Wednesday, March 28, 2007

Houston Judges Continue Inquiry Into Practices of Prominent Creditors' Firm

Proceedings involving a prominent Houston creditors’ firm (hereafter referred to as the Firm)* heated up recently as two bankruptcy judges considered sanctions issues arising out of the Firm’s extensive bankruptcy practice. The Firm feuded publicly with the U.S. Trustee’s office while seeking to demonstrate the sincerity of its repentance. While a significant amount of information was added to the public record, no resolution is likely until mid-summer.


The firm in question operates a high volume foreclosure and bankruptcy practice. Its recent spate of difficulties began on February 3, 2006, when U.S. Bankruptcy Judge Marvin Isgur assessed sanctions of $65,000 against the Firm in connection with its requests for attorney’s fees in connection with motions for relief from stay. In re Porcheddu, 338 B.R. 729 (Bankr. S.D. Tex. 2006). In the opinion, the court estimated that the firm filed 5,000 motions for relief from stay per year in the Southern District of Texas alone and estimated the Firm’s revenues from motions for relief from stay at $125,000 every two weeks.

U.S. Bankruptcy Judge Wesley Steen issued a series of orders arising out of objections to a chapter 13 plan filed by the Firm on behalf of its client, Countrywide Home Lending, Inc., which culminated in an opinion finding that sanctions should be assessed against the Firm. In re Allen, 2007 Bankr. LEXIS 231 (Bankr. S.D. Tex. 1/9/07). See “Court Rejects Defense of The Computer Made Me Do It” (1/10/07). The Court bemoaned the fact that prior warnings and the Porcheddu sanction had not caused the firm to change its behavior. The Court scheduled a hearing at which the Firm was ordered to appear and report what sanctions would deter future repetition of the conduct.

Meanwhile, Judge Jeff Bohm issued his own show cause order after the Firm filed a motion for relief from stay and then withdrew it following allegations that it was based on a flawed payment history. In re Parsley, No. 05-90374 (Bankr. S.D. Tex. 2/12/07). This case involved Countrywide as well. (Note: The specific allegations regarding the accuracy of the pay history are disputed. Apparently the debtor would have been in default even if the two disputed payments were disregarded). Judge Bohm scheduled a hearing for March 5, 2007.

Thus, by the end of February 2007, one Houston judge had assessed sanctions against the Firm, a second Houston judge was preparing to assess sanctions and a third Houston judge was considering whether sanctions should be imposed. The stage was set for March madness.

The Parsley Hearing

Judge Bohm’s case was the first to be scheduled for a hearing. On March 2, 2007, the U.S. Trustee appeared and submitted a nine page Statement. The U.S. Trustee suggested that the Court should investigate whether Countrywide and its counsel had engaged in similar conduct in the past and should consider that information when deciding whether to assess sanctions. The U.S. Trustee concluded that “additional inquiry is needed to determine with certainty whether conduct at issue involves bad faith.” On the day of the hearing, the Firm's counsel filed an Emergency Motion to Strike, or in the alternative to Limit Issues and/or to Continue Hearing. The Firm objected that the U.S. Trustee had “at the eleventh hour” requested that the Court’s inquiry “be exponentially expanded.” The Firm also questioned the trustee’s ability to participate and criticized its failure to confer prior to filing its Statement.

The Bankruptcy Court declined to strike the U.S. Trustee’s Statement. The Court heard some testimony and then continued the remainder of the hearing until June 26, 2007. Some of the testimony received at the hearing related to the relationship between the Firm and its client. Specifically, testimony was received which indicated that Countrywide Home Lending, Inc. did not allow the Firm to communicate directly with it, but instead required that all communications be routed through another law firm.

In a post-hearing brief, the Firm argued that it had acted simply as local counsel for the referring law firm and had acted reasonably in relying upon the information provided to it.

The Allen Hearing

Shortly after the Parsley hearing, Judge Steen invited the U.S. Trustee to submit a statement in his case as well. When the U.S. Trustee submitted its statement one week later, it had grown to 35 pages and included selections from the transcript of the Parsley hearing. The U.S. Trustee suggested that the court expand its inquiry to examine the relationship between the Firm, Countrywide Home Lending and the national firm identified as the go-between. The U.S. Trustee pointed to specific statements by the Firm which referenced direct communications with Countrywide and suggested that these statements could not be correct if the Firm were not allowed to speak directly with its client.

The Firm's attorneys were not amused by the U.S. Trustee’s comments. They stated, “It is at once poignant and disturbing to witness the U.S. Trustee – in connection with a Rule 9011 sanction hearing – file a pleading containing reckless and untrue allegations concerning (the Firm) and third parties.” The Firm's counsel sent a Rule 9011 safe harbor letter to the U.S. Trustee demanding that it withdraw its allegations and attached a copy to its response. Apparently, there were only certain types of loans where Countrywide required that all of its law firms communicate through a single law firm. The Parsley case involved a no direct contact case, where the Allen case apparently involved a case where direct contact was allowed. The bemused U.S. Trustee pointed out that it had simply quoted from the transcript in the Parsley case.

In preparation for the Allen hearing, the Firm's attorneys filed several pleadings designed to show the sincerity of the Firm's repentance. In response to an order from Judge Steen requiring it to disclose “all similar occurrences and proceedings involving the firm” in the prior five years, the Firm submitted a list of nine proceedings which it contended were directly relevant (including Porcheddu, Allen and Parsley), as well as five other incidents which it contended were not directly relevant but were submitted in the interest of full disclosure.

The Firm also submitted a Response in which it accepted responsibility for its actions. It suggested that the Court consider the damage to the Firm’s reputation in assessing a sanction** and detailed a list of actions taken subsequent to the Porcheddu opinion. Among other things, the Firm stated through its counsel that:

• It had hired an experienced Managing Bankruptcy Attorney in April 2006;
• It had retained former bankruptcy judge Bill Brister as an independent “legal” auditor;
• It had conducted in-house trainings, including training in ethics and attorney due diligence as well as the specific issues raised by the Allen case;
• It had required additional CLE for its staff;
• It made 211 changes to its software during 2006;
• It had developed new payment tracking software;
• It had required that its motions include payment histories certified by its clients;
• It had required greater involvement and review by senior attorneys; and
• It had terminated two attorneys.

The Firm estimated the compliance costs which it had incurred at over $2 million.

On March 22, 2007, Judge Steen conducted a hearing on the sanction to be imposed. However, he did not make a ruling at that time. Instead, he entered an Order for Continuance, Supplemental Report, and Discovery. The Court made the following rulings:

• It required the U.S. Trustee and the Firm to confer about whether discovery was required with regard to the Certificate of Conference attached to the Firm’s first objection to plan confirmation;
• It allowed the U.S. Trustee to file a revised Statement based upon the testimony received and the discussion regarding the Certificate of Conference;
• It allowed the Firm to respond to the U.S. Trustee’s revised Statement and to respond to issues addressed in open court with regard to Case No. 04-50312; and
• It stated that it might enter an order stating that it would rule without any further hearings or it might hold a hearing to consider an update from Judge Brister and to determine the issues surrounding the Certificate of Conference.

The Court’s order indicates concern in two specific areas. The objection to confirmation contained a Certificate of Conference which recited that “I, (Attorney), an attorney employed by the offices of (the Firm) made a good faith effort to negotiate a settlement of the dispute with Debtor’s counsel. Resolution of this dispute was not successful and the filing of this Objection to Confirmation is therefore necessary.” If the parties had conferred and the Debtor’s counsel failed to raise the issue subsequently raised in its response, then the mistakes in the subsequent pleadings would be more innocent. On the other hand, if no conference occurred, then the subsequent errors would appear more serious. A false certificate combined with an erroneous pleading would be more serious than an erroneous pleading standing alone.

The Court also focused attention on prior proceedings in In re Cordova. Cordova was a case in which an objection to confirmation had been filed and then withdrawn. On January 12, 2005, Judge Steen issued an Order Continuing Hearing and Requiring Attendance at Hearing to Show Case Why Sanctions Under Rule 9011 Are Not Appropriate. According to the docket, Judge Steen admonished the Firm, but declined to issue sanctions at that time. Curiously, the Cordova case was not mentioned by the Firm in its self-disclosure of “similar occurrences and proceedings” despite the fact that Judge Steen's Allen opinion had specifically referred to a prior instance in which he had admonished the Firm.

What Does It All Mean?

In the short-term, there has been a lot of attention focused on the Firm without any resolution of the issues. However, the cases raise several important questions.

How does a firm handle a high volume of cases and still satisfy its professional obligations? That seems to be the question raised by the Houston judges. It is also seems to be the issue which the Firm has addressed in its responses.

There is also a question as to the extent that the Firm must assume responsibility for the information provided by its clients. In the Parsley case, the Firm apparently submitted inaccurate information which it received from its client (although the extent to which the information was inaccurate is a matter of dispute). To what extent should the Firm be responsible for policing the accuracy of the information received from its clients? Under the new procedure proposed by the Firm, the Firm’s clients must certify as to the accuracy of its pay histories. At what point does any attorney have an affirmative obligation to question the information being provided by his client?

What is the Firm’s obligation to disclose that it is merely acting as local counsel and does not have direct contact with its client? In at least the Parsley case, it appears to be undisputed that the Firm accepted referrals from another law firm on the condition that all communications go through that law firm. However, the Firm filed pleadings in which the identity of the other firm was not disclosed. If a Firm files pleadings on behalf of a client, is it representing that it has had direct contact with that client?


*The identity of the firm involved is widely known. However, it is this blog’s policy not to specifically name attorneys involved in sanctions issues.
**In a separate pleading, the Firm stated that “The spoken and written comments by the Court are widely read, blogged, and commented on by practitioners and other courts as well as clients and potential clients.”

Saturday, March 24, 2007

Mental Incapacity Excuses Debtor From Credit Counseling; Prior History Proves Insufficient Grounds for Dismissal

Judge Robert Jones from the Northern District of Texas was recently faced with a situation which looked like an easy candidate for dismissal. The debtor filed pro se, did not obtain credit counseling, had previously filed ten unsuccessful bankruptcy cases and had filed over 100 suits against various parties. Despite the debtor's unsympathetic profile, the court carefully read the statute and considered the circumstances in determining not to dismiss the case. In re Jarrell, No. 06-10409 (Bankr. N.D. Tex. 3/9/07).

The Incapacity Exception to Credit Counseling

While the requirement to obtain credit counseling is well known, the exceptions are somewhat more obscure. Under Sec. 109(h)(4), a debtor may be excused from credit counseling if he has an incapacity or a disability. Incapacity is defined as meaning that the debtor "is impaired by reason of mental illness or mental deficiency so that he is incapable of realizing and making rational decisions with respect to his financial responsibilities." Disability means that "the debtor is so physically impaired as to be unable, after reasonable effort, to participate in an in person, telephone, or Internet briefing."

At the hearing on the motion to dismiss, the debtor's psychologist testified he had diagnosed the debtor with bipolar disorder, schizophrenia and clinical depression. The psychologist testified that the debtor "is severely impaired to the point where he is unable to make rational decisions regarding his financial responsibilities and ... doesn't have the mental ability to realize his decisions are irresponsible." On the other hand, the debtor had sufficient capacity to recognize his income and specific assets and debts. The court was satisfied that the debtor had a mental illness and commented that his filing of over 100 lawsuits "may in and of itself be evidence of mental illness." Based on the undisputed testimony of the psychologist, the court found that the debtor's mental incapacity was sufficient to justify a waiver of the pre-filing credit counseling briefing.

Judge Jones's ruling should be unremarkable for the reason that he read the statute and applied it as written. However, the exception which the court applied highlights a weakness in the statute itself. The credit counseling requirement has been described as "absurd," "a meaningless formality" and "a trap for the unwary" by Texas judges. In re Sosa, 336 B.R. 115 (Bankr. W.D. Tex. 2005); In re Navarro, No. 06-51007 (Bankr. W.D. Tex. 6/27/06). While the mentally ill may escape credit counseling due to the fact that they would not receive a benefit from it, other debtors must still fulfill the requirement regardless of whether it serves a useful purpose.

Dismissal for Bad Faith/Totality of the Circumstances

The court also considered whether the case should be dismissed under Sec. 707(b)(3) based on bad faith or totality of the circumstances. The court noted that there was certainly plenty of evidence to raise the specter of bad faith. Double-digit bankruptcy filings, triple-digit lawsuits and dilatory conduct in dealing with his major creditor all pointed to a debtor who was out of control and gaming the system. However, Judge Jones made an admirable effort to go below the surface and analyze the significance of the facts.

First, the court examined the circumstances of the present case. The debtor filed after Huntington State Bank obtained a judgment against him. The debtor testified that he was concerned that the judgment could cause him to lose his home and social security payments. The court found that this was a legitimate reason for filing.

It was true that the debtor filed many unsuccessful bankruptcies and frivolous lawsuits. However, this conduct occurred before the debtor moved to Texas and incurred the debt which ultimately caused him to file bankruptcy. As a result, the court found that there no connection between the prior pattern of bad conduct and the present case. Additionally, the present case was distinguishable from the typical serial filing abuser. As Judge Jones noted, the modus operendi of a serial filer involves the filing and dismissal of multiple cases. Failure to follow through with the bankruptcy case is part and parcel of what makes it abusive. Here, the debtor, after filing pro se, retained qualified counsel, filed schedules and the statement of financial affairs and appeared at his first meeting of creditors. Thus, the debtor was faced with possible dismissal for bad faith at the point where he was finally taking his obligations to the bankruptcy court seriously.

The court considered the effect of allowing the bankruptcy case to proceed on each of the constituent parties. The court found that creditors would not be harmed since it was unlikely that the debtor would ever accumulate significant wealth. (Left unasked was the question of what the bank was thinking when it extended credit to a person who had previously filed ten bankruptcies, whose only income consisted of social security and who had serious mental health issues.).

The court found that the debtor would benefit:

"Jarrell has more problems than should be visited upon any human being. His wife and four children suffer from various illnesses; Jarrell is very sick. While no one deserves a free pass by simply offering up the excuse that he does not know wht he is doing, Jarrell's situation is unique. This bankruptcy will not begin to address the majority of the many problems that Jarrell has, but it may provide token relief from some of his debts."

Finally, the court considered the interests of the court and judicial process. The court found that Mr. Jarrell's conduct had burdened both the state and federal courts and the public at large. Nevertheless, the court decided to give him one last chance. "The Court concludes that it will take Jarrell with his many problems and issues, at least one more time, and allow him the opportunity to pursue some modicum of relief." Thus, the court decided to retain the case even though it was undesirable.

Recognition to Debtor's Counsel

Debtor's counsel, Dick Harris, should be commended for taking on a difficult and unsympathetic client. While he may not be paid much (or at all) for his efforts, the court's opinion recognizes him as a "competent counsel (who) has for many years practiced before this Court representing both creditors and debtors in a professional manner."

Tuesday, March 20, 2007

Supreme Court Allows Recovery of Post-Petition Attorney's Fees Based On Pre-Petition Contract

In a unanimous opinion, the Supreme Court ruled that nothing in the Bankruptcy Code prohibits a creditor from asserting an unsecured claim for attorney's fees incurred post-petition where such fees would have been recoverable outside of bankruptcy. Travelers Casualty & Surety Co. of America v. Pacific Gas & Electric Co., No. 05-1429 (U.S. 3/20/07).

Travelers had issued a surety bond to Pacific Gas & Electric. In connection with the bond, the parties executed a series of indemnity agreements which allowed recovery of attorney's fees incurred in protecting Travelers rights. Travelers filed a claim to protect itself in the event that the debtor defaulted in the future. The debtor's plan preserved Travelers right to subrogation and indemnity in the event of a default, but Travelers disputed whether the language was sufficient. As part of a settlement, PG & E agreed that Travelers could assert an unsecured claim for its attorney's fees. However, when Travelers amended its claim to add the attorney's fees, the debtor objected. The Bankruptcy Court sustained the objection based upon a Ninth Circuit decision which held that attorney's fees were not recoverable for litigating issues unique to bankruptcy. In re Fobian, 951 F.2d 1149 (9th Cir. 1991). Not surprisingly, the District Court and the Ninth Circuit affirmed.

The Supreme Court reversed, finding that Sec. 502(b)(1) generally allows claims to the same extent that they would be allowable outside of bankruptcy. The only subsection of Sec. 502(b) which addresses recovery of attorney's fees is Sec. 502(b)(4), which limits claims by an attorney for the debtor to the reasonable value of such services. Thus, where the Code contained a specific limitation on attorney's fees, the Court would not imply a broader one.

The Supreme Court found that Fobian did not have any support in the language of the Bankruptcy Code. Travelers did not attempt to defend the Fobian rule. Instead, it argued that because Sec. 506(b) only allows attorney's fees to oversecured creditors, that unsecured creditors should not be entitled to recover them at all. The Supreme Court declined to address this argument on the basis that it had not been raised in the lower courts.

This ruling is important for what is decides and for what it does not decide. The first important point is that this case was determined with regard to unsecured claims under Sec. 502(b). Even though the litigation in this case took place post-petition, the creditor did not attempt to assert a post-petition administrative claim. The Supreme Court's broad reading of claims allowable under Sec. 502 would not apply to administrative claims under Sec. 503, which have a much narrower scope. Although it was not discussed in the Supreme Court's opinion, it appears that the parties recognized that litigation under a pre-petition contract created a pre-petition claim even though the litigation occurred during the bankruptcy. The Travelers opinion will create more opportunities for parties who could have recovered attorney's fees pre-petition to amend their unsecured claims to include post-petition attorney's fees. For example, if the debtor unsuccessfully objects to a proof of claim which had a contractual attorney's fees provision, the creditor could add the fees for defending the claim to its unsecured claim. In most cases, adding additional amounts to the unsecured pot will not have a major effect on the case. However, the potential for amending claims after the bar date could create administrative headaches in cases.

The opinion also creates potential tension between Sec. 502(b) and Sec. 506(b). Sec. 502(b)(2) disallows claims for unmatured interest, while Sec. 506(b) allows interest to oversecured claimants. Thus, these two sections are consistent. On the other hand, Sec. 502(b) is silent as to allowance of attorney's fees while Sec. 506(b) allows such fees only to oversecured creditors. Thus, there is a potential for claims for post-petition attorney's fees to be allowed under Sec. 502(b) and disallowed under Sec. 506(b). Because the Sec. 506(b) issue on attorney's fees was not addressed by the Supreme Court, lower courts will have to guess at how it would resolve this issue. However, it may be a safe bet to assume that with all nine justices silent, it might be reasonable to assume that the Supreme Court would find a way to reconcile the two statutes as opposed to overruling a recent precedent.

Judge Clark Protects the Brooklyn Bridge

The prolific Judge Leif Clark, who has written many memorable footnotes, including one quoted here yesterday, has written another one which is both quotable and addresses an important point. In In re Rendon, No. 06-52501 (Bankr. W.D. Tex. 3/15/07), a party who claimed to be purchasing a home from the debtors filed a Motion to Create Equitable Lien/Motion for Expedited or Emergency Hearing. The court found that the motion requested three forms of relief: an order quieting title, an injunction and an objection to the debtors’ claim of exemption. The court found that the first two forms of relief must be brought in an adversary proceeding and dismissed the motion without prejudice. The court found that the objection to exemptions was untimely and must be denied. Even though the purchasers were not listed as creditors in the bankruptcy, they admitted that they had actual knowledge of the bankruptcy case prior to the 341 meeting.

The court noted that the mere fact that the debtors had successfully claimed the property as exempt did not establish their ownership of the property. In a footnote, the court added the following comment:

"Just in case there is any confusion, let’s suppose I claim an exemption on the Brooklyn Bridge, and you fail to timely object to my exemption claim. Is the sainted bridge thus exempt? Technically, section 522(l) says it is. But of course, what difference does my exemption claim make if Hizzoner, Mayor Bloomberg, comes to court and successfully establishes that, in fact, the Brooklyn Bridge is not my bridge to claim, but is safely still the property of the City of New York, safely untarnished by my exercise in hubris? None at all you correctly reply, none whatsoever.”

It is important to note that an exemption merely determines whether property is excluded from the estate. However, it does not operate to grant title to the property. Mayor Bloomberg will no doubt sleep more soundly.

Monday, March 19, 2007

Forum Shopping Is Bad--Or Is It???

Judge Leif Clark recently wrote a very brief opinion with regard to jury demands and forum shopping. He ruled that the defendant's good or bad faith was not relevant to whether a jury could be demanded. Osherow v. Clonch Industries, Adv. No. 06-5200 (Bankr. W.D. Tex. 2/5/07). He stated:

"Congress has authorized bankruptcy courts to adjudicate matters involving trial by jury, but only with the consent of all the parties. A party can thus easily obtain a change of fourm by the fiat of first demanding a jury then refusing to consent to the bankruptcy court's conduct of the trial. (citation omitted). A pleading filed for the purpose of forum shopping is potentially sanctionable. Then again, it might not be (citation omitted)."

In support of the proposition that forum shopping might not be bad, Judge Clark cited this wonderful comment from Judge Rubin of the Fifth Circuit:

"Forum-shopping is sanctioned by our judicial system. It is as American as the Constitition, peremptory challenges to jurors, and our dual system of state and federal courts."

McCuin v. Texas Power & Light Co., 714 F.2d 1255, 1261 (5th Cir. 1983).

So, the next time someone hurls the charge of forum-shopping, be sure to point out that you are defending the Constitition and the American way (although you might still want to have an argument as to why you are engaging in good forum-shopping as opposed to the other kind).

Friday, March 16, 2007

Lunchtime Conversation Prompts Judicial Inquiry, Pt. 3

Previous posts discussed the independent investigation initiated by Judge Marvin Isgur with regard to a credit counseling firm in the Southern District of Texas. Judge Isgur was concerned with regard to statements made at a lunchtime presentation which suggested that Money Management International refused to hire individuals who had filed bankruptcy as credit counselors.

At the hearing on March 1, 2007, MMI appeared and informed the court that "it does hire individuals notwithstanding any prior bankruptcy filing." The court was not completely satisfied and wanted to know whether they had hired former debtors in the past and whether they would in the future. As a result, the court continued the status conference to March 30, 2007.

Subsequent to the hearing, MMI submitted a new affidavit which represented that at least 24 of its current employees, including a manager and two supervisors, had filed for bankruptcy in the past. The affidavit also represented that "MMI intends to continue the practice of hiring qualified persons as credit counselors, including qualified persons who have been in bankruptcy." Thus, it would appear that the court's inquiry corrected a misunderstanding and most likely provided some job security for former bankrupts employed as credit counselors.

Administrative Insolvency, Professional Responsibility and the Art of Judging

Recently I was involved in a heavily litigated chapter 11 case. The professional fees (which included fees from two sets of debtors’ counsel, a chapter 11 trustee, an examiner, various special counsel and parties claiming substantial contribution fees) threatened to consume the estate until the lawyers agreed to limit their take and leave some funds for the pre-petition creditors. In a remarkable display of good sense, the attorneys then compromised on how the professional fees would be allocated rather than continuing the fight. (I can’t claim any credit here since others did the heavy lifting).

At the hearing to approve the fees, the judge commended the lawyers for their professionalism. However, while everyone was basking in good spirits (or at least as good as you can feel after having agreed to a fee reduction), the court asked what could have been done to stop the bleeding before everything got so expensive. Waxing philosophical, the court questioned whether the traditional ethical rules with regard to professional billing work in the bankruptcy context and whether the court should play a more activist role in managing troublesome cases. The court raised a good question.

In the traditional two-party litigation model, professional responsibility is primarily a matter of consumer protection. Fees are governed by a limitation that they may not be unconscionable, Texas Disciplinary Rules of Professional Conduct 1.04, but beyond that, the rates and amounts charged are largely a function of the client’s ability and willingness to pay. Fee shifting distorts the traditional model, since one party can shift its costs onto the other party. However, there are still some limits since there is no guarantee that the party who is on the receiving end of the fee award will have the ability to pay.

In a complex bankruptcy, the dynamic is far different than the two party litigation model. In this context, a “complex” bankruptcy is one where there is a pot of unencumbered assets worth fighting over and multiple parties with an interest in the pot. In an efficient bankruptcy, the pot is maximized for the benefit of the residual claimants, who are typically the unsecured creditors. On the other hand, in an inefficient bankruptcy, the post-petition claimants (such as professionals, committees, secured lenders and parties claiming a “substantial contribution”) consume the estate at the expense of the residual claimants.

An inefficient bankruptcy poses both an ethical challenge for the professionals and a management challenge for the court. Professionals employed by the estate have a duty to maximize value for the estate (and thus to ultimately benefit the creditors) rather than to simply run up their own fees. The Fifth Circuit has held that professionals may not be compensated unless their efforts result in an “an identifiable, tangible and material benefit to the bankruptcy estate.” Matter of Pro-Snax Distributors, Inc., 125 F.3d 414, 426 (5th Cir. 1998). Thus, there should be a practical deterrent to pursuing inefficient litigation on the part of the estate’s professionals.

However, there are several important limitations on the ability of the estate’s professionals to act efficiently and ethically when it comes to incurring fees. First, contested fee applications are fairly unusual. As a result, the deterrent effect is more theoretical than real. Second, efficiency is much easier to judge in hindsight than in the heat of battle. As a result, decisions which result in unproductive fees may have appeared reasonable at the time. Finally and perhaps most importantly, third parties can impose costs on the estate through their litigation tactics quite independently of the good judgment and ethical decision making of the debtor’s professionals. If a creditor decides to pursue a program of expensive discovery and objects to every action proposed by the debtor, the estate’s professionals will often have little choice but to participate to the same extent, resulting in an escalation of professional fees.

So, since the professionals have an imperfect ability to avoid a train wreck, what can the court do?

1. Watch out for ugly cases. While this sounds fairly trite and self-evident, some cases bear closer watching than others. In some cases, the parties and personalities involved have a greater potential for spiraling out of control. Becky McElroy likes to say that you should watch out for any case with an “ex” in it, whether it is an ex-wife, ex-partner, ex-employee and so on. In the business context, this can apply to a rebuffed purchaser, a competitor or a debt buyer whose strategy is to cause trouble until someone buys them off. Of course, litigiousness can be a management style for the debtor as well. If the court is able to see the warning signs, it can step in sooner to manage the case more closely.

2. Monitor Fees. In a particularly ugly case, the parties may be reluctant to submit fee applications for fear of retaliatory objections. However, in a case where no one is submitting their fees for approval, the court may not be aware that the case is approaching administrative insolvency.

3. Send the Parties to Mediation. Not all problems can be solved through litigation. If the parties are using litigation as a negotiating strategy, the court may be able to save costs by requiring the parties to negotiate directly. Of course, mediation can also be another opportunity for delay and expense if the parties aren’t ready to negotiate.

4. Set Deadlines/Force the Issue. All lawyers want more time and some cases require time to find a business solution. However, time also creates more opportunities for mischief. If the debtor’s lawyers are asking to continue the hearing on the disclosure statement for the fifth time and no creditor is stepping up to propose a plan, then perhaps the case is in a stalemate which won’t be resolved unless the court sets deadlines and forces the parties to litigate, reach an agreement or go away.

5. Appoint a Trustee/Change the Parties. Some cases are basically a two party dispute with the remaining creditors held hostage to the main dispute. While appointing a trustee is normally reserved for situations where the debtor has misbehaved, perhaps it is appropriate to appoint a trustee in cases where the parties’ irrational hatred for each other threatens to consume the estate to the detriment of the third party creditors. By appointing a trustee, the court may deprive one of the factions of its motivation to fight. Of course, the opposite could be true as well. If the non-debtor party has an irrational to inflict its will on others, then appointing a trustee may simply create another opponent for the malevolent party while defunding the former debtor-in-possession (who can no longer bill the estate for its fees).

The suggestions offered here are imperfect and incomplete. Please feel free to use the comments function to offer your own suggestions.

Wednesday, March 14, 2007

Now for Something Completely Different: A Salute to Success

I took my family to the rodeo last night. It was not because I wanted to put on my boots and watch bull riding or mutton bustin’ (although those were my favorite events). No, we went to the rodeo because Aly & AJ were the featured performers last night. If you have a daughter between the ages of 10-14 and own a television, you likely know who I’m talking about, while the rest of you may be scratching your heads. For those of you who are unfamiliar with Aly & AJ, I will take a break from writing about bankruptcy to talk about the Disney/Nickelodeon teen machine.

In case, you may have missed this trend, there are now about a million shows aimed at middle school girls on Disney and Nickelodeon. As a result of aggressive marketing, the teen stars of these shows, rather than being snickered at for being modern Mouseketeers, are plastered all over the pages of Tiger Beat, Pop Star and similar teen girl fan magazines. (In case you may be thinking that it is really weird that I would know this, I need to point out that I spend a lot of time helping my eighth grade daughter with homework and the posters from these magazines cover every available inch of wallspace in her room).

So, what is the secret to this success?

1. The first step is finding the right niche market. Here, it is all girls all the time. .If you flip through the offerings on Disney and Teen Nick, you will find that they are predominately aimed at middle school girls. If boys have a lead role in a show, they must be cute and non-threatening and be part of a cast with strong girl characters (e.g., Dylan and Cole Sprouse from the Suite Life of Zack and Cody or Ricky Ullman in Phil of the Future). Maybe guys of this age are too glued to their Xbox to watch TV. However, middle school girls provide an eager audience. Since they are too young to drive, they spend a lot of time in front of the TV (usually while talking on the phone at the same time). They also buy the magazines, CDs and movie tickets which spin off from these shows and spend hours discussing them with their friends.

2. Second, is that it helps to have some vaguely familiar names. Thus, you will find Julia Roberts’s niece (Emma Roberts of Unfabulous), Billy Ray Cyrus’s daughter (Miley Cyrus of Hannah Montana), Haley Joel Osment’s sister (Emily Osment also of Hannah Montana) and Britney Spears’s sister (Jamie Lynn Spears of Zoey 101). I’m not sure how this helps with the kids, but perhaps it means something to the parents to know that their kids are watching the daughter of the guy who sang “Achy Breaky Heart.” (By the way, Billy Ray also appears in the show).

3. Third, cross-marketing is key. Disney in particular has mastered the three pillars of middle school girl society: music, movies and television (if they could just find a way to bring the telephone into the equation, they would be unstoppable). Aly & AJ are a prime example. The blonde sisters began performing songs on Radio Disney and in Disney movies such as Ice Princess and Herbie: Fully Loaded. The music videos from these songs play constantly on the Disney channel, promoting both the singers and the movies. Alyson Michalka played the female lead in Phil of the Future (which was tragically cut short when Phil’s father unexpectedly fixed the time machine parting the star crossed couple). The Michalka sisters also appeared in their own made for TV movie, Cow Belles, and will be appearing in a movie released for the big screen by MTV this summer. Their debut CD "Into the Rush" quickly went gold (or is it platinum by now?). Last year, I took my daughter to Houston to see Hannah Montana in concert. Hannah Montana is not an actual person, but is a character played by Miley Cyrus. In the show she plays a teen who has a secret life as a pop star. Reality imitated art when the actress had a concert tour playing her character (along with the Cheetah Girls, another made for TV singing group). Brenda Song plays a supporting role in The Suite Life of Zack and Cody, but got to be the star of her own made for TV movie, Wendy Wu: Homecoming Warrior (no, I am not making this up).

For those of you who didn’t know this world was out there, you probably could have lived without this information. However, it is important to acknowledge genius. Only time will tell whether these stars will retain their luster after they turn 18. However, for now they are certainly enjoying their moment in the sun. My next post will be on the somewhat drier topic of administrative insolvency, professional responsibility and the art of judging.