Client-Focused Management of Expectations for Legal Fees in Large Chapter 11 Cases

Nancy B. Rapoport

Originally posted on UNVL Boyd Law

Inside counsel have to manage expectations in a variety of ways. They need to provide guidance to their business units; they need to ensure compliance with a network of statutes and rules relating to their organization's industry; and they need to monitor the work and the cost of their outside counsel. Many, if not most, inside counsel have worked in law firms and understand how legal work gets billed. But what happens when inside counsel find themselves in a situation in which many of the parties involved have little incentive or ability to examine and manage the costs of the professionals involved in the case? I'm speaking, of course, of chapter 11 bankruptcies.

In chapter 11 cases, professionals working for the debtor or the creditors' committee-once their employment has been approved by the bankruptcy court-are paid out of a collective pool. They're either paid from general unsecured funds or they're paid from a carve-out of a secured creditor's collateral. When they're paid from general unsecured funds, the normal relationship between client and counsel, in which counsel's fees come directly from the client's own funds, doesn't exist. Instead, those payments come from a pot of money that is one step removed from the client's pocketbook.

Even when the funds come from a carve-out from a particular secured creditor's collateral, that creditor might not have enough information to be able to monitor the fees and expenses incurred by all of the court-approved professionals in the case. The lack of an incentive (or the ability) to review professionals' fees in a meaningful way leads to billing inefficiencies that can affect everyone involved in the case. Large chapter 11 cases can have fees that run into the hundreds of millions of dollars. That's one of the reasons that, in 2013, the Executive Office of the United States Trustee promulgated additional guidelines that affect" legal fees in large chapter 11 cases.

Bankruptcy courts have been appointing fee examiners and fee committees in large cases' to aid the courts in their duty to ensure that the fees and expenses of estate-paid professionals are reasonable." I've been one of those people charged with helping bankruptcy courts review fees. As such, I've seen first-hand what happens when the professionals involved in high-stakes, bet-the-company litigation 3 serve as the actual decision makers, rather than involving their clients deeply in their decisions. This article will discuss the dynamics that create a disincentive for most parties to monitor fees in large chapter 11 cases and will then provide suggestions to inside counsel whose organizations find themselves involved in those cases-as the debtor, as a member of the creditors' committee, or as a secured creditor whose collateral is being tapped for the carve-out to pay the professionals' fees.