Things are Better When Someone Else Pays

Years ago, a young person I know was quite proud to show me his first credit card. I was underwhelmed and said: “Big deal. Anyone can get a credit card with their own name on it. The trick is to get a credit card with someone else’s name on it.”

I was reminded of that incident recently when I got a notice in the mail from a major insolvency firm telling me that a fund which I had unwisely invested in was insolvent, the insolvency firm had been appointed as the receiver, and a large law firm has been appointed as ‘representative counsel.’?Now I had reason to worry that all was lost.

For those of you who may not know, in the insolvency context, a ‘representative counsel,’ is an incredibly lucky law firm which establishes contact with a creditor group and then applies on the group’s behalf to the court to authorize them to be the lawyers for those creditors in an insolvency proceeding. Then, they ask the court to grant them a ‘representation order’ which authorizes them to bill some huge amount every month at their approved hourly rates to a maximum dollar amount per month. The company’s monitor or receiver has to pay that bill every month. From the company’s money.

Believe me, there is nothing as good as sending bills to someone other than your own client to pay. And also trust me, it is a rare month that representative counsel will bill less than the maximum amount that they are authorized to bill. Great work, if you can get it.

After my firm first became representative counsel in an insolvency restructuring, I finally understood why one of my former insolvency partners used to propose toasts at partners meetings with the words: “To many profitable insolvencies.”?This same partner used to define a successful insolvency file as “one where all of the professionals get paid.”?Note the absence of any reference to the creditors getting paid.

You can see why I now despair of any hope of getting a significant recovery on my ill-fated investment, although my investment dealer tried to offer me some hope. He told me that during the receivership, no management fees would be payable by the fund, and that he could not imagine that the receiver and the representative counsel could bill more than the management fees previously payable. I am not so sure about that.

Of course, I had already learned about how great it is to be a lawyer billing someone other than their own client back in the day that I did bank lending work. As anyone who has ever borrowed from a bank in Canada knows, the borrower always pays the bank’s lawyer’s fees. When the bank is competing to get the loan, the legal fees stay somewhat under control. But, when the borrower has no other choices, the legal fees can be astronomical.

How this works really hit home with me when I was asked to represent a borrower on a renewal of its line of credit with a lending institution. On the first go-round, the lender’s lawyer had charged about $100,000 and the borrower’s lawyer had also charged about $100,000. This was quite some time ago, so you can just about double every number that I mention in this story to reflect today’s hourly rates.

The line of credit was $50,000,000, back in the day when that was a lot of money. Unfortunately for the borrower, its fortunes had taken a turn for the worse and it had only two options: (1) renew the line of credit on whatever terms were demanded by the lender; or (2) go under. Not surprisingly, the borrower chose the former. With that decision came a demand from the lender for a renewal fee of quite a few hundred thousand dollars which had no relationship whatsoever to the degree of risk being undertaken by the lender or the amount of work to be done to process the renewal. It was more in the nature of a “What you going to do about it?” type of fee.

Anyway, the deal was that the lender would rely on its existing loan agreement and security, so the legal work should have been quite limited. My client asked me what I would charge because they were gun-shy after the $200,000 of fees that they had incurred the first time around. I looked at everything that had been done the first time and naively told the client that I would be hard-pressed to find a way to bill more than $30,000. After all, the security was already in place, so how much time could I possibly spend on this file? I was anticipating coming in well below the estimate.

Well, I had forgotten to consider the effect of the ‘someone else’s credit card’ principle. The lender’s legal team of oh so many lawyers attacked the file with vigor. There was no stone too small to turn over and no risk too tiny for the lender to be concerned about. And I, of course, had to keep up with them. There were mountains of documents required to address all of these very unlikely risks. At the end of the day, I billed the client about $70,000 (after discounting my time) and the Bank’s lawyer billed well over $100,000. Again.

Do I think that the lender’s lawyers could have done a perfectly adequate job at a third of the cost, and would have had to do that if their own client were paying? Absolutely. And had they done that, my fees would have been slashed by at least two thirds as well.

There was another deal that I did representing management in a management buy-out. In his management capacity, my client had to process the legal bills submitted by the company’s solicitors, who were effectively representing ‘the other side’ of the deal. He showed them to me. There was a significant charge for two associates to meet to discuss the?Competition Act?and?the Investment Canada Act, in a transaction among Canadians which was well under the threshold for the application of either of those two statutes. And by ‘well under’ I mean tens and tens of millions of dollars under. Were the lawyers at this national firm too inexperienced to know that these statutes could not possibly apply? Maybe. After figuring out that they could not possibly apply, did they eliminate the time spent barking up the wrong tree from the bill? Of course not. No need. Someone else was paying.

This principle is actually quite ubiquitous. For example, in law firms, the firm sometimes pays for partners to have ‘toys’ such as technology gadgets or to enjoy ‘perks’ such as travel to a great destination for a ‘retreat.’ And the firm will usually pay for client entertainment expenses.?These are all valid business expenses, but I often got the sense that if the partners had to pay for some of these things personally, retreats would be in their home province, they would hold onto their phones longer, sit in cheaper seats at events and drink less expensive wine. But the firm is paying, so what the hell. All the more amusing because the partners are the firm, but even so it is so much better when the firm pays.

Of course, one of the worst things that can happen to you is that you are sued by someone who does not have to pay their own legal bills. Perhaps there is a government program which provides them a remedy that they do not have to pay to use, or perhaps their own professional association is coming after them using the money of its members.

I feel that I have gotten to the stage of this article where I should wrap it all up with a pithy and useful conclusion to reward the reader for slogging through to this point. But I can’t think of anything other than to say, “beware of lawyers bearing other people’s credit cards.”