Steven J. Harper, former Kirkland partner, now critic of law schools and the legal profession, makes an important point in the American Lawyer about the disparity between the collection percentage law firms attain on bills to chapter 11 debtors and law firms' collection rates from other large corporate clients.
Harper notes, correctly, that while listed hourly rates for the top lawyers have soared in recent years to as high as $1500, collection percentages for overall law firm billing have plunged at the same time,, with many firms realizing less than 90% of their inventory value and many scraping 80% realization.
Harper also contrasts the falling realization on the total book of business with the continued high realization experience of law firms who submit fee applications in large chapter 11 cases, where payment is often over 95% of the amount rung up in the given fee app period.
Harper deduces that "If a firm’s average is 83 percent and its bankruptcy lawyers collect close to 100 percent, then firms with large bankruptcy practices have nonbankruptcy clients pushing some practice areas into deep concessions off standard rates". Stated another way, which perhaps out of deference to his former firm he does not, bankruptcy practices in those firms are compensating for a good portion of the discounts that their non-bankruptcy clients are receiving, which seems illogical.
I think this is cause for concern about reflexive approval of fee applications in chapter 11 cases, but at the same time, the issue is more complex than simply saying, "let's find out what the firms' realization rates are and haircut their bills by that amount." This is because of what is known as the "ecological fallacy", which is when someone mistakenly believes that every individual in a group under study acts the same way as a single statistical measure of the group. In this context, law firm billing is much more heterogeneous than an average or bottom line percentage reveals. For example, a corporate finance practice may realize, on average, more than 100% on closed deals, and less than 70% on busted deals. The average may fall in the ninth decile (i.e. between 81 and 90%), but that doesn't imply that the average is the relevant metric for evaluating the reasonableness of a single fee situation, especially a one-time representation. If the one-time deal closes, only the closed transaction realization is relevant. If it fails, only the failed deal realization is relevant. Of course, how you apply that to chapter 11 is not a simple proposition: consider two cases - first, a 363 sale that pays secureds 60% of their claims, followed by a liquidating plan with nothing but a litigation trust for unsecureds, and second, a similar case that produces 100% for secureds and 15% for unsecureds after a spirited auction in the case. In both cases, everything closed as a legal matter, but people walk away happier from the second. There is an intuition that perhaps law firm realization should vary in the two cases, if it is the custom to vary realization based on result in the non-bankruptcy context. The difficulty with this intuition is that, in bankruptcy, there are usually several constituencies with widely differing outcomes and the analogy to closing a transaction for a solvent enterprise where only one constituency, the representatives of the shareholders, calls the shots, is clearly imperfect.
Similarly, there are realization disparities within a firm based on a variety of factors. Litigation departments may offer higher discounts than corporate because their matters tend to be more leveraged and also very long-lasting, providing annuity-like underpinning to the firms' net income over several years; such financial security may be worth an insurance-like premium, i.e., an extra discount For similar reasons, clients with large books of repeat business can procure larger discounts than occasional ones. Most relevant to chapter 11 billing, lawyers with national reputations in other specialized areas, such as patent law, are in such demand that they don't have to offer discounts.
I think that legal bills in chapter 11 are generally too high, not so much due to the hourly rates of the lawyers leading the representation or even the realization, but for four reasons, which are, in declining order of importance: (1) structural incentives in the chapter 11 system for unhappy constituencies to trigger costly litigation; (2) failure of judges to run cases efficiently, especially in terms of uncontested matters, which could be signed off on without a hearing as 95% of district judges do; (3) failure of all actors in the system to establish reasonable standards for the cost of recurrent, predictable tasks, like motions to assume contracts and leases; and (4) fear of institutional creditors to alienate the most powerful debtor firms for fear of reprisal in plan negotiations or being frozen out in future cases.
I could envision judges and USTs asking firms submitting fee apps about realization rates on similar representations, but I think it is unlikely to make much difference in fee awards, except in the rare case where recoveries melt down during the case.
