Filing Chapter 9 Could Cost More Than It Is Worth

Posted on March 11th, 2015 by Legal Fee Advisors

Cities filing for bankruptcy should realize that its costs may far outweigh any benefits and attempting to restructure outside of court proceedings should be given prudent thought.[1]

The city of San Bernardino in California filed bankruptcy in the middle of 2012 “with a $45 million budget deficit” and thus far has paid over $6 million to its lawyers with no end in sight.[2] This information comes on the cusp of court-ordered mediation sessions regarding legal fees in the Detroit Chapter 9 bankruptcy case where at least $141 million in legal fees and services have been billed.[3] Noting that the approved debt cutting plan for Detroit will yield substantial benefits, it is a “tight plan” where saving every penny counts.[4] It was also noted that costs have exceeded preliminary estimates.[5] In contrast, no bankruptcy plan has been finalized in the San Bernardino case and costs could “easily exceed $10 million” experts say.[6]
It appears clear that entering into Chapter 9 cases should not be entered into lightly and that all other avenues should possibly be explored before filing in Bankruptcy Courts. However, that leads one to ponder, whom is making the decision to file and whose best interest(s) are being satisfied? It appears obvious, at least in the aforementioned cases, that the courts are adhering to their obligations of justice and fairness in questioning these exorbitant fees. But where do we go from here? Maybe it is time for an independent review from the outset in assisting the court to set realistic budgets in such cases and imposing penalties for lack of adherence. Only time will tell. Regardless, there is seemingly a trend that fees in these cases may very well be scrutinized going forward.

Dawn E. Guglielmo, Esq.

Legal Fee Advisors © 2015

[1] Tim Reid, Bankrupt San Bernardino has paid $6 million legal fees, millions more expected, Reuters, http://www.reuters.com/article/2014/12/03/us-usa-municipals-sanbernardino-idUSKCN0JH1PM20141203 (December 3, 2014).

[2] Id.

[3] Christine Ferretti, Detroit bankruptcy judge to review attorney fees, The Detroit News, http://www.detroitnews.com/story/news/local/wayne-county/2014/11/09/detroit-bankruptcy-fees-attorneys/18721185/ (November 9, 2014).

[4] Id.

[5] Id.

[6] Tim Reid, Bankrupt San Bernardino has paid $6 million legal fees, millions more expected, Reuters, http://www.reuters.com/article/2014/12/03/us-usa-municipals-sanbernardino-idUSKCN0JH1PM20141203 (December 3, 2014) [a May deadline for a final plan has been set by the court].

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