate plan involving considerable tangible and intangible property. Considering the extraordinarily conservative character of the client, the plan involved primarily the tangible property, i.e., considerable amounts of undeveloped real property. From the corpus of the estate, three limited partnerships were created with the client as the sole general partner and his five heirs as limited partners. Because the partnerships held primarily real estate, involved only members of a single family, and essentially involved only illiquid property, based on multiple appraisals, the capital value of each of the partnerships was as much as forty percent lower than the value of the assets if they did not comprise the corpus of a partnership. These discounts to market value allowed the property to be gifted from the client to his heirs much more rapidly than otherwise might have been possible. The result was that one partnership was gifted completely out of the estate and went untaxed and the other two were gifted almost entirely and were only lightly taxed. To this day, the assets gifted remain in the family of the client.

        16. A litigation to collect a multimillion dollar investment banking fee involved whether or not a transaction subject to the payment of a fee had taken place and the quantum of the fee payable. The involvement of all of the parties to the transaction had been heavily disguised and any calculation of the fee require special insights into the fee agreement and the capital structure of the subject of the transaction in question. To determine whether a transaction subject to a fee had taken place, I flew to Mexico and connected with a friend who practiced law there. We set up concealed audio/video equipment, interviewed one of the principals at great length, and established that, indeed, a subject transaction had taken place. Once this fact was established, we recognized that the quantum of the fee payable derived from the capital structure of the subject. This we calculated to be $10,000,000. Confronted with this information, the obligor under the fee agreement paid our client the sum owed.

        17. Of course we have handled a lot of other matters that have been fairly conventional in terms of process. Many, however, have been unusual in terms of content. These include the first private loan to the government of the People’s Republic of China, the restructuring of the debt of the Great Wall Hotel Beijing, the first bankers’ acceptance facility for the Central Bank of Turkey, and a drachma loan to a pharmaceutical company. These transactions were fairly conventional, but were interesting for their exoticism. Others include the composition of speeches, magazine articles, mission statements, and even seating protocols for major financial and industrial entities. These activities were entirely straight forward, but unusual in the degree of dependence on and trust of me shown by these distinguished entities.

ABOUT THE AUTHOR

Bruce Claugus

Bruce Claugus was born in 1948 and has practiced law since 1976. He is the founder of the firm of Claugus & Mitchell LLP and DeForest Global Partners LLP and practices primarily in the areas of banking, finance, and commercial and intellectual property litigation. Mr. Claugus is responsible for all of the areas of practice of the Firm. He pioneered the use of pre-export facilities to finance the privatization of natural resource properties in Latin America and is renowned for his forceful and innovative presence and tactics in corporate transactions and litigation. The formation of DeForest Global Partners LLP exemplifies his drive and focus on innovation and aggressive tactics. This new venture is expected to become a major vehicle in the improvement of services to Mexico and South America with offices in Mexico City, Puebla, Monterrey, Queretaro, of the United Mexican States. Along with Claugus & Mitchell LLP in New York, Salas Piza (founded in 1989) will maintain the offices in Mexico City, Garcia Heres (founded in 1998), will maintain those in Puebla, Lobo & Graham (founded in 2001) those in Monterrey, and Rodriguez, Ruis y Zepeda (founded in 2002), those in Queretaro. Affiliates include Casa Hierro in Lima, Perú, Estudio Trevisan in Buenos Aires, Argentina, Garcia Parot y Cia. in Santiago, Chile, and Kosmas y Kosmas in Panamá, Panamá.

Mr. Claugus earned a Bachelor of Civil Engineering degree and a Master of Science degree in Engineering Mechanics from The Ohio State University in 1972 and a Juris Doctorem from Georgetown University Law Center in 1976. He was trained in the practice of law at the firm of Shearman & Sterling .

In 1984, he earned a Master of Business Administration degree from The University of Chicago where he studied under Nobel Laureate Merton Miller , Victor Zarnowitz , and Dean Jack Gould.

Mr. Claugus has been a lecturer at numerous capital markets workshops in New York and Mexico conducted by such entities as El Financiero, The Lubin Center for International Business, and the Harvard Club. He has published with and at the request of Institutional Investor and has been quoted frequently by El Financiero, Latin Finance, and Crain's New York Business.

Professional Memberships

Admitted to Practice

New York
Illinois

Reported Decisions and Articles

For more information about Claugus & Mitchell LLP, visit our website.

For more information from Bruce Claugus, visit: Choke Points to Die For, The Business of New York Is Business, Bruce Claugus and Claugus & Mitchell LLP are AV Rated, Speaking Engagements, and New York International Law Firm of Claugus & Mitchell LLP Joins the Partnership of DeForest Global Partners.

Bruce Claugus

Monday, April 11, 2011

Creative Solutions To Intractable Problems

Bruce Claugus

No comments: