The New York Times on Chapter 11 Fees

As Adam has noted, the Times is out with a big article today on chapter 11 fees, focusing particularly on Weil, Gotshal and the Lehman case, where Weil acts as lead counsel. My thoughts:

I found the article disappointing, in that the obvious attempt to bring chapter 11 practice into the larger stream of rage directed at Wall Street often leads the reporters to pettiness. Yes, an out of town partner spent more than $600 a night at a hotel, but it might be nice to mention that the hotel is right next door to Weil's offices. And given that the attorney in question probably only spent three hours a night out of the office, having the hotel next door is important. And then there is the dammed if you do, damed if you don't aspect to dinging attorneys for using the hotel next door, but also criticizing them for using car services (and yes, it can be hard to get a taxi at 3am -- they are all in Chelsea and the Meat Packing District then).

As Adam notes, the article is also entirely without context:  for example, how much has Sullivan & Cromwell made from seemingly advising every side in the financial crisis, all without any press scrutiny?  Is there any good reason to pick on Weil and not Sullivan? Maybe they are both getting too much, but then it's no longer a bankruptcy problem but a problem of corporate lawyers generally. It would have been nice if the reporters had placed these fees in their larger context.

The reporters also don't put the fees in the context of creditor recoveries, except for the quote from yours truly and a reference to the fact that some unsecured classes in the Lehman plan are getting just under 15%. The professional fees are the cost of going from a 0% recovery to a 15% recovery. You can't do that for free, despite what the article implies.

The real question is whether the creditors are overpaying for the move to 15%, but that's a complex question that's hard to address in the popular press, but the Times, of all publications, should have been able to give it a try. For example, if you find cheaper bankruptcy counsel, are we sure that creditor recoveries go up, as the article implies, or do recoveries go down, because the cheaper firm is too inexperienced, too small, etc.? Sometimes it is true that you get what you pay for.

The reporters also give the fee examiners something of a free pass, despite their $250,000 a month budget and the fact that the biggest study of professional fees found that fee examiners don't actually save the estate any money, but instead impose the cost of fee examiners on the estate. I somehow doubt I failed to mention the study in my two interviews with the reporters.

That said, I think the professionals do have to bear some of the blame for billing in these high profile cases without any sense of the optics. For a few thousand dollars they could have had somebody go through the bill to remove things like the airport gum and hotel dry cleaning that fee examiners and reporters love to rave about. (At most, the client should have been responsible for difference between "normal" dry cleaning rates and "hotel" dry cleaning rates, and even then it would have been smarter for the firm to eat that nominal cost.)

The failure to appreciate the larger audience of these cases, especially in this economic context, makes them no better than the tone deaf Wall Street bankers demanding bonuses when they wouldn't even have jobs but for taxpayer assistance.

Comments

[Adam Levitin]

Amen on the hotel question. The hotel choices with in a couple blocks of Weil's offices in the GM Building are: (1) the Sherry-Netherland, (2) the Pierre, (3) the Peninsula, (4) the Four Seasons, (5) the Ritz-Carlton, (6) the Essex House, and (7) the Plaza (if it hasn't completed the condo conversion). $685/night for a room in the Sherry-Netherland isn't really such a bad price; would it be better for the attorney to stay in cheaper digs farther away and then bill for the transit time?

[Allan]

How about this for the hotel? Put the office in a less expensive place and get less expensive hotels. These guys already have the business, no need to do all the work in the most expensive office in the world.

I really unsure about billing out at $500 to $1,000 per hour. Is the marginal value worth more than you would get from a $200 per hour attorney? a $300 per hour attorney?

If we are really concerned about going from 0 to 15% return (or 14% to 15%), perhaps a contingency fee (like debt collectors get) might be a better barometer on the estate's return on investment.

Finally, it is unseemly that an attorney (or a group of attorneys) get paid (and a king's ransom, at that) by a company while the creditors are left stranded.

[Regis]

I think some of the dialogue shows the parties are talking past each other. Saving 10,000 jobs does not mean you do not have to buy your own chewing gum. The fact that derivatives are complex instruments does not mean you should send legal assistants to court hearings to reserve seats for lawyers. Saying a lawyer who has worked 14 hours should not have to take a subway home does not answer the question of why is the debtor rather than the law firm paying for the limo. Some perspective would be nice. Being tone deaf does not advance the image of lawyers.

[mt]

Another perspective missing from the article is that the institutions who hold the debt and thus bear the cost are mostly other large financial institutions and hedge funds who probably pay similar rates and bear similar disbursement practices when they hire professionals directly. Also they can afford the cost of fighting the fees if they want to. So I see little reason to invest public resources in what the affected private parties appear to regard as a nonissue.