Worth Every Penny
Bankruptcy-related legal fees calculated as a percentage of liabilities has soared. Every dollar that is paid to debtor or creditor counsel is a dollar not going to creditor recovery. On top of soaring legal fees, one must add the cost associated to the army of advisers and accountants to guide a company through bankruptcy. BK has become more expensive than ever, not only due to the cost of potential business interruption, but also the cost to retain legal counsel. Yes, it’s expensive, but good lawyers are worth every penny all corporate restructuring benefit from proper legal expertise, advice, and representation.
Lawyers claim that BK takes longer, litigation is more contentious, restructuring more intricate given complex credit facilities, regulatory compliance for public companies more onerous.
The company and its shareholders destroy value when filing BK; while creditors typically take a haircut, depending on outcome and seniority, but the running joke is that lawyers always win. Supply and demand drive free markets and fees are based upon what debtors and creditors are willing to pay. Perhaps AI will help lower hourly billings at some point in the future, but for now legal fees have recently rising by double digits annually. Top law firms are approaching $3,000 per hourly billing for Partners. The largest 100 law firms in the U.S. raised their hourly rate ~9% in 2023, with the top law firms billing rate rising 10-15% y-o-y. According to a Wells Fargo report top associates are billing at a rate of $1,500 an hour, while earning $400,000 – $500,000 annually. Who says law school is not a good investment?
The recent Supreme Court ruling that overturned the Sackler Family/Purdue Pharma liability previously set at $6B is a just outcome given unsettled claims outstanding, however this ruling establishes precedent that claims must be unified and settled for a company to be protected before it emerges from bankruptcy. This ruling might will add to legal costs as increased litigation costs are incurred giving holdouts increased power in negotiations.
This chart below is from a Creditor Coalition recent publication showing legal fees soaring 2x in the past years for BK filing with liabilities in excess of $150M. |
