Professor Eugene Volokh of The Volokh Conspiracy blog recently wrote here of a particularly noteworthy “stupid lawyer trick” in a case involving a lawyer recently charged with suborning perjury by advising his client to lie under oath in a DUI case. The “stupid trick” part of the lawyer’s misconduct involved his documenting his advice to lie in emails to his client, one of which advised:

They won’t have anyone there to testify how much you had to drink. You won’t be charged with perjury. I’ve never seen them charge anyone with perjury, and everybody lies in criminal cases, including the cops. If you want to tell the truth, then we’ll just plead guilty and you can get your jail time over with.

“Stupid lawyer tricks” are not uncommon in bankruptcy cases either, and Professor Volokh’s post prompted me to start a new category called “Stupid Lawyer Tricks” in which I hope to periodically report on some of the “Jackass-type” tricks some bankruptcy lawyers try to get away with from time to time.
WARNING: THE FOLLOWING CASES FEATURE STUNTS PERFORMED BY PROFESSIONALS OR UNDER THE SUPERVISION OF PROFESSIONALS. THE BANKRUPTCY BLOG MUST INSIST THAT NO ONE ATTEMPT TO RECREATE ANY STUNT OR ACTIVITY REPORTED, OTHER THAN IN A SUPERVISED CLASSROOM SETTING.
This opening segment (vol. 1) of “Stupid Bankruptcy Lawyer Tricks” reports on some tricks found in the following recent cases, each of which is discussed below:
In re Sadorus, 2005 WL 3429467 (Bankr. C.D. Ill., 12/8/05) (advising a client to lie in order to get his bankruptcy case dismissed and thereby avoid having to disclose the existence of a bank account the lawyer had wrongly advised would be exempt)
In re Kollel Mateh Efraim, LLC, 2005 WL 3439684 (Bankr. S.D.N.Y., 12/15/05) (entering into a settlement on the record, but first not telling the client and then evading the client’s attempts to find out what happened)
I.G. Petroleum, L.L.C., v. Fenasci (In re West Delta Oil Co.), 2005 WL 3220291 (5th Cir, 12/1/05) (lawyer retained as special counsel joins with a possible suitor for the debtor’s assets, sends threatening letters to other potential bidders, and never discloses its conflict to the court)
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Continue Reading Stupid Bankruptcy Lawyer Tricks – Vol. 1

Professor Stephen J. Lubben, a former Skadden Arps associate, now Seton Hall law professor, and no stranger to the phenomenon of “feasting” in bankruptcy, has just made available for the general public’s review his latest working draft of a paper entitled “The Microeconomics of Chapter 11 and the Irrelevance of Ex Ante Costs,” which is accompanied by the following abstract:

Several recent studies have put the level of professional fees in large chapter 11 cases at about 2.5 percent of assets or less. This compares favorably with other significant corporate transactions. But little attention has been given to the issue of how professional fees are allocated within chapter 11 cases. Examining this issue is important because a significant strain of bankruptcy scholarship is premised on the notion that chapter 11 is excessively expensive, notwithstanding the existing evidence that suggests otherwise. In particular, these theorists employ the long-recognized principle that lenders will recoup anticipated losses through higher ex ante interest rates to support the argument that altering or even replacing chapter 11 will reduce the costs of debt financing and thus promote efficiency. But if most of the supposed costs of chapter 11 are in fact exogenous to the Bankruptcy Code, reductions in the cost of chapter 11 may have only a modest correlation with reductions in the cost of financial distress.
This paper thus offers the first look at the intra-debtor distribution of professional fees. I analyze a new sample of almost 4,000 attorney time entries, from more than 30 law firms, in 27 very large chapter 11 cases filed between 2001 and 2003 to look at several basic questions regarding the allocation of attorney’s fees within chapter 11 cases. I find that up to 60% of the professionals fees in a bankruptcy case may be exogenous to chapter 11. I then develop the broader argument that ex ante costs are virtually irrelevant to current discussions of chapter 11.

Professor Lubben’s analysis provides a good summary of the current state of research on professional fees associated with chapter 11 cases, and adds a unique perspective by focusing his analysis on law firm microeconomics. I found especially interesting his analysis under the sub-heading, “Staffing in Chapter 11” at pages 26-33 (where he even quotes from a book by Sol Stein entitled A Feast for Laywers, referenced here).
According to Professor Lubben, the data he examined suggests a counterintuitive result: that is, the bulk of hours billed in a case is more concentrated among “mid-level” attorneys (whose average billable rate is between about $350 and $450 per hour) than their more senior or junior counterparts. These mid-level attorneys, the data suggests, bill 25%-30% more hours on average per month than more senior or more junior attorneys working on the case (whose average billable rate is around $625 for the more senior attorneys and $260 for the more junior attorneys). Professor Lubben says he had predicted the data would fall along a relatively straight upward sloping line, with the most senior attorneys working the least number of hours per month (to the far left of the graph) and the most junior attorneys slaving away the hardest (to the far right of the graph). Instead, Professor Lubben notes, the data suggests that legal fees in large chapter 11 cases actually form a horseshoe (or upside-down “U”) shaped curve, with time most heavily concentrated in the middle (where fat often concentrates) among mid-level attorneys/associates.
Professor Lubben is not sure what all this means, or even whether his data is reliable because he didn’t have complete access to law firm billing records. Still, he doesn’t shy away from asking the tough questions suggested by the data, such as:

Continue Reading Who’s Really Feasting in Chapter 11 Cases? Professor Lubben Provides a New Perspective on This Perennial Question

A popular method of distinguishing a case that contains harmful reasoning is to call it “mere dicta.” In Tate v. Showboat Marina Casino Partnership, 05-1681 (7th Cir., 12/13/05), Judge Richard Posner ponders exactly what “dicta” (or, better put, “dictum”) is. He wrote:

The plaintiffs call the statements in Harkins that we quoted merely “dicta”�that is, things the court said, not what it held; and only what a court holds is binding (within the limits of stare decisis, discussed below) in subsequent cases. But what does “dictum” (the singular of “dicta,” the two words being used interchangeably by most opinion writers these days) mean exactly? There are two principal contenders. The first�that dictum is anything besides the facts and the outcome�is unacceptable; as a practical matter, it would erase stare decisis because two cases rarely have identical facts. Michael Dorf, “Dicta and Article III,” 142 U. Pa. L. Rev. 1997, 2035-37, 2067 (1994). But Harkins and this case do have identical facts; so even if “dictum” were construed so broadly, these plaintiffs would be out of luck.
The sensible alternative interpretation is that the holding of a case includes, besides the facts and the outcome, the reasoning essential to that outcome. Henry J. Friendly, “In Praise of Erie�and of the New Federal Common Law,” 39 N.Y.U.L. Rev. 383, 385-86 (1964) (“a court’s stated and, on its view, necessary basis for deciding does not become dictum because a critic would have decided on another basis”).

Continue Reading Judge Posner’s “Dictum” on “Dicta”

Thanks to Tom Kirkendall for his post on his Houston’s Clear Thinkers blog to a 102 page opinion (available here also) issued by Dallas’ Bankruptcy Judge Robert McGuire in a case that challenged the grant (and funding) of over $100 million in retention bonuses to approximately 300 highly-coveted energy traders and related management employees on the eve of Enron’s bankruptcy filing in December 2001.
Tom K. says that BAPCPA’s “recent amendments to the Bankruptcy Code limit the precedential value of the decision [because] [u]nder those amendments, pre-petition retention bonuses to key employees are now presumed to be voidable transfers and are expressly subject to Bankruptcy Court approval even if made prior to the commencement of a bankruptcy case.” Let me add two qualifications to this comment:

First, while Tom K. is right that Bankruptcy Court approval is now needed for all proposed postpetition payments of retention bonuses (even if the bonuses were authorized prepetition), BAPCPA’s amendments to new Code Section 548(a)(1)(B)(ii)(IV) do not presume that prepetition retention bonuses payments are voidable. Rather, such payments are voidable under the new Code section only to the extent that (i) the debtor “received less than a reasonably equivalent value in exchange,” and (ii) the transfers were made to “an insider,” “under an employment contract,” and “not in the ordinary course of business.” Notably, the new law does not appear to shift the burden of proof, which remains with the plaintiff/trustee as to all elements.
Second, the case has significant precedential value for a bankruptcy litigator because of the Court’s analysis (often extensive) of such bread and butter issues for a bankruptcy litigator as:

  • when an “antecedent debt” arises for preference purposes (pp. 38-43);
  • whether the “new value” defense applies (pp. 43-48);
  • whether the “ordinary course” defense applies to the preference action [N.B.: discussion of what constitutes “ordinary course” for purposes of an affirmative defense to a preference action may well become the standard in future litigation under new Code section 548(a)(1)(B)(ii)(IV) regarding whether a prepetition payment under an employee contract was in the “ordinary course”] (p.48);
  • whether the debtor “was insolvent” at the time of the transfer (both from a “balance sheet” and “equitable” perspective and from a “going concern” vs. “liquidation” perspective) (pp. 48-79);
  • whether, applying the doctrine of Moore v. Bay (the case I love to hate), there existed at least one pre-existing creditor with standing to avoid the transaction (pp. 82-84);
  • whether the bonuses, being on the eve of bankruptcy, were intentional fraudulent transfers (pp. 86-88);
  • whether the bonuses were accepted for value and in good faith under Code section 548(c) (pp. 89-94);
  • whether “reasonably equivalent” value was given in exchange (pp. 94-97).

This matter was initiated by the “Official Employment-Related Issues Committee of Enron Corporation (the “Employment Committee”), an official committee formed by the US Trustee in Enron’s bankruptcy case primarily to investigate these challenged payments and to commence avoidance litigation regarding them, as appropriate. Initially, over 300 defendants were sued, 40 of whom went to trial to defend their right to the bonuses (several of whom, the record suggests, apparently were unaware of the saying that “one who represents himself has a fool for a client and an idiot for a lawyer”).
With extensive references to the voluminous record (which included over 1,000 documentary exhibits), Judge McGuire methodically ruled that:

Continue Reading Enron’s Retention Bonuses Avoided by Texas Court as Preferential Transfers and Intentional and Constructive Fraudulent Transfers