Pensioners of insolvent companies left out of contingency fee debate

Friday, January 05, 2018

Something’s been lost so far in the debate about contingency fees that the Law Society of Upper Canada (LSUC) calls “[protecting] access to justice for the public, while ensuring protection from unscrupulous practices and unreasonable fees.”

Unfortunately, what’s been lost are a lot of people. They’re called “pensioners,” a group that includes retirees and employees who’ve invested their lives, savings and future working for employers who are suddenly insolvent.

The LSUC debate culminated with Convocation’s acceptance earlier this month of a report from LSUC’s advertising and fee arrangements issues working group regarding contingency fees. The report focused on transparency, and I have no quarrel with it.

What does bug me is the continuing focus on the small practitioner, in this case the personal injury bar. It’s as if small retail-market oriented firms are the only ones who serve consumers and the only ones from whose potential transgressions the “public interest” must be protected.

Here’s what might be a revelation: the large firms, even the ones who cling fiercely to the “business law” rubric, serve consumers too — and in a big way. The Oxford dictionary, after all, defines consumers as people “who purchase goods and services for personal use.” That’s got to include the employees and pensioners who look to the lawyers working in Canada’s insolvency regime, particularly Companies’ Creditors Arrangement Act (CCAA) proceedings, to sort out their rights.

CCAA proceedings, like the current Sears debacle, are court-supervised and subject to court approval. Generally speaking, the court affords employees and pensioners groups legal representation. The lawyers who represent them are often paid from the assets of the insolvent estate.

That’s fine as far as it goes. But here’s the rub: it’s not just the pensioners’ lawyers whose fees erode the already slim pickings in an insolvency. The court-appointed monitor (usually an accounting firm) and monitor’s counsel are also, and understandably, paid from the estate. The court may also choose to let the estate bear the legal and professional fees of other creditors. Let’s say, for argument’s sake at least, that that’s okay too (though you might want to question how the American bondholders got some of their fees paid from Nortel’s Canadian assets, even as they recovered at least 100 per cent of their investment).

What’s not okay is that too often, the legal firms and other professionals who are paid from the estate have — despite the alleged court oversight — little accountability for how efficiently or appropriately they spend their time or for the amount of their fees. Since any fees paid out of the estate, not just those paid to the pensioners’ lawyers, reduce the distribution available to unsecured creditors, including pensioners, the large firms and prestigious boutiques who are typically counsel in insolvencies have at least an indirect responsibility to pensioners and the justice system. Certainly the monitor, Ernst & Young and its counsel, Goodmans LLP, have something resembling a duty of this kind.

If any of the professionals involved in Nortel felt that responsibility, you certainly wouldn’t know it from the numbers emerging from the legal proceedings that followed Nortel’s collapse. No less than 26 per cent of the US$8.2 billion available for creditors, or $2.2 billion, has gone to lawyers and other professionals  in Canada, the United States, and around the world — and the proceedings are still ongoing.

Some might say that 26 per cent compares favourably with contingency fees charged by Canadian lawyers acting for plaintiffs in personal injury files and class actions — the very professionals who appear to be the subject of LSUC’s recent recommendations. However that may be, one of the primary reasons the courts allow contingency fees to be as high as they are is because the lawyers bear all the risk: they don’t get interim payments and they don’t get paid unless they win. The lawyers paid out of the Nortel estate had no such risk: they were going to be paid, paid first, and paid well, come hell or high water.

Otherwise, the $2.2 billion spent on professional fees in Nortel is roughly equivalent to the legal fees paid in the bankruptcy proceedings involving Lehman Brothers that followed the credit crisis. But Lehman distributed about US$147 billion to creditors, meaning that the professional fees were in the one per cent range.

Do the math: proportionately, it cost Nortel’s creditors 26 times what it cost Lehman creditors to wind up the respective estates. Nortel wasn’t even Canada’s largest bankruptcy. That honour goes to the ABCP mess that followed the financial crisis. ABCP professional fees amounted to $199 million, again just one per cent of the $32 billion available for distribution.

And guess how the fees in Nortel were calculated: the professionals resorted to nothing less than the time-honoured but now generally discredited hourly rate. Suffice it to say that there are fewer and fewer corporate counsel or sophisticated clients worth their salt anymore who blandly accept the “hourly rate multiplied by hours” calculation as a fair fee. The average hourly rate charged by Goodmans, counsel for the monitor was $650 — and that average includes rates going back to 2009.

It’s not unfair to say that, as counsel for the monitor, Goodmans’ rates were if not the standard, at least the example, for the hordes of other professionals claiming a share of the pie. Goodmans did not challenge any of the fees submitted by any of the lawyers who were being paid out of the Nortel estate. No one challenged Goodmans’ fees. Nice, but it smacks of one hand washing the other.

There was no court scrutiny of the fees until November 2016. And they were paid in a timely fashion as they were submitted by all professionals over the nine-year length of the proceedings. By the time the court got to look at them, scrutinizing them closely would have been an impossible task. Essentially, the court relied on Goodmans. But Goodmans, together with every other law firm being paid out of the estate, had its finger in the pie.

Now here’s the saddest part: one group of creditors were the individuals who were on long-term disability when Nortel collapsed. They didn’t get a full payout. It would have taken about $44 million to make them whole. That’s approximately 1.5 per cent of what the estate paid to the lawyers worldwide.

If Goodmans had reduced its hourly rate by about 1.5 per cent, or $10 per hour, to about $640, and if all the other professionals had made a similarly proportionate deduction, the individuals on long-term disability would have been whole. It is, of course, beyond belief to suggest that even this minuscule bit of philanthropy, if you want to call it that, could have overcome a group of professionals who were already in a bitterly adversarial situation.

But would it have been so silly for a court, entrusted with a statutory mandate that basically required that it be fair and reasonable, to have taken a bit of a harder look at this outrage called professional fees? Especially when collectively, the professionals charging those fees represented a burden amounting to 26 per cent of the estate?

Let’s see what happens in Sears.

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