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A Good Time to Be a Bankruptcy Lawyer:

This will come as no surprise, but it is a good time to be a bankruptcy lawyer. The front page of the WSJ reported yesterday (may be subscriber only) that Weil, Gotshal & Manges is requesting $55.1 million in quarterly fees and expenses for its work in the Lehman Brothers case. "The firm says it worked more than 100,000 billable hours during that period. Lead lawyer Harvey Miller is asking to be paid $950 for each of the nearly 795 hours he worked during the period."

And a few months back was the first reported sighting of a $1000 an hour bankruptcy lawyer, an English chap at Kirkland who cracked the $1000 barrier after converting dollars into pounds. The rate for Kirkland's domestic bankruptcy partners topped out at $965 an hour. Skadden's lawyers requested $1050 an hour for its work in the Circuit City bankruptcy case.

There are several structural peculiarities in bankruptcy that tends to push fees in an upward direction.

First, as Lynn LoPucki stresses in his book Courting Failure, forum-shopping in bankruptcy is easy and prevalent. And one of the margins on which a debtor can forum-shop is the receptiveness of bankruptcy judges in a given district to generous awards of attorneys' fees. So a judge that takes a hard-line on fees, such as capping fees at a local prevailing rate or scrutinizing the necessity of expenses closely, will soon discover that no big cases are filed in his court. Firms like Weil or Kirkland won't accept a case unless they get these rates. So a debtor given a choice between a venue that pays full fees versus one that limits fees will choose the one that pays full fees because otherwise it won't get the lawyers of its choice.

Second, fees are paid from "the estate" rather than a typical client. There is no inherent incentive for the debtor-in-possession acting on behalf of the estate to seek to minimize fees. Creditors can object to excess fees, but the lawyers for the creditors committee are also paid from the estate. As a result, if the creditors' lawyers object to the fees of debtor's counsel, debtor's counsel later may object to the fee requests of the creditors committee's lawyers. Thus, they are repeat-players and tend to adopt a "go along to get along" attitude toward each others fees, rather than vigorously challenging excessive fees.

Third, unlike a traditional client, bankruptcy lawyers don't really negotiate their fees with the debtor in the case. Because the fees are paid from the estate, the debtor has no incentive to try to cut down hourly rates or to demand volume discounts or the sort of thing that occurs in regular legal practice.

All of these factors tend to exert an upward hydraulic pressure on fees in bankruptcy. Thus, while one might expect that the overriding principle of fees and expenses in bankruptcy cases would be one of "economy" (which was the principle until 1978), today bankruptcy lawyers tend to push the upper-end of fees and expenses for lawyers.

This points out an issue for Congress to think about. There have been much chatter about whether federal judges are underpaid. I take no position on the general point. These massive fees in bankruptcy cases, however, does raise the question about the adequacy of salaries for bankruptcy judges. The opportunity cost for bankruptcy judges in this economy seems extremely high. And while there are many good things about being a bankruptcy judge, they are paid less than Article III judges (92% of a district court judge salary) and lack the prestige and life tenure of Article III judges. As a result, their salaries also are tied to those of district court judges.

Thus, one possible concern to keep an eye on in the near future is the potential that smart and able bankruptcy judges may be tempted to leave the bench in the near future to take advantage of what is starting to look like a once-in-a-lifetime opportunity in private practice. I've not heard of bankruptcy judges stepping down for this reason, but I'm sure there must be some and there will be more.

While on my soapbox, and regardless of what one thinks of raising bankruptcy judges' salaries, one area of bankruptcy practice that needs to be addressed is the ridiculously low rate paid to Chapter 7 trustees in no-asset cases. Chapter 7 trustees are paid $60 for a no asset case, a sum that has not been raised in years. I was talking to a chapter 7 trustee the other day and he noted that today's no-asset 7's are not at all like those in the past. He had a case where a debtor owned 10 properties, all encumbered by various liens, mortgages, and junior mortgages. So technically it was a case with no assets to be distributed to unsecured creditors. Yet he had a fiduciary duty to figure out what was happening with all those properties. That seems absurd. It seems especially absurd in light of the fact that the unwinding of the real estate bubble is going to expose more than usual levels of fraud for which chapter 7 trustees are going to be essential to uncover.

DiverDan (mail):
Forum shopping in big corporate Bankruptcy cases is a major problem, and it could have been fixed, but Joe Biden, working hard to protect the Delaware Bankruptcy industry, and Charles Shumer, working just as hard to protect the Southern District of New York, prevented any reform. Notwithstanding this, Creditors can have a say in Bankruptcy cases by taking advantage of the point you make in the above post -- Bankruptcy Judges are NOT Article III judges. While the statute establishing Bankruptcy Courts calls them judges, Constitutionally, they are the equivalent of magistrates. Every good litigator knows that they can't be forced against their will to consent to a magistrate exercising jurisdiction over case-dispositive matters. The Supreme Court affirmed in CFTC v. Shor that there is a constitutional right of a litigant to an Article III tribunal (although in Shor, the litigant waived that right). The Article III issue was critical in Marathon v. Northern Pipeline, and Congress "fixed" that problem with the Bankruptcy Amendments of 1984, drawing the line between "core matters" and "non-core matters" in Bankruptcy. However, unless you think that a Bankruptcy Judge is not exercising any judicial power in core matters (an argument I once heard from a Weil Gotshal partner, which still strikes me as ludicrous), then Congress didn't really fix the Article III problem in Marathon, and we are still waiting for the other shoe to drop in Marathon -- The Second Chapter.

So, if you are representing a creditor in one of these big cases that is going to get hosed by the pro-debtor Bankruptcy Judges, like a secured creditor with cash collateral that the Bankruptcy Judge is going to allow the Debtor to use to fund those outrageous professional fees, just file an objection to the Bankrutcy Court's jurisdiction on the grounds that he is not an Article III Judge, and you have a Constitutional right to an Article III tribunal; concurrently file a Motion to Withdraw the Reference for the entire Bankruptcy case (or, in the alternative, any and all matters including, but not limited to Cash Collateral Motions and Plan Confirmation, which may affect your substantive rights) based on your refusal to consent to a non-Article III tribunal. Be prepared to lose at the District Court - they don't want to deal with Bankruptcy Cases. And you probably won't even be able to appeal immediately to the Circuit level -- the Circuit Court is going to consider the denial of a Motion to Withdraw the Reference as interlocutory, with no appeal as of right until after you've gone ahead and tried everything in the Bankruptcy Court. But, as long as you don't unintentionally waive the objection to a non-Article III tribunal, the case law is solid, if you are prepared for a long appeal process.
4.17.2009 8:24am
David Chesler (mail) (www):
There is no inherent incentive for the debtor-in-possession acting on behalf of the estate to seek to minimize fees. Creditors can object to excess fees, but the lawyers for the creditors committee are also paid from the estate. As a result, if the creditors' lawyers object to the fees of debtor's counsel, debtor's counsel later may object to the fee requests of the creditors committee's lawyers.

We don't lawyer-bash in this blawg, but that's a good example of behavior that is against the interest of all but the lawyers.

This is not new.

A family member was a commercial collections manager (ironically for the old-school business credit ratings company, and even with that much redacting I won't repeat what he used to say about their sales and credit-granting policies [except to note that he complained that collections answered to sales, and salesmen were rewarded for contracts, whether or not they were ever paid, and also something about the Factoring companies that were concentrated in the his, the NY, district, always making his numbers low) for a quarter century and he was regularly in the position of collecting from bankrupt companies. He said that if the case was handled out of court (I believe it was the NY Creditman's Alliance that arbitrated) he stood to collect 50 cents on the dollar, but once it went to the lawyers he knew he was only going to collect 10 cents on the dollar.
4.17.2009 8:43am
Houston Lawyer:
All of what you wrote about the forum shopping and fees is true. However the bit about bankruptcy judges going to work for law firms because of income disparities rings hollow. The collective experience of my peers is that you shouldn't hire an ex-judge and expect to get any work out of him. In addition, in a couple of years all the bankruptcy work will calm down and the sharp knives will come out among bankruptcy lawyers competing for work.
4.17.2009 9:15am
JP22 (mail) (www):
My experience is similar to Houston Lawyer's. Also, the practitioners I know who left practice to become bankruptcy judges did so because they had already made enough money and wanted the intangible benefits of being on the bench.
4.17.2009 9:20am
Justin_F (mail):
I understand the debtor's lack of incentive to manage fees. But time and again, creditors' committees hire the same expensive lawyers that the debtors do. The individual creditors, many of whom are repeat players, should have an incentive to keep fees down when they hire law firms. They generally have their choice of law firms eager to perform the lucrative task of representing the committee. Yet their continued insistence on the most expensive counsel shows to me that these firms must be doing something to justify their fees.

That said, I agree that the $60 a case for Ch. 7 Trustees is ridiculous. However, it should be noted that Ch. 7 Trustee operate on the lottery system of compensation. Sure, 95% (or whatever) of the cases are no asset, but you get one case where a debtor, say, transferred a house to his wife right before the case (or even more lucratively, a rare large corporate chapter 7 case, such as Bennigan's) and you can be set for months. The question is how these cases balance out with the no-asset cases, especially the labor-intensive no-asset cases.
4.17.2009 9:26am
anon123 (mail):

Thus, they are repeat-players and tend to adopt a "go along to get along" attitude toward each others fees, rather than vigorously challenging excessive fees.

This is a violation of the duty of loyalty by the lawyer. The client is not neccessarily a repeat player, but the lawyer is. The lawyer is sacrificing his client's best interests for his own if he takes into account repeat play.
4.17.2009 10:12am
Ben P:
When I did some legal aid type chapter 7 work last year, the way I always say the $60 fee was that it keeps trustees honest rather than encouraging corruption.

The concern with the most recent bankruptcy law was debtors abusing the system, not creditors. The low fee does it's job of ensuring that trustees aren't getting sloppy with ensuring that the debtor isn't hiding non-exempt assets.

Additionally, I'd disagree about the nature of the cases being "that different."

The income threshold is relatively hard, but not impossible to get around, it's rare to see people with lots of money filing chapter 7's. And if they have no money but a ton of assets, they're not exempt and the trustee gets a chunk of all that that he's collecting for the creditors.
4.17.2009 10:51am
davod (mail):
Anyone involved in littigating the bankruptcy of a company which received government money will of course be bound by the same pay rules as the company which received the money.

We are going to get lots of really good lawyers working on these cases.
4.17.2009 10:52am
richard:
In others words, it is a racket.
4.17.2009 11:21am
Justin_F (mail):
Ben P: The income threshold is relatively hard, but not impossible to get around, it's rare to see people with lots of money filing chapter 7's.

I disagree. The means test counts all secured debt as an allowable monthly expense. This means that anyone who bought several investment properties which aren't doing too well can pass the means test. Also, those debtor who have primarily business debts (i.e. small business owners) are exempt from the means test. Those two groups, which often overlap, account for the large majority of high income Ch. 7 debtors. You likely would not have seen them at Legal Aid though.
4.17.2009 11:23am
DCP:
It would seem to me (as a layman) that higher bankruptcy fees are a byproduct of the nature of the work. The incentive is to pick whatever meat off the carcass you can while it is still available.

If Company X retains your firm on a select matter, then your work product and billing practices are going to be performed with an eye towards attracting more and/or different business from that client in the future. If Company X is in bankruptcy liquidation, that incentive all but disappears.

I would venture a wild guess that some practice areas may operate under the opposite guidelines. Wills and Estates, for example, may bring in wealthy individual clients who are minimally billed in the hopes that they will send over a book of corporate and litigation work.
4.17.2009 11:50am
early bird (mail):
A trustee came to talk to my bankruptcy class a few weeks ago. He's been a trustee since the new system was set up in 1979, and I got the impression that the reason he's still a trustee is that it's cool to have been a trustee since the beginning.

He also seemed to imply that, with the low fees that are typical in ch7s nowadays, most people will become trustees in order to build a reputation for their bankruptcy practice. This means there won't necessarily be a shortage of trustees, but there may be a shortage of experienced trustees, as the people who got into it solely to build up their practice get out of it as soon as they don't need it anymore.
4.17.2009 12:09pm
Cityduck (mail):
Aren't free markets great!
4.17.2009 12:11pm
IJW473 (mail):
Going to third Houston Lawyer's point... and I've got to say, DiverDan's creditor lawyer strategy is a good way to (1) infuriate every bankruptcy judge in the district (2) waste a ton of money and (3) infuriate every judge in the district. Bankruptcy is a small community, and if you are a bankruptcy lawyer who starts telling bankruptcy judges that they have no right over the core matters in your bankruptcy case... even if you may be technically correct, have fun standing in front of that judge or anyone who hears about it.
4.17.2009 12:27pm
Bob from Ohio (mail):

100,000 billable hours during that period. Lead lawyer Harvey Miller is asking to be paid $950 for each of the nearly 795 hours


I can't access the article.

How many lawyers to get to 100,000 and how many days involved?

Lehman filed in October if I recall. Is this for just to the end of the year?
4.17.2009 2:06pm
Calderon:
Second, fees are paid from "the estate" rather than a typical client. There is no inherent incentive for the debtor-in-possession acting on behalf of the estate to seek to minimize fees.

Third, unlike a traditional client, bankruptcy lawyers don't really negotiate their fees with the debtor in the case.


I question the validity of these points in large, non-liquidating Chapter 11 cases where most of the large fees are generated (obviously, this doesn't apply to Lehman Bros). There's not much of a line between the "estate" and the debtor-in-possession in such cases. The officers of the company have similar incentives to keeping their costs low in Chapter 11 as they do outside of Chapter 11 (even if they have less control since they have to pay for committees). The more money in attorney's fees they pay out, the less they have to help restructure, pay for cap ex, pay operating expenses, etc.

Probably the biggest structural issue you missed, and one that at least arguably is completely rational, is that most bankruptcies are truly "bet-the-company" cases. Thus, even slightly differences in the perceived competencies of law firms can lead to large differences in fees and costs, similar to what we see in "bet-the-company" litigation. If Firm A is 1% more likely to help you successfully reorganize a $10 billion enterprise than Firm B, the officers of that enterprise would rationally pay a lot more for that firm's services even though the difference in quality seems miniscule.
4.17.2009 2:15pm
DiverDan (mail):

I've got to say, DiverDan's creditor lawyer strategy is a good way to (1) infuriate every bankruptcy judge in the district (2) waste a ton of money and (3) infuriate every judge in the district. Bankruptcy is a small community, and if you are a bankruptcy lawyer who starts telling bankruptcy judges that they have no right over the core matters in your bankruptcy case... even if you may be technically correct, have fun standing in front of that judge or anyone who hears about it.


IJW473, you may well be right about infuriating SOME [but certainly not all] Bankruptcy Judges. On the other hand, a Judge who gets angry with you for respectfully making a well-supported legal argument, just because he doesn't like the results of that argument, is unfit for the Bench. And yes, I have pissed off my share of Bankruptcy Judges before, including Randall Wheless when he sat on the Bench in Houston. But when the District Court (Lynn Hughes, an outstanding Judge) saw what Wheless was trying to do, he withdrew the reference for the entire case and wouldn't send it back down until Wheless was off the Bench. If I, or my client, had been too afraid of infuriating a crazy Bankruptcy Judge who was bound and determined to ignore the law to get his own desired result, my client would have taken a big financial hit; instead, when we got a competent Bankruptcy Judge (Greendyke - I'm really sorry he left the bench for a lot more money in Private Practice), my client did very well, thank you very much. All I can say is if you are too afraid to piss off a judge every once in a while for the sake of making a sound legal argument, you aren't much of a lawyer.
4.17.2009 4:05pm
DiverDan (mail):
Preamble to Texas Bar Rules: "In all professional functions, a lawyer should zealously pursue clients' interests within the bound of the law."

I don't see an exception there for cases where your legal position might piss off a judge. If you think that the position that a non-Article III judge can't be imposed upon you without consent is well founded (I believe it is), and that it is in your client's best interest NOT to have his rights determined by a Bankruptcy Judge, especially one who has demonstrated the ability to bend over backwards for the Debtor in big cases, then refusing to assert that position (in a respectful manner, of course) just because the Judge might get angry with you is, in my humble opinion, a breach of your duty of zealous advocacy.
4.17.2009 4:39pm
guest:
Charles Dickens' Bleak House lets us know things have not changed in a very long time.
4.17.2009 7:12pm
IJW473:
DiverDan,

I have no problems with zealous advocacy... but I can't see how this will help avoid fees in a vast majority of situations (I probably should have said as much). It isn't that one should 'fear' pissing off a judge, its that you have to balance that with what you are gaining.

It seems to me that:

(1) bumping it up to DCt. isn't necessarily going to get the fees reviewed any more strictly... or at all. DCts. hate everything bankruptcy, and you want them to dive into the level of appropriate fees?

(2) you won't know whether the fees are absurdly high until the hours have been billed... so bumping it up will only further the problem and, as you stated, will still likely end up in a loss at the DCt. level (or chaos... why would you want a DCt. dealing with a large complex bankruptcy proceeding?).

(3) if there is anyone that wants to deal with bankruptcy issues less than a DCt. its an App.Ct... seems like hoping for salvation there is another stab in the dark.

But hey, it apparently worked for you. It just seems like a ton of risk for very little potential upside for that one particular client, and a lot of automatic downside for everyone else.
4.17.2009 8:54pm
Dave hardy (mail) (www):
My brother in law does a lot of bankruptcy work. My sister has quipped that, with current economic conditions, it's like being married to an undertaker during the Black Death.
4.17.2009 10:52pm
Guestie:
Ah, "zealous advocacy." Here in Arizona, we actually deleted the phrase from the Rules of Professional Conduct because it was almost universally invoked to justify unprofessional behavior.
4.18.2009 12:20am
DiverDan (mail):
Perhaps I wasn't clear - I didn't suggest my strategy solely or even primarily as a means of dealing with fee applications. Indeed, I have to agree with IJW473 that trying to remove a fee application to the District Court by objecting to a non-Article III tribunal would be a waste of money. But in many situations where a creditor has a great deal more at stake, that creditor would be crazy to let it stay in front of a Bankruptcy Judge that has demonstrated a willingness to bend the Code for the Debtor.

I am old enough to remember the Second Continental Airlines Bankruptcy - the one in Delaware, not Houston. That was the heydey of Delaware Debtor Bankruptcy Practice, primarily because the Delaware Bankruptcy Judge, Balick, followed one rule of law in Commercial Chapter 11s: The Debtor Wins. There were bond holder classes that just got raped in that case, by plan provisions that were clearly in violation of the Bankruptcy Code, but Balick was bound and determined to confirm the Plan, come hell or high water. They let Balick confirm the Plan and tried to appeal, but came up against the doctrine of prudential mootness (another doctrine I think has real Article III problems, when the result is to deny any review of the merits by an Article III tribunal), and the District Court told them he would be glad to stay consummation of the Plan, if only they would post a bond of over $100 Million (I don't recall the exact amount, it was something like $150 Million); the Bond could not be posted, the Plan was consummated, and the appeal was dismissed as moot, which was affirmed by the Circuit Court (the Constitutionality of prudential mootness when the effect is to deny any review on the merits by an Article III tribunal was never raised). In a situation like that, those Bond Holders would have been MUCH better off taking the case out of Balick's hands. The problem here is that you can't afford to wait until Plan Confirmation to raise your Article III objection for the first time; there is far too big a risk that, by going along in the Bankruptcy Court for all the various preliminary matters, cash collateral orders, adequate protection hearings, lease assumptions and rejections, etc., etc., you'll be deemed to have waived the right to insist upon an Article III tribunal under CFTC v. Schor. So, if you are a creditor with a LOT at stake in a Chapter 11, in front of any Bankruptcy Judge who has demonstrated a pro-Debtor Bias (i.e., all of them in SDNY or Delaware), you might be well served to try your best from the beginning to take it out of the Bankruptcy Court's hands.
4.18.2009 9:26am
AlanP (mail):


Very funny bankruptcy humor site
4.18.2009 11:11am
AlanP (mail):
http://bankruptcybill.wordpress.com/

Sorry
4.18.2009 11:11am

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