Some thoughts on bankruptcy fees

Peter Lattman has an article and some detail on Kirkland-Ellis's $100 million fee petition in the United bankruptcy. I have some further thoughts.

First, are the fees "too high"? As I said here, that's not the question:

everybody's getting the market value of their services. . . . but the market is determined by the law, and it’s the bankruptcy law that creates these legal proceedings.

So we should focus on bankruptcy law, and specifically Chapter 11. We're talking about an amount approaching $350 million in professional fees to preserve another competitor in an overly crowded industry.  The big question is the value of that activity. As I observed about United, there are continuing questions about its viability, and about its plan to exit bankruptcy focusing on highest-paying customers. As I said earlier

I continue to believe that at least one airline has to terminate for the industry to stabilize. Then, instead of competing with companies whose costs are artificially managed in bankruptcy, the airlines can invest in their brands. We might actually get an airline that offers an acceptable and consistent level of good service to a customer base it can sustain through good and bad times.

Second, I wonder about the implications of all this for executive compensation disclosure. As I've discussed

the function of the executive pay disclosure system seems to be to give the envious the numbers necessary to help them quantify their resentment. To be sure, that might create more envy and resentment at the beginning. But then firms would reduce their pay to keep the resentment under control.

That would seem to apply in spades to the bankruptcy context. There's little enough money to go around that $350 million would seem to make a difference. And consider that a lot of this money is being paid so that the lawyers figure out ways to eliminate pensions and cut pay under labor contracts (in fact, the fee petition allows us to compute exactly how much was spent on this).

Now, don't get me wrong – I still don't think that resentment is an appropriate basis for federal law on compensation. But if resentment is a reason to keep pay down, why not start with lawyers' fees in bankruptcy, where resentment would seem to be more acute and the courts have the power to do something about it? Conversely, if that's unsavory for bankruptcy fees, why should it be a savory argument for executive compensation?

Third, one might say that this sort of thinking is counterproductive. After all, if we clamp down on bankruptcy fees, we won't get the most talented people to devote their lives to this important endeavor. And surely there is a lot to that. But should we be more solicitous of those who pick up the scraps than of the business executives who are paid to guide their firms away from these disasters?

Fourth, I gotta confess that reading this petition was a little more interesting than perhaps it should have been.  After all, we get to peek at what a whole bunch of lawyers have been doing with their lives for the last few years. The petition can't be real comfortable for K & E. I wonder if we required such petitions for securities disclosure lawyers if we would get a different attitude emerging about executive compensation disclosure.

Finally, assuming it all should come down to the "value" of the lawyers' services, not whether it's a "lot" compared to say, the flight attendants, how do we determine that? The fee petition invites the court to look at the hourly rates charged by comparable lawyers, and to determine whether the number of hours was reasonable given the task. How many would that be? More importantly, the petition emphasizes that K & E was successful in guiding United through bankruptcy.  Of course, it's not clear whether the requested fee would or should have been less if United ended up liquidating. Should bankruptcy lawyers get paid according to whether the company emerges from bankruptcy? Seems like some perverse incentives there.

After the bankruptcy courts figure all that out, maybe they can figure out exactly how much business executives should be paid.