The Upside of High Fees

Some of the comments to Stephen Lubben's post on "overhead" raised the longstanding complaint about high fee awards in New York and Delaware Chapter 11 cases. We all know the academic and political condemnations of Chapter 11 as merely a feast for lawyers.

It's important to remember, though, that the possibility of higher attorney's fees was considered a feature, not a bug, when the Code was enacted in 1978. Or, more precisely, the liberalization of fee awards was intended to attract lawyers (the elite bar) who had largely shunned bankruptcy practice after the New Deal-era bankruptcy reforms. There's no doubt that the overall quality of representation in business bankruptcy cases has increased markedly since 1978, along with the cost of that representation. That's why I don't understand those critics whose objections really seem to be about the presence of large, sophisticated (and expensive) national law firms in Chapter 11 cases.  

Of course, high fee awards come out of the pockets of unsecured creditors, who don't have much say in hiring the attorneys. The system needs an outsider monitor to take account of that inherent principal-agent problem, and that's where the US Trustee plays a crucial role. But anyone who has practiced in New York knows that the US Trustee's Office has not always been predictable in its fee objections. The overhead argument is an example.

 

Anna Nicole Smith and Mass Torts in Bankruptcy

Stern v. Marshall presents another issue that deserves attention. In addition to the constitutional arguments, the respondent (the creditor) raised a statutory objection to the bankruptcy court's ability to hear and decide the debtor's counterclaim as a core proceeding. The judicial code (28 U.S.C. § 157(b)(2) and (b)(5)) limits the power of bankruptcy courts to adjudicate "personal injury tort and wrongful death claims" as core proceedings--provisions that come into play in mass tort bankruptcy cases.

I'd like to focus on why we have such a genuinely odd qualification of the jurisdiction of the bankruptcy courts.

Anna Nicole Smith, Equity, and Article III

As John Pottow previewed in this post, the Supreme Court heard oral argument last week in Stern v. Marshall, better known as "The Anna Nicole Smith Case II." Justice Sotomayor put the first question to Kent Richland, lawyer for Vickie Lynn Marshall (aka Anna Nicole Smith), and it was a doozy:

JUSTICE SOTOMAYOR: What’s the authority at all for a bankruptcy court to adjudicate proof[s] of claims, without violating Article III? I don’t think we have ever had a case that’s actually said that.

MR. RICHLAND: This Court has never approached that issue directly. . . .

Despite that opening, by the end of the argument the Court seemed sufficiently receptive to Anna Nicole Smith's side (albeit with serious skepticism by the Chief Justice and Justice Scalia) that I wouldn't be surprised if they reverse the Ninth Circuit. What is very surprising, though, is that the questions presented in this case are still undecided in 2011. Northern Pipeline is a 1982 case, and Congress created the current system of bankruptcy courts in 1984. What's taken the Supreme Court so long?