Attorneys Fees For a Corporate Bankruptcy, Q&A

How much do attorneys charge for a corporate bankruptcy?

Attorney fees for corporate bankruptcy can vary widely depending on the complexity of the case and the size of the company. For Chapter 7, fees can range from $5,000 to $25,000 or more, depending on asset liquidation complexity. For Chapter 11, fees are significantly higher, often starting around $50,000 and going into the hundreds of thousands or even millions for large, complex cases. Chapter 11 cases involve extensive legal work, including drafting reorganization plans, court appearances, and negotiations with creditors.

How do attorney fees get paid in Chapter 11 Bankruptcies?

In Chapter 11 bankruptcies, attorney fees are considered administrative expenses and are given priority. The fees must be approved by the bankruptcy court to ensure they are reasonable for the services provided. Payment typically comes from the debtor's assets as part of the reorganization plan. The attorney may receive periodic payments throughout the case or at its conclusion, depending on the court's approval and the terms of the reorganization.

If the attorney fees are accruing on a monthly basis, how does that work?

In Chapter 11, attorney fees are typically billed monthly based on the work performed. The attorney submits detailed invoices to the bankruptcy court for approval. These invoices outline the services provided and the time spent. The court reviews the invoices to ensure the fees are reasonable and necessary for the case. Once approved, the fees become administrative expenses. Payment can be made from the debtor's cash flow as part of the operating expenses or from a special fund set aside for professional fees. If the debtor lacks sufficient funds, the payment may be deferred until later in the case or paid through the reorganization plan.

If the attorney is not able to get paid, is the attorney able to withdraw?

Yes, an attorney can request to withdraw from a Chapter 11 case if they're not getting paid. However, because bankruptcy cases are under court supervision, the attorney must get court approval to withdraw. The court will consider factors like the impact on the debtor's case and whether the attorney's withdrawal would cause undue harm. If allowed to withdraw, the attorney must follow any procedures set by the court to ensure a smooth transition and protect the debtor's interests.

Are withdrawals typically granted by the court?

Courts may grant withdrawal requests, but they're not automatic. The court considers the reasons for withdrawal, the timing in the case, and potential impacts on the debtor and creditors. Valid reasons include non-payment, a breakdown in the attorney-client relationship, or ethical conflicts. The court will deny the request if withdrawal would cause significant harm or delay in the case. When allowed, the attorney must comply with court procedures to ensure an orderly transition.

If you are interested in a bankruptcy, we at the Law Offices of Albert Goodwin are here for you. You can call us at 212-233-1233 or send us an email at [email protected].

The Retainer and Pre-Petition Payment

Most bankruptcy attorneys require an up-front retainer before filing a corporate bankruptcy petition. The retainer covers the work of preparing and filing the petition, and it represents the only certain compensation the attorney will receive. Once the case is filed, all future payments require bankruptcy court approval.

For Chapter 7 cases, the retainer is typically paid in full before filing because the company is liquidating and the attorney will not be receiving substantial post-petition fees. For Chapter 11 cases, the retainer functions as a security deposit that may be applied against post-petition fees once court-approved or returned at the case's end.

The size of the retainer reflects the expected complexity. Routine Chapter 11 cases for small businesses may carry retainers of $25,000 to $50,000. Complex cases involving substantial debt, multiple secured creditors, or contested proceedings can require retainers of hundreds of thousands of dollars.

The Application to Employ Counsel

In Chapter 11 cases, the debtor must file an application to employ counsel under Section 327 of the Bankruptcy Code. The application requires:

• A statement of the work the attorney will perform.
• The attorney's hourly rates and billing practices.
• A disclosure of any connections the attorney has with parties in interest (creditors, equity holders, other professionals).
• A representation that the attorney is "disinterested" within the meaning of Section 101(14).
• Information about the retainer received.

The U.S. Trustee reviews the application and can object. Creditors and other parties in interest can also object. If no objection is sustained, the court enters an order authorizing the employment. Only after that order is in place can the attorney be paid from the estate.

Fee Applications

Periodic fee applications are how Chapter 11 attorneys get paid. The standard schedule for an active case is monthly invoices submitted to the U.S. Trustee and major parties for review, with quarterly fee applications filed with the court. The applications include:

• Detailed time records showing each task performed.
• The timekeeper, date, time spent, and rate for each entry.
• A narrative summary of the work performed during the period.
• The total fees and expenses requested.
• Identification of any holdback or retainer balance.

The U.S. Trustee reviews the applications for compliance with fee guidelines. Common areas of scrutiny include excessive time entries, multiple attorneys on the same task, vague descriptions, work that could have been performed by lower-rate timekeepers, and expenses that are not reasonable.

The Carve-Out for Professional Fees

In secured creditor cases, the secured creditor's collateral may cover essentially all of the debtor's assets. In that situation, there would be no money to pay professionals unless the secured creditor agrees to a "carve-out" — a portion of the collateral set aside for professional fees and expenses.

Carve-out amounts are negotiated at the start of the case as part of cash collateral or DIP financing arrangements. The amount must be sufficient to cover the expected professional fees through the case. If the carve-out runs out, the professionals stop getting paid, which can lead to withdrawal motions.

Caps and Budgets

Larger Chapter 11 cases often involve fee budgets and caps. The debtor and major creditors negotiate a budget for professional fees, broken down by professional and by phase of the case. Fees within the budget are presumptively approvable; fees that exceed the budget face additional scrutiny.

Caps can be hard (no fees beyond the cap regardless of work performed) or soft (fees beyond the cap allowed if good cause shown). The approach varies by case.

The Interim Compensation Order

Most active Chapter 11 cases include an interim compensation order entered early in the case. The order establishes the procedure for monthly billing, quarterly fee applications, and interim payment of professionals. Without an interim compensation order, professionals would need to wait for case closing to be paid, which is impractical in cases that run for many months.

Under the typical interim compensation order, professionals submit monthly invoices, parties have a short objection period (often 10 days), and if no objections are filed, the debtor is authorized to pay 80% of the fees and 100% of the expenses. The remaining 20% is held back pending court approval through the quarterly fee application process.

Fee Disputes

Fee applications are sometimes contested. The U.S. Trustee, creditors, or the official committee can object on various grounds:

• Excessive time for the task performed.
• Duplicative work by multiple timekeepers.
• Vague or block-billed time entries.
• Work that provided no benefit to the estate.
• Rates that exceed market rates for similar work.
• Expenses that are unreasonable or undocumented.

The court resolves the objections by approving the fees in full, reducing them, or in extreme cases denying them entirely. Reductions of 5-15% are not uncommon in contested cases.

The Practical Reality

For small business Chapter 11 cases, the cost of professional fees can quickly become prohibitive. Many small business cases convert to Chapter 7 or are dismissed because the debtor cannot afford to continue. The Subchapter V provisions of the Bankruptcy Code, available for businesses with debts under $7.5 million (the threshold has fluctuated), provide a streamlined process that reduces professional fees substantially compared to standard Chapter 11.

For larger cases, professional fees are a significant but expected cost. The fees come out of value that would otherwise go to creditors, so there is constant tension between paying professionals enough to do the work effectively and minimizing the burden on creditor recoveries.