Contingent Fee Business Litigation Blog : Houston Patent & Contingent Fee Business Litigation Lawyer & Attorney : McClanahan Myers Espey Law Firm : Intellectual Property, Commercial Litigation

             A company files for bankruptcy. Millions of dollars are lost by unsecured creditors. There is no cash to pay lawyers to go after third parties. What do you do? 

            It’s simple. Find a competent firm willing to take the case on a contingent or hybrid fee basis. 

            Take theHeller Ehrman bankruptcy as an example. The 750-member international law firm filed for bankruptcy, in part it says, because its main two lenders -- Bank of America and Citibank -- refused to renegotiate the terms of a $5.7 million debt the banks say the firm owes as part of a long-term loan. 

            According to a recent court filing, the unsecured creditors' committee has asked the bankruptcy judge to approve the hire of a litigation firm for a pending case against Bank of America and Citibank. Under the proposed contract, the 11-lawyer firm would be paid $1 million up front, plus a contingency fee based on the net benefit to the estate if they win. “It’s BIG, You’re in Charge! Firm Picked for Pending Case Against BofA, Citi,” The Recorder, April 9, 2010. 

            When such a bankruptcy gets underway, counsel for the debtor should investigate potential claims against third-parties. They should then work with the unsecured creditors’ committee to search for special counsel – typically contingent fee business litigators who frequently represent plaintiffs against powerful companies. Once they negotiate a contract with the law firm that will undertake the case, the contract can be presented to the bankruptcy judge for approval. 

            Of course, the firm chosen for the task must possess entrepreneurial spirit and courage, as big third-party defendants such as B of A and Citi will have excellent counsel who are highly motivated by their substantial hourly fees. But such is the case in major, contingent fee business litigation. 

            In the end, it should be a win-win for everyone. Enough money may be generated to pay back all or part of what is due the unsecured creditors. Counsel for the debtor and the creditors will be heroes. The Court will be happy. The contingency fee lawyers, who get paid if they win, will be happy. The only unhappy people will be the third-party defendants who pay. 

            If the right lawyer agrees to take the case, it’s a no-brainer for the debtor and creditors!

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2008 was a dismal year for some of the country’s largest financial institutions. But it was a relatively good year for others. By coincidence or otherwise, the successes and failures of these institutions appear to be reflected by increases in their reported holdings of bank owned life insurance or BOLI.

An increase in BOLI holdings will generally result from one of three events, or some combination of them. Reported BOLI holdings may increase because the bank bought new policies on its employees. They may also increase when the reporting bank acquires a competitor and, during the process, the competitor’s BOLI policies. Increases may also occur when investment returns raise the cash surrender value of existing policies.

            Over the preceding four quarters, BOLI holdings of Bank of America, Citibank, Wachovia, Washington Mutual, and Wells Fargo have been:

                        Dec. 07            Mar. 08            June 08            Sept. 08           % increase

BOA                14.3B               14.5B               16.5B               17.1B                  19.5

Citi                   3.9B                 4.03B               4.05B               4.1B                       5

Wachovia       14.6B               14.4B               14.5B               14.6B                     0

WaMu             4.9B                 5.028B             5.072B             no report               3.4

Wells Fargo    4.9B                 5.15B               5.19B               5.36B                   9.38

While the relationship between BOLI increases and institutional success may be coincidence, a correlation exists nevertheless. Bank of America, with its 19.5% increase in BOLI holdings, recently reported third quarter 2008 net income of $1.18 billion, or $0.15 per share, a figure far lower than a year ago but significant in relation to other 2008 returns in the industry. Bank of America also received approval for the $50 billion acquisition of Merrill Lynch. Wells Fargo likewise achieved solid growth in loans and deposits during 2008 and is on track to complete its acquisition of Wachovia by year’s end. This success correlates to Wells Fargo’s 9.38% increase in BOLI holdings over the last year.

Wachovia, Citibank and Washington Mutual did not fare as well in 2008. Citibank required bailout money from the federal government and has cut tens of thousands of jobs during the year. Wachovia and Washington Mutual were acquired by competitors while on the brink of collapse. These failures correlate to the relatively pedestrian increases in their BOLI holdings. But perhaps the most interesting question is why their BOLI holdings increased at all (Wachovia’s did not). It seems unlikely that these institutions invested their cash in additional policies. The reported increases may therefore be attributable to investment gains which, at these percentages, are similar to the returns available from treasury bills or similar investments.

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