‘Efficiency’ Counsel

I actually welcome the notion that the committee decided to hire the firm not purely as conflicts counsel but as efficiency counsel, which is, I think, a nice way of saying less expensive counsel for matters that are appropriate.

 

Hon. Robert D. Drain in re Purdue Pharma L.P. et al.

Transcript of hearing, November 19, 2019, at p. 23: 12-16

The reality of modern cases is that, in almost all of them, the mega law firm cannot take the case without conflicts counsel. These days, as large law firms have so many clients, conflicts inevitably arise. Thus, there is the need for another firm to handle the matters for which the main counsel cannot.

The term “efficiency counsel” was created by the United States Trustee Program when it promulgated fee guidelines for large cases that are handled by mega law firms. “Efficiency counsel” refers to the work that conflicts counsel does in a case in addition to conflict matters. It is not that the mega firm cannot do things efficiently. Rather, it is that a boutique firm like Togut, Segal & Segal LLP can do the same task more efficiently and at a much lower cost. We keep our billing rates 25% below market, and, moreover, we have done so much of this sort of work over the past 40 years that we have learned to streamline the tasks and use smaller teams. Both factors drive down costs – significantly.

The work we are speaking of is the commoditized tasks that come with every Chapter 11 case. There are discrete bankruptcy projects, such as working on issues relating to adequate assurance for utilities, claims objections, executory contract assumptions and rejections, preference recoveries, and preparing bankruptcy schedules, just to name a few. These are the sorts of services that are required in every Chapter 11 case, but they do not require the heft of a larger firm to be done well.

The largest case in which the Togut Firm provided such services was that involving Enron, when we were co-counsel to the debtors with Weil, Gotshal & Manges LLP. Eighty percent of the work we did had nothing to do with conflicts.

However, we do not like the term “efficiency counsel.” There is a much broader way to think about it. It is really a co-counsel arrangement. It takes main counsel plus conflicts counsel to satisfy the disinterestedness requirement of the Bankruptcy Code. The conflicts counsel then also partners with the main counsel in handling the tasks of the case. Main counsel does the heavy lifting of plan formulation and confirmation, complex tax and litigation matters, and the like. Conflicts counsel, as co-counsel, does the more routine tasks at a lower cost, taking advantage of the strengths of both firms. It’s a win-win for the estate.

Conflicts counsel is best utilized when it offers an independent benefit to the estate rather than serving as the main counsel’s “shadow,” standing behind main counsel and billing with no direct benefit to the estate. For conflicts counsel to be effective, it needs to find a way to stay in the mix of the case without duplicating the efforts of main counsel. This is most important. Unless the conflicts counsel knows what is going on in real time, understands the client’s strategy and goals, and is inside the tent, there is the real danger that when a matter is passed to the conflicts counsel, it may not be handled as smartly as if conflicts counsel were fully up to speed.

The best way to do that is to have conflicts counsel also handle commoditized tasks, which gives it an independent reason to be at meetings and court hearings. It does different tasks than the main counsel. And what the “efficiency counsel” does is less expensive to the client and the estate.

Although the use of the term “efficiency counsel” is relatively new, the model it is based on is 40 years old and was developed by the Togut Firm. Recognizing this, the U.S. Department of Justice asked attorney Albert Togut to testify – not once, but twice – in hearings in Washington. The Togut Firm is actually cited in a footnote as the example of a firm that does efficiency counsel work.

For this type of commoditized work, the main counsel directs our efforts.

As was stated by Professor Stephen J. Lubben, reporter for the American Bankruptcy Institute’s landmark Chapter 11 Professional Fee Study, in his article published by The New York Times:

“[B]ig corporate law firms can bring real value to a Chapter 11 case in matters requiring great speed or involving great complexity. They do not bring real value to the estate in handling common bankruptcy matters such as small preference actions, contract rejections and simple claims objections. And it surely is not efficient for these firms to have partners make court appearances on such mundane matters.

A basic requirement that work be allocated to the professional who can handle it most efficiently would go much further than many, more detailed application requirements. The debtor and its professionals should be charged with such a duty at the outset of the case.”

Professor Lubben is correct when he says that the allocation of work to the most efficient professionals should be done at the very beginning of the case. Once the duties are divided, the professionals in both firms know who is responsible for the discrete tasks assigned to the co-counsel so that no one renders duplicative services. And it is much easier for the client who knows from the outset who to call with its questions. This is the most efficient way by far to deal with co-counsel.

Citing Enron, in which duties were divided at the very beginning of the case, the court-appointed fee committee said in its final report:

“Weil Gotshal handled all of the main work in the case; the Togut Firm, as co-counsel, was assigned discrete subsets of work either because Weil Gotshal had conflicts or because the Togut Firm, being smaller, could handle the work more efficiently. The Togut Firm coordinated its efforts with Weil Gotshal to avoid duplication of effort. Over the course of the case, Togut Firm timekeepers billed for only 10 meetings with Weil Gotshal, most of which were general status meetings. There was virtually no overlap and no duplication of effort.

The Togut Firm managed its work well and staffed it tightly with timekeepers with appropriate experience and billing rates. It handled every type of bankruptcy matter very efficiently as attested by the timely filing of the schedules with a single extension of time and by the Togut Firm’s favorable dollars-recovered-to-fees-billed ratio.

When a Weil Gotshal conflict arose in the middle of a matter, the Togut Firm as conflicts counsel took the matter over instantly and seamlessly. The two firms handled transitions so effectively that the committee found no indication in the time records of how a transition had occurred. Weil Gotshal timekeepers were working on the matter one minute; Togut Firm timekeepers the next.”

The following is only a representative list of the types of routine bankruptcy matters that the Togut Firm has handled as bankruptcy co-counsel, including in recent large Chapter 11 cases, such as Endo Pharmaceuticals; LATAM Airlines Group; McClatchy; Trident Health; Synergy Pharmaceuticals Inc.; SunEdison, Inc.; Aéropostale; and in past cases that have concluded, such as General Motors, Chrysler Corporation, Enron Corporation, and Delphi Automotive PLC.

• Assisting the debtors in obtaining the court approval of certain “first-day” motions, such as motions seeking authority to (i) jointly administer Chapter 11 cases filed by affiliated debtors, (ii) extend the time for filing the debtors’ schedules and statements and file consolidated monthly operating reports, and (iii) file a consolidated list of the top 30 unsecured creditors and redact certain personal identification information for individual creditors
• Assisting the debtors in obtaining the bankruptcy court approval for the retention of professionals (financial advisers, investment banks, auctioneers, appraisers, etc.)
• Assisting the debtors’ professionals with preparing monthly fee statements and interim fee applications
• Assisting the debtors with preparing their monthly operating reports
• Assisting the debtors with preparing their schedules and statements
• Assisting the debtors with enforcing the automatic stay pursuant to section 362(a) of the Bankruptcy Code
• Assisting the debtors in conducting the claims resolution process, including representing the debtors in connection with contested matters seeking the setoff, allowance, and/or settlement of priority or secured claims and general unsecured claims
• Effectuating the assumption or rejection of executory contracts and unexpired leases
• Assisting the debtors in connection with utility matters, including, but not limited to, demands by utility providers pursuant to section 366 of the Bankruptcy Code
• Analyzing transfers made by the debtors in the 90-day period prior to the commencement of their respective Chapter 11 cases for an assessment of potential avoidance claims under Chapter 5 of the Bankruptcy Code
• Prosecuting claims under Chapter 5 of the Bankruptcy Code in favor of the estate
• Conducting investigations on behalf of debtors, boards of directors, special committees, or other estate fiduciaries concerning, among other things, the proprietary of prepetition transactions and transfers

The Togut Firm as co-counsel has litigated a gamut of issues that can arise in a bankruptcy case, including:

• Insider transactions
• Breach of fiduciary duty disputes
• Disputed valuations
• Lender liability
• Cash collateral disputes
• Critical vendor disputes
• Asset sale disputes
• Claim subordination/re-characterization disputes
• Plan confirmation and disclosure statement approval
• Debtor-in-possession (DIP) and exit financing
• Examiner and trustee appointment
• Professional retentions
• Bankruptcy fraud claims
• Chapter 5 avoidance actions (including preferences and fraudulent transfers)

Attorney Albert Togut’s work in many cases over four decades led the U.S. Trustee Program to incorporate the concept of “efficiency counsel” into its large case fee guidelines. The “efficiency counsel” model was conceived by the Togut Firm for the reasons discussed above. In formulating the mega-case fee guidelines, the U.S. Trustee Program held hearings in Washington to which Mr. Togut was invited to testify. In promulgating these guidelines, the Togut Firm is singled out as the exemplar of such co-counsel arrangements.