The duties of a Chapter 7 trustee or liquidation trustee are different from those of an operating fiduciary as the Chapter 7 trustee or liquidation trustee is typically appointed to wind down the operations and perform an orderly liquidation of the estate. However, in some very large or complex situations, Chapter 7 trustees have had to operate at least a part of the entity for years to maximize value through the sales process. Pursuing substantial litigation may also come within the purview of a liquidating or Chapter 7 trustee if a liquidation trust is not formed to separate these responsibilities.
An examiner plays a much different role and most often, although not always, has no operating responsibilities. His or her duties are to do just what the title implies: examine a set of circumstances, decisions, or transactions as designated and specified by the court. Most frequently, some allegation of malfeasance or gross mismanagement has been made against the management, the board of directors, or the owners of the company. However, the powers and duties of an examiner vary greatly, and the amount of money approved for the examiner to complete his or her assignment often dictates the methods used to carry out the job. In all cases, the examiner is likely to review scores of documents, emails, phone records, and the like. In many situations, the court permits the examiner to conduct wide-ranging depositions and informal interviews, as well as to retain private investigators, accountants, and others to trace missing assets. And, in almost all matters, the culmination of this review is an extensive, well-documented public report filed with the court. Often the information in this report is used by others to obtain asset recoveries or as a road map for litigation.
In cases in which there is a successful reorganization, a litigation trust is often established by the court to pursue litigation that either the reorganized debtor or the creditors prefer be chased by someone not related to the debtor. This litigation might include such things as avoidance actions or actions against previous officers and directors, accountants, and others. The trustee is appointed by the court and reports to a trust board, which hires litigators to handle the various matters, often in several different courts and venues.
Often lawyers are appointed to serve in these in these capacities. However, it is equally common for experienced and knowledgeable business professionals to be appointed by the courts. When a fiduciary serves in the capacities described above, their specific needs in choosing counsel will differ depending on the case and the type of appointment. Regardless, two qualities are absolutely required: trust and respect. Fiduciaries put their reputations on the line with each new engagement and, especially as trustees or receivers, expose themselves and their firms to large legal liabilities and risks. As a result, individuals serving in these capacities want to make absolutely certain that they have legal counsel who they know will be able to not only provide sound legal advice on the matters related to the case but also guard the fiduciary from undue legal risks.
Nevertheless, despite the role being played by the fiduciary in the particular case, there are issues that transcend when determining who to retain as counsel. The first is whether or not there is existing cash to pay the professionals. I use the word “existing” because in many cases, there is barely adequate cash or cash flow to continue to conduct the business, liquidation, or examination. In a Chapter 11 bankruptcy case, or in a state or federal receivership, lenders may be willing to step up and fund the continuing operation. However, even in these instances, lenders are likely to put tight clamps on the amounts allowed to be paid from these loans to cover legal and other professional bills. This is especially true at the start of a matter when the professionals are being retained and when there may be extreme uncertainty as to the company’s ability to survive. In other matters, it may be clear that no additional outside funding will be made available, and it is an “eat what you kill” situation. In other words, professionals will be paid predominantly from the proceeds of future asset sales or litigation.
In either of these scenarios, it may be difficult for fiduciaries to find and retain their top counsel choices. It takes a special kind of person or firm that has the guts to take on this risk, especially where no outside funding is available. In fact, in many of these cases, counsel must seek and receive approval from the court to resign, making it difficult for them to exit the case due to lack of timely payment. Yet, there are still numerous well-qualified attorneys who are used to these situations and more than happy to throw their hat into the ring to take on the matter. Only once in my 23-year career have I had a law firm resign because the firm feared not being paid. Ironically, in this particular matter, all professionals and secured creditors were paid in full, and unsecured creditors received a handsome return.
The second consideration is related to conflicts. Often, by the time a fiduciary is appointed, many of the potential firms have been retained by one or another party-in-interest or have a relationship—unrelated to the case—to the entity or one of its creditors or other constituents. As a result, finding attorneys or other professionals without conflicts, or conflicts that can be waived, can be a major problem. In one large case, I asked 11 attorneys—all of whom I had complete faith would do a great job—before I found one without a conflict. So, conflicts become a key gating issue to retention.
The third consideration is the attorney’s fee structure and hourly rates. In court-appointed situations, attorneys are usually held to an hourly rate structure, with contingency arrangements typically limited to litigation recoveries. As a result, a fiduciary will review hourly rates on an absolute basis and then review experience related to total fees charged in similar cases. This is easier if the fiduciary has worked with the attorney or firm before. If not, it is common for the fiduciary to ask referral sources about their experience with the firm or individual under consideration. Needless to say, the lowest hourly rates do not always produce the lowest fees or best value for the estate. Nonetheless, it is a common benchmark that we all use.
The fourth consideration is the venue. For instance, I want to retain counsel who has practiced in federal court, if the case is in federal court; bankruptcy court, if it is in bankruptcy court etc. It is very important for the specific attorney responsible for handling the representation and for the firm to be familiar with the appropriate court procedures and, equally so, the actual judge assigned. This is especially true in state court. Knowing how the judge thinks and reacts and how the judge responds to various arguments is a key to winning and a very important element when choosing counsel. And retaining someone who has the judge’s respect is very important.
Some fiduciaries require—or would prefer—that their legal counsel have specific industry knowledge. This is perhaps a benefit if the fiduciary is dealing with an industry in crisis or with a regulated industry. I tend to place less emphasis on this consideration as it relates to the specific attorney working on the matter; however, it is always a plus if the attorney’s firm has some degree of expertise in the industry upon which the attorney can draw.
The fiduciary needs to determine the specific requirements of the case before making a decision on which counsel to choose. Does the fiduciary need an attorney who is known for his or her ability to settle major disputes, or an attorney who is a bulldog in negotiations or someone who can understand general business issues and contracts? Obviously, if a large law firm is retained, the sell will be that “they have it all.” However, the truth is that it is the specific attorney or attorneys who are hired that really matters the most. First, you the fiduciary must know that they will be at the fiduciary’s side whenever—and I do mean whenever—needed. It also means that they will be committed to commanding and directing the case at every step, not just relying on their well-positioned associates to do the “right” job. This is where trust and respect matter most.
Having said that, the breadth of expertise of the firm is very important. No individual can do it all alone. Most cases, regardless of size, typically require a number of skills and areas of expertise, ranging from bankruptcy to corporate contract, tax, international, leasing, litigation, and investigative. As noted earlier, some cases need specific expertise, such as knowledge of oil and gas, health care, or a regulated industry. So, a fiduciary who understands his or her needs upfront will be careful to choose an individual and a firm that can fulfill most of the essential needs of the matter. By doing so, the requirement to retain other firms to handle specialized issues is reduced. In addition, one must consider the actual costs associated with the possible need to retain local counsel or conflicts counsel if the primary counsel hired cannot fulfill those, or similar, roles. Seldom can an individual counsel or firm “do it all,” even in smaller cases. So, fiduciaries have to weigh the cost benefit of all of these matters when retaining lead counsel.
But probably the greatest consideration when choosing counsel is to pick someone who has represented debtors and corporations in distress as his or her main practice area and knows what issues the company and the fiduciary will be facing and how to best prioritize those issues. This experience is essential when dealing with companies in a crisis or in deep distress and can never be underestimated or undervalued. And, because the community of counsels working in this practice field is relatively small and very close knit, it is key that the attorney chosen has a reputation that is impeccable and fits the need of the specific case.
The type of attorney retained by an examiner may differ substantially from the attorney chosen by an operating fiduciary. Often, there are substantial Securities and Exchange Commission (SEC) investigation issues involved. Hiring an individual and firm with close knowledge of, and ties to, SEC staff can be very helpful in these types of matters. Likewise, the individual and firm should have experience, and proof of success, in dealing with other regulatory agencies that may be involved.
Having a group of experienced litigators who can perform interviews and depositions is also extremely important. An examiner’s attorney will typically only have one opportunity to depose or interview a limited number of individuals; therefore, choosing that select group correctly and being able to ask the truly important questions will drive the success of the investigation. Likewise, having a firm that can efficiently review thousands of documents and put together the puzzle in a cost effective manner can make or break the investigation.
All of these points require not only expertise and competency, but also individuals who are able to relate in a positive manner with their counterparts on the “other side.” An investigation requires cooperation and a level of reasonableness to be successful. So, a level-headed attorney can often win substantially more from an opposing party than a bulldog who wields nothing but threats.
Because the job of a litigation trustee is to pursue the remaining litigation from a bankruptcy case, the choice of counsel will be predominantly centered on retaining a firm that is, first, known for its litigation skills in the relevant areas and, second, able to clear the conflicts to handle the major pieces of litigation held in the trust. For instance, if one major piece of litigation is based on an accounting malpractice claim and the other on a financial derivative action, it is important to find a firm that is noted in both areas. Often, it will also be necessary to retain local litigation counsel. So, hiring a primary firm that has good contacts in the local area is helpful. For small law suits within the trust, it is not uncommon for smaller or boutique firms to be retained, which often has the effect of reducing overall costs.
In a litigation trust, funds are usually limited. Therefore, it is imperative that the attorney retained has the skill set to do several things quickly: identify the menu of litigation, place potential probabilities for success on each, and define the dollar value of that success. It is equally important that legal counsel evaluate the matters that would be better settled than litigated. Likewise, it is important to know whether the firm retained will work on some form of a contingency basis that incentivizes the firm to win the largest victory while assuring the trust that there will be adequate funds to pursue the remaining litigation matters to a reasonable outcome.
Last, settling a matter is much less expensive than litigating. Reaching a successful settlement is as much an art as it is a science, and not all litigators possess the talent. If I perceive that an attorney is disinclined to consider the option of settlement, or does not have the skills required to successfully settle matters, I will not retain that attorney.
It is important to understand what fiduciaries look for in choosing counsel. And it is imperative that the fiduciary is comfortable with your judgment, reputation, and professional demeanor as an attorney. Equally important, you must feel that you are compatible; after all, you may be working together for a long time.
Keywords: Chapter 11, Chapter 7, trustee, examiner, receiver, corporate reorganizations and investigations, liquidation trustee, litigation trusts, fiduciary