Case Studies
Guidance on Selecting and Not Selecting Bankruptcy Lawyers
(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
1. Big picture on the primary elements of Chapter 11 bankruptcy
a. When a company, the ”Debtor” files for Chapter 11 bankruptcy, its law firm immediately files numerous necessary documents, setting up the bankruptcy process.
b. The next fundamental goal of Chapter 11 is that the debtor commences designing and negotiating a Plan of Reorganization, to which significant creditors and the court must agree in order to confirm the Plan. By doing so, the debtor can successfully exit Chapter 11 with a newly restructured company.
c. If such a plan cannot be agreed upon by the appropriate creditors and approved by the judge, then the judge will likely order the company and/or its individual assets to be sold at public auction or the court will appoint a Chapter 11 Trustee to take control of the entire company to either reach a Plan of Reorganization or to liquidate.
2. Creditor-oriented bankruptcy firms
a. When creditor-oriented law firms represent a debtor in a Chapter 11 bankruptcy, they often deliver a low level of service priority to their Chapter 11 client, who likely won’t be around later as a client anyway. Hence, those clients are often referred to as “Throw- away” clients.
i. Chapter 11 clients generate no repeat business like the large creditor-type companies that they primarily represent.
ii. 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 considerable legal issues that must be dealt with. But achieving agreement on a Plan of Reorganization is primarily a negotiation (sometimes even creative) process rather than a “legal” process.
iii. Dealing directly with the Chapter 11 creditors by sharing necessary information, the realities of the debtor, and whatever legal advantages the debtor might have to discover the range of realistic deals that can be made is usually the most efficient and effective route to a Plan of Reorganization.
iv. Instead, creditor-oriented law firms generally tend to file motions and debate those issues in open court, which results in higher legal fees due to the second and third series of motions, arguments, and paying all related debtor and creditor lawyers multiple times on the same issue.
v. They have little incentive to find alternative solutions or be creative in making early deals. They tend to continue that process until they hit the debtor’s “wall,” being almost out of financial sources to fund the duration of the Chapter 11 case. Then, the creditor-oriented firms finally focus on finding deals with creditors and hoping that it’s not too late to confirm a Plan acceptable to the debtor. If not, then the judge likely gives up and converts the case to a Chapter 7 liquidation or assigns the case to an outside independent Chapter 11 trustee.
vi. The creditor collection side of the bankruptcy function, when representing creditors is mostly repetitious, mechanical, “left-brain,” easy fee- generating work.
vii. When these firms represent debtors, their financial incentive is to staff their bankruptcy departments with the lowest-talent lawyers, leaving their sharpest lawyers to focus on solving other long-term creditor client problems to retain their business.
viii. They almost never present their debtor clients with a “game plan” to quickly achieve Plan approval, or a legal fee budget, or a “critical path” with timelines for success for which they can be held accountable.
ix. Promptness and attentiveness in service are generally not on their minds.
3. Debtor-oriented bankruptcy firms
a. Their focus generally is to find solutions quickly, or the client is liquidated and lost.
b. They gain their new Chapter 11 clients generally by referral. Hence, a reputation of economically achieving successful Plans of Reorganization is critical to their new business development.
c. Their mindset must be to quickly find solutions to problems that the client, its leaders, CPAs, and lawyers could not solve.
d. In Chapter 11 cases, often the client already has hit its “wall” having used all its expertise and available resources to avoid the embarrassment, costs, and customer losses prior to having to file.
e. Therefore, the debtor’s attorneys must be motivated, skilled, and experienced at finding previously “impossible” solutions quickly and urgently to earn a winning reputation.
i. Therefore, the only solution is to save the client from liquidation or failure.
ii. They must connect with clients, learn more about them, brainstorm with them, find alternatives to present to creditors, and sometimes take appropriate risks.
iii. If there is no success there, then use the bankruptcy laws and rules creatively to attempt to mitigate the damage.
iv. They have no choice but to apply their best brains and group thinking to find alternatives.
v. Therefore, primarily creative (right-brain) automatic thinking and personnel must be applied to the challenges to outsmart their (left-brain) linear-thinking opposing lawyers.
vi. They, like their debtor clients, must be in “crisis” mode also.
vii. Promptness in client service is important for quicker client decisions and feedback on the lawyer’s ideas and recommendations.
viii. Debtor-oriented bankruptcy firms, therefore, live in “another world” from creditor bankruptcy firms.
f. Therefore, the management of the debtor must aggressively create and/or find this “Other World.”