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The Costs of Chapter 11

posted by Stephen Lubben

Although I keep swearing off the topic, I've written something about chapter 11 professional fees.  Again.  Over at Dealb%k.

Comments

I think the mid-cap bankruptcy case I am a creditor in is typical of the attorney fee problem.

The debtor sold a $10 mil. asset for $2.85 mil. at an expedited auction after which estate counsel were paid $1.4 mil. in fees in chapter 11 and 7 over a 12 year period.

At the sale hearing estate counsel drastically overstated the dividend available for unsecured creditors and declined to give any estimate of their own fees.

A year after the sale (in which the buyer failed their good faith finding) and after it became apparent the dividend would be half as much as indicated by estate counsel, I moved to vacate the sale order based on estate counsels’ fraudulent disclosures at the sale hearing.

I was sanctioned, held in contempt, and incarcerated for 42 days for accusing estate counsel of fraud.

From my perspective and experience in business the bankruptcy bench and bar have returned to the clubby collusion the Bankruptcy Reform Act of 1978 intended to abolish.

“They’re back” like a poltergeist in a Spielberg movie.

This collusion has several masters.

First, the court’s control over attorney fees by definition creates the appearance of collusion.

Second, the court’s control over attorney fees exerts undue control over the parties and their issues.

Third, the court’s award of attorney fees panders to class warfare. The Judicial Class awards the Attorney Class with fees taken from the Creditor Class. There is an obscene structural prejudice designed into the Bankruptcy Code by prioritizing attorney fees independent of the dividend.

Fourth, fees build empires instead of promoting the integrity of the court.

Fifth, paying full billable hours promotes more billable hours.

Sixth, never trust a profession that needs an Ethical Code. It is the client’s discretion to pay the bill that leverages the attorney’s fiduciary duty. An attorney guaranteed their fees is guaranteed to hedge their duties.

So if I were designing the perfect Bankruptcy Code I would abolish full billable hours charged at the highest rate of any other area of law, de-prioritize attorney fees, link attorney fees to the dividend, and abolish the useless office of the US Trustee.

First, you're right about "other people's money" not being a way to distinguish Chapter 11 from regular operation, but you don't go far enough. It isn't just management and shareholders being separate; our entire system runs on OPM, whether debt or equity. If we were paying any attention at all, our take-away from the various financial crises we've ground through over the last three decades is that OPM makes the world go around, everyone is playing fast and loose with it, and no one is regulating it except for slapping around nickel-dime operators and people like Madoff who have the temerity to mark 1%ers.

Second, fiduciary work always carries a premium price. Anyone who can't figure that out is incapable of an informed opinion on the topic.

Third, if the upfront proposal were that simple, we'd be seeing a lot more of it outside of bankruptcy. I'm not seeing flat fee proposals for litigation, and even insurance defense litigation budgets don't come close to what you're proposing.

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