💥Clash of Titans: Biglaw vs. PE Direct Lender💥

Professional Fees (Long Nasty Records)

We expect to see more disputes over professional fees as (i) rates continue to rise into the stratosphere and (ii) large asset management firms try to exert their considerable pull. The good thing is that the rest of us can just sit back, pop some popcorn and put our feet up. A brawl between biglaw and a direct lender is WAY more entertaining than, say, Pacific Rim.

Late last week, Cerberus Business Finance LLC (“CBF”) gave Hughes Hubbard & Reed LLP (“HH&R”) some light weekend reading when it objected to the firm’s fees in the Patriot National Inc. (“PN”) case — an objection that Cerberus said “will not come as a surprise to Hughes Hubbard.” Cerberus stated (Docket 1001):

Given the Debtors' obvious financial distress and substantial cash needs for operations, CBF very vocally expressed its concerns regarding the potential magnitude of all professional fees and the need to manage them and keep them under control. Among other things, CBF specifically questioned whether these cases were "too small" for Hughes Hubbard, and whether it would more efficient and cost effective for the Debtors to be represented by a firm with a Delaware office and significant experience representing Chapter 11 debtors. Hughes Hubbard (who had previously been counsel to the Board of Directors of Patriot National, Inc. and choreographed the termination of the Debtors' prior counsel in order to take on that role themselves) was party to those discussions with CBF, was thus acutely aware of CBF's concerns, and at the request of CBF provided- and agree to abide by - a specific line-item budget relating to the performance of legal services for the Debtors. Hughes Hubbard also agreed that prior to incurring fees beyond the agreed budget (whether for unforeseen events or otherwise), Hughes Hubbard would seek the approval of the Debtors and CBF.

Nothing like one paragraph that simultaneously says (i) the law firm Game of Thrones’d its way into the representation, (ii) wasn’t the first or preferred choice, (iii) is inadequately suited for debtor cases, (iv) flagrantly busted a “specific line-item budget,” and (v) didn’t adhere to its pre-petition agreement to keep the lines of communication open about fees.

Cerberus further argued that, among other things, HH&R was inefficient. It noted:

Even the most cursory review of the actual time entries evidences the fact that senior attorneys were devoting substantial time and attention to matters that more properly should have been handled by more junior attorneys or paralegals.

A law firm tried to make as much money possible? Never in a million years would we expect that to happen.

Meanwhile, we find it very interesting that it at last appears that a future owner of a company — by way of a debt for equity swap — is understanding the extent that professional choices can result in (potential) value leakage to the estate. Indeed, as the now owner of PN, CBF has every incentive to claw back HH&R’s fees because each incremental dollar that it doesn’t pay to HH&R remains with and enhances the value of PN.

And so this is precisely what HH&R focuses on in its response. Indeed, HH&R wastes no time whatsoever leading off its response by stating (Docket 1011):

The Objection should be seen for what it is: an attempt to improve Cerberus’ return on a bad investment by shifting the cost of these Chapter 11 Cases to estate professionals. Having lent close to $200 million to the Patriot Debtors only to see the business collapse within a year, Cerberus apparently is frustrated by the Bankruptcy Code’s requirement that part of the price of confirming a chapter 11 plan of reorganization is paying the professional fees incurred in achieving that result. This Objection is brought out of naked self-interest. Now that the cases are over and the Plan effective, Cerberus simply does not want to pay the fees.

Bam! Counter-punch! Nothing like one paragraph that, if we may paraphrase, essentially says (i) you’re a crappy investor, (ii) you reap what you sow, (iii) you obviously don’t read PETITION enough because you clearly didn’t recognize that bankruptcy is big business (sorry, we had to), and (iv) you’re not even remotely slick, bro.

For good measure, HH&R throws Schulte Roth & Zabel LLP under the bus, highlighting that its invoices came in well over the budgeted amount for HH&R —creating a record that it, too, is certainly no bargain.

Moreover, HH&R highlights a fundamental issue with bankruptcy cases these days: who is the client? Clearly CBF believed it to be them. HH&R begged to differ.

Speaking of clients, HH&R sure seems to be cautioning law firms about what it might expect from the way CBF does business. HH&R wrote:

Cerberus waited until after Hughes Hubbard achieved confirmation of the Debtors’ chapter 11 plan of reorganization to object to Hughes Hubbard’s fees, despite the fact that Hughes Hubbard timely filed monthly fee statements in these Cases—fee statements that made it clear from the beginning that the fees incurred were substantially more than the DIP budget envisioned. Much like the numerous other estate professionals that Cerberus has stiffed throughout these cases (except its own professionals who demanded and received prompt payment from the Debtors), Cerberus refused to fund any interim payments to Hughes Hubbard after a single payment of $364,706.

This tactic of lying in the weeds while Hughes Hubbard achieved the results Cerberus wanted and then objecting to the fees required to achieve those results is inherently dishonest. It is also fundamentally unfair. The Court should not tolerate it here.

Something tells us that CBF’s direct lending competitors will have a field day with that language. Something also tells us that HH&R won’t be servicing any companies with CBF in the cap stack anytime soon. Yes, call us Captain Obvious.

At the end of the day, we can’t believe that this dispute saw the light of day. Clearly there is no love lost between HH&R, Schulte and CBF and now the record is replete with unflattering commentary about all three. Their loss. Our gain.