Thursday, May 7, 2009

In Defense of Professional fees in Bankruptcy

The fees paid to attorneys and other professionals have become a popular target recently. Today, on the ZeroHedge blog, they write about Chrysler's attorneys at Jones Day asking for superpriority status under Section 364(c)(1) of the Bankruptcy Code. They claim that asking for this status is unusual.

They may be correct about the employment of 364(c)(1) being unusual, but Jones Day's fees already have priority status under Section 503. Typically these fees are paid over time during the case, and are subject to Court approval. It should also be noted that Chrysler's motion to retain Capstone as an advisor also referenced Section 364.

This request, in my opinion, relates to the fact that, under the current structure of the proposed 363(b) sale, Jones Day will be working for an entity with no cash and no way to generate cash as they settle the remainder of the Chrysler estate. I can't speak to how typical it is for a law firm to rely on 364(c)(1), but in this case it may be warranted.

A more virulent attack on legal fees was created by a study, released this week, by Lynn M. LoPucki and Joseph W. Doherty of UCLA. The study is entitled "Routine Illegality in Bankruptcy Court Fee Practices."

Bloomberg announced this report in an article entitled "Chrysler Bankruptcy Lawyers Reap Fees Illegally, Professor Says." Great title, right? They do include the following in the article:

LoPucki is wrong conceptually and legally,” said Dewey & LeBoeuf LLP partner Martin Bienenstock, who has advised GM and some of New York-based Lehman’s creditors. “The legislative intent of the Bankruptcy Code’s fee provisions is that bankruptcy lawyers should be compensated” promptly.

No Objections

"To avoid judges spending time on fee hearings every month, many courts adopt a practice under which lawyers circulate monthly invoices and the debtor pays the amount that other parties, including the U.S. trustee, do not object to,” Bienenstock said in an e-mail. “Then, once every three or four months, the court makes determinations about the invoices to date.”

The Wall Street Journal posted an item about this on their Law Blog entitled "New Study Accuses Bankruptcy Judges Of 'Routine Illegality.'”

The Journal's piece includes this quote:

Nancy Rapoport, a bankruptcy specialist at UNLV’s law school, believes it is acceptable in many cases, in the interest of administrative convenience, to allow professionals to be paid before their fee requests are formally reviewed. “There is a presumption that if we don’t like what [the lawyers] did, they are good for it,” and the courts can claw back any excessive fees, Rapoport told the Law Blog.

The Journal piece also notes:

bankruptcy judges do require professionals to submit formal fee applications, and courts can require lawyers to pay back any fees that are deemed excessive. Still, “payments are harder to reverse than to prevent,” LoPucki and Doherty write.

One of the unfortunate problems with Chapter 11 is that it is expensive. Thus smaller firms generally can't take advantage of the process. The bankrupt estate not only has to pay for its own professionals, it must bear the cost of the professionals retained by the official creditors committee and any other official committees approved by the judge. That doesn't mean that the fees are to high.

The skills needed to be a top bankruptcy attorney like Harvey Miller or Corinne Ball are extensive. Bankruptcy proceedings are generally highly contested and require great strategic insight. In addition to having an encyclopedic knowledge of the Bankruptcy Code, national Bankruptcy Rules, and the rules of specific jurisdictions, these attorneys have to have the strategic sense similar to that required of great battlefield strategists. A detailed understanding of Sun Tzu's Art of War is not inappropriate. Then the lead attorney has to manage a team of similarly skilled attorneys as they dive into the smallest details of every contract of the bankrupt company. In addition, they also need to have the ability to negotiate with one another and, when that fails, to persuade a bankruptcy judge (and the judge considering an appeal ... including, in some cases, the Supreme Court!). The changes in conditions for bankruptcies (which I've discussed here, here, here, here, here, and here) has made this job even harder!

The consultants and investment bankers need to be similarly capable, but with different skills. It is a significant challenge to change an under performing company's business and culture to make them viable. They have to deal with legacy issues remaining from prior operations, eliminate bad habits, identify operations that are superfluous to the business and sell them, and, in some cases, make personnel changes.

Is it any wonder that bankruptcy is so expensive?

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