Guidance on Selecting and NOT Selecting Bankruptcy Lawyers, v23
(This is the author’s opinion, and is intended to cover the two extremes and provide a framework within which most bankruptcy law firms fall.)
Creditor-oriented vs. Debtor-oriented Bankruptcy Law Firms
Big picture on the primary elements of Chapter 11 bankruptcy
When a company, the ”Debtor,” files for Chapter 11 bankruptcy, its law firm immediately files numerous necessary documents, setting up the bankruptcy process, which usually includes allowing the debtor to be still controlled by its existing management, hence Debtor-in-Possession or “DIP.”
The next fundamental goal of Chapter 11 is that the debtor commence designing and negotiating with its creditors a Plan of Reorganization, which must be accepted by a significant number of creditors and approved by the court to confirm the Plan. By doing so, the debtor can successfully exit Chapter 11 with a newly restructured company.
If such a Plan cannot be agreed upon by the appropriate creditors and approved by the court, the court will likely order the sale of the company and/or its assets pursuant to specific court directions or through a Chapter 7 trustee sale. Additionally, the court could appoint a Chapter 11 trustee to assume control of the entire DIP and either pursue a Plan of Reorganization or liquidate it.
Creditor-oriented bankruptcy firms:
The goal of Chapter 11 attorneys for the debtor should be to create and gain acceptance of a Plan of Reorganization at the lowest possible appropriate cost to the debtor. Yes, there are significant legal issues that must be addressed. However, achieving agreement on a Plan of Reorganization eventually becomes more of a negotiation (sometimes even creative) process, not simply a legal process. In other words, to cease primarily arguing the law and focus mainly on making deals with creditors before the debtor is about to go “off its financial cliff,” to the detriment of all parties involved.
Used here, a “creditor-oriented” law firm is one that, in Chapter 11 cases, generally specializes more in representing its already-existing clients for collecting accounts receivable or defaulted loans from a debtor that had already filed Chapter 11. Not included in this category are firms representing claimants in suits for damages caused by the debtor. An extreme example is when these creditor-oriented firms represent the debtor side in Chapter 11, these clients are sometimes internally referred to as “throw-away” clients that might not survive, even if a Plan of Reorganization is completed.
Creditor-oriented law firms representing DIPs typically file motions and continue to argue new versions of these legal issues in open court, leading to increased legal fees due to an additional series of motions and responses, and to multiple payments to the same debtor and creditor lawyers for the same issue. Sometimes in other businesses, this is called “churning the account.”
When representing the debtor, these creditor-oriented law firms often lack the motivation to be efficient or effective in serving the debtor’s interests. For example, they frequently are accused of returning these clients’ calls and messages last. They typically continue this process, earning more fees, until they reach the debtor’s “wall,” meaning the client is almost out of financial resources to fund the Chapter 11 case further. At this point, the creditor-focused firms shift their attention to reaching agreements with creditors, hoping that it’s not too late to obtain approval of a Plan acceptable to the debtor. If not, the judge is likely to dismiss the case and either convert it to a Chapter 7 liquidation or assign it to an independent Chapter 11 trustee from outside.
When representing creditors, the creditor collection side of the bankruptcy function is mostly repetitious, mechanical, “left-brain,” easy fee-generating work.
When these same creditor-oriented firms represent debtors in Chapter 11, their financial incentive is to staff their bankruptcy departments with the least qualified lawyers, leaving their sharpest lawyers to focus on solving other long-term creditor-client problems to retain their business.
They rarely provide their debtor clients with a “game plan” to expedite plan approval, a legal fee budget, or a “critical path” with accountable timelines for success.
Providing prompt and attentive service to their “throw-away” clients is rarely a top priority.
Potential conflicts of interest are usually reviewed and/or disclosed to clients before the execution of engagement agreements. The increasing length of many Chapter 11 cases often gives rise to new conflicts of interest within and outside the case. These are usually difficult to identify and neutralize well into the case, and can grow into significant problems for both sides with detrimental repercussions.
Debtor-oriented bankruptcy firms:
When representing the DIP in Chapter 11, their primary focus is generally on finding solutions quickly rather than risking the liquidation and loss of the client.
They acquire their new Chapter 11 clients primarily by referral. As a result, establishing a reputation for successfully achieving economic Plans of Reorganization is crucial for their new business development.
Their mindset is more likely to be focused on quickly finding solutions to the problems that the client and its executives, CPAs, and lawyers were unable to solve.
In Chapter 11 cases, clients often reach a point at which they have exhausted all available resources and expertise to avoid embarrassment, costs, and customer losses before filing. They have hit their “wall” already.
Therefore, the debtor’s attorneys must be motivated, skilled, and experienced in quickly and urgently finding previously “impossible” solutions to earn a winning reputation.
At that point, their immediate focus must be on saving the client from liquidation or failure.
They must have already connected with their clients, learned more about them, brainstormed with them, found alternatives to present to creditors, and sometimes take appropriate risks.
If there is no success there, use the bankruptcy laws and rules creatively to mitigate the damage.
They have no choice but to promptly apply their best brains and group thinking to find such alternatives.
Therefore, primarily creative (right-brained) collective thinking and personnel must be applied to these challenges to outsmart their (left-brained) linear-thinking opposing lawyers.
They, like their debtor clients, must also be in “crisis” mode.
Promptness in client service is essential for quicker client decisions and feedback on the lawyer’s ideas and recommendations.
Debtor-oriented bankruptcy law firms, therefore, live in “another world” from creditor-oriented bankruptcy firms.
As a result, the debtor’s management must proactively create or identify this “other world” before final selection of the law firm.
However, you must keep in mind that debtor-oriented bankruptcy attorneys are more likely to be Club members than creditor-oriented lawyers are. Therefore, regardless of how confident you are that your debtor’s attorney is not a club member, you must still use the critical path tool. At the very least, it will reduce legal fees and improve the quality of your attorney’s work and your decision-making and understanding of what is being done for you and to you.
