As the wrath of COVID-19 continues to pummel the global economy, troubled companies that faced challenges before the pandemic are now beginning to collapse.  Since nationwide lockdown orders were put into place in late March, several iconic brands have filed for Chapter 11 bankruptcy protection in what experts are predicting is merely the first wave of bankruptcies.  In the retail department store space, JC Penney, J. Crew, and Neiman Marcus recently filed for Chapter 11, following famous “big box” brands like Pier 1, Gold’s Gym, and Modell’s Sporting Goods.  Considering these recent filings, and in anticipation of more to come, professional firms in the bankruptcy and financial restructuring industry are gearing up for a massive wave of new cases – and the concomitant surging professional fees and costs. 

Chapter 11 bankruptcy is easily the most expensive form of bankruptcy.  In fact, professional fees in large Chapter 11 cases involving companies the size of the aforementioned retailers can run into the hundreds of millions of dollars in the blink of an eye.  While it is true that the successful reorganization and rehabilitation of a distressed company is not a minor undertaking, it is vital to ensure that  “professional fees and expenses paid by the estate are reasonable, actual, and necessary,” according to Section 330 of the Bankruptcy Code and guidelines set by the Office of the United States Trustee.  Bankruptcy professionals know that fees can accumulate quickly given the complexity of Chapter 11 cases, as well as the countervailing pressures on law firms to bill significant numbers of hours to balance their own budgets.  To make matters worse, there is often a deep disconnect between the professionals who are doing the work in Chapter 11 cases and those who are watching the costs add up.  Those tasked with “minding the shop” when it comes to professional fees have often lacked the time, incentive, experience or tools to bridge the disconnect to ensure that professional fees are reasonable.   

In her recent Fordham University Law Review article entitled “Using  General Counsel to Set The Tone for Work in Large Chapter 11 Cases,”[i] Professor Nancy B. Rapoport eloquently argued that the best way to overcome this disconnect, and to keep professional fees under control, is for the general counsel to assume a more proactive role in the bankruptcy process.  In order to help bankruptcy professionals make better staffing and budget decisions, the general counsel must clearly communicate her values to those professionals from the outset and continue to monitor their compliance throughout the entirety of the engagement.  In her role as the chief legal officer, the general counsel needs to let the bankruptcy professionals in on her thought processes, including how she oversees her own attorneys’ decisions in these types of cases and what expenses she considers reasonable.  If she takes an active role in monitoring her bankruptcy professionals’ work, her values (assuming that they are good values), will contribute to the oversight necessary to keep the fees and expenses reasonable.  In a follow-up dialogue with me, Professor Rapoport went one step further to say that the general counsel has a fiduciary duty to her client-stakeholder to ensure that professional fees are reasonable. 

Given the dynamic and complex nature of a Chapter 11 case, even the most diligent general counsel may need to partner with a bankruptcy fee examiner to understand the burn rate of the professional fees in a large Chapter 11 case. Bankruptcy fee examiners can also assist the general counsel in monitoring a law firm’s compliance with billing guidelines through data analytics.  Data analytics tools such as those provided by Legal Decoder’s Legal Spend Analysis (LSA) Technology also can be used to help determine how professionals in a bankruptcy are staffing the cases, how careful they are about curtailing unnecessary expenses, and how well-tailored their work product is to the company’s business, operational, and legal needs.

The LSA Compliance Engine intelligently automates the invoice review process provides superior data analytics that identify key trends and actionable information.  The proprietary rule set developed by Legal Decoder includes 46 unique flags to highlight a professional firm’s compliance with the mandate of Section 330 of the Code and the U.S. Trustees Guidelines, as well as staffing and workflow efficiency levels and billing hygiene[ii].  The LSA dashboards identify discrepancies and problematic charges at the firm level, or by invoice, or by individual timekeeper.  For a general counsel caught in the throes of a large Chapter 11 bankruptcy case, with its long days and many moving parts, having this kind of data at her fingertips is invaluable. 

In addition, general counsel can using the LSA data to analyze a professional firm’s overall performance in a bankruptcy matter and will be in a better position to weed out firms whose values do not align with hers, and reward (by retaining and by referring) those firms with compatible values.

In sum, as daunting as the task sounds for an overworked general counsel, carefully monitoring and containing professional fees in a Chapter 11 is not a task to be ignored.  The good news is that there is a host of tools in the general counsel’s toolbox that makes discharging her fiduciary duty a straightforward and effortless task.

[i] Nancy B. Rapoport, Using General Counsel to Set the Tone for Work in Large Chapter 11 Cases, 88 Fordham L. Rev. 1727 (2020) (solicited manuscript) (presented at the Stein Center for Law and Ethics Colloquium on Corporate Lawyers (October 2019)), available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3591118.  See also Nancy B. Rapoport, Client-Focused Management of Expectations for Legal Fees in Large Chapter 11 Cases, 28 Am. Bankr. Inst. L. Rev. 39 (2020), available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3541347; Nancy B. Rapoport, The Case for Value Billing in Chapter 11, 7 J. Bus. L. & Tech. Law 117 (2012), available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2039506; Nancy B. Rapoport, Rethinking Fees in Chapter 11 Bankruptcy Cases, 5 J. Bus. & Tech. Law 263 (2010) (solicited manuscript for University of Maryland School of Law’s symposium on Examining Government Reform in the Financial Crisis), available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1625102.

[ii] Legal Decoder’s Billing Hygiene rules are based upon the principal that a timekeeper’s time entries should be clear, concise, and accurately reflect recorded time.