To see how profitable helping clients field bankruptcy proceedings can be, look no further than the saga of craft-store chain Michaels and the Wyly brothers.

Sam Wyly, a Texas entrepreneur and former billionaire, along with his late brother Charles bought and transformed Michaels into a multibillion-dollar big-box juggernaut.

US Bankruptcy Court (Bloomberg)
(Image: Bloomberg)

After the SEC won a nearly $300 million judgment against the brothers in September 2014 for fraud, however, Wyly and his brother’s widow filed for Chapter 11 bankruptcy protection to shield themselves and their assets. The bankruptcy represents a chapter of woe in the Wyly saga (if not as woeful as the subsequent $3.2 billion tax bill brought by the IRS), but it has certainly lead to steady cash flow for the family’s advisers. The bankruptcy court approved payment of more than $1 million in fees since 2014 when the Wyly bankruptcy was filed.

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A contingent of hardy, hard-working advisers has been earning fees awarded in bankruptcy courts — an arena that was once the sole province of lawyers.

Perhaps no other contemporary case better illustrates the allure of bankruptcy work. Indeed, a contingent of hardy, hard-working advisers has been earning fees awarded in bankruptcy courts — an arena that was once the sole province of lawyers.

Although newer numbers are not available, a 2006 study by Lynn LoPucki and Joseph Doherty of the UCLA School of Law noted that financial advisers took nearly 42% of the pie in the Chapter 11 reorganizations studied by the professors. Fees for financial advisers, including CFPs, meanwhile, grew at a rate of 25% per year, compared to just 7% percent industry-wide.

FIERCE COMPETITION

But competition is fierce for what work there is. Further, some experts see difficulty on the horizon, owing to a new, aggressive class of creditor that is loath to pay fees in large bankruptcy proceedings.

“You have to go to a hearing to be awarded your fees,” warns J. Randy Hough about bankruptcy proceeding. Hough is a CPA and CFP, with Hough, Gelfand & Associates in West Palm Beach, Florida, who has worked as an adviser in bankruptcy courts. But he has done so with some reluctance, he says, precisely because of the encumbrance of court approvals. He tells clients who are filing bankruptcies that he will as a favor help them in the court, but only if such a commitment is a matter of months, not years.

But other advisers who are veterans of the bankruptcy process have more optimism.

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“I wouldn’t discourage anyone from providing services in the bankruptcy community."

“I wouldn’t discourage anyone from providing services in the bankruptcy community, and there are couple of areas where financial advisers are really useful,” says R. Todd Neilson, a managing director in the Century City office of Berkeley Research Group, in Los Angeles. Neilson, a CPA and former FBI agent, began providing services to stakeholders in bankruptcy proceedings decades ago. Neilson has lent his expertise to such high-profile clients as former heavyweight boxing champion Mike Tyson and record mogul Suge Knight.

But Neilson, echoing sentiments of other veteran bankruptcy-court advisers, warns that newcomers should initially expect a rocky road. “You need to get with an attorney and understand how the process works,” Neilson says. “If you don’t do that, you do so at your own extreme financial peril.”

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In a bankruptcy proceeding, advisers, including CFPs, may provide services to multiple stakeholders.

In a bankruptcy proceeding, advisers, including CFPs, may provide services to multiple stakeholders, including debtors, creditors and trustees, or directly to federal court bankruptcy judges.

Recently, for example, a court approved a debtor’s request to retain Brian Drevs, a CFP at Midwest Financial Consulting in Des Moines, Iowa. To obtain the court approval, the debtor explained that Drevs, who also has an IRS designation to practice before the agency, would help with general bookkeeping and accounting matters and to assist with preparation of all related income and other tax-related matters.

Regardless of which category of client they service, advisers must first win approval of a federal court bankruptcy judge to be retained, and then submit fee applications prior to receiving any payments. All stakeholders in a bankruptcy have an option to object to the advisers’ fee applications on a variety of grounds. The judge settles the disputes and makes the final call, which might go against advisers — even after they have labored intensely on a case.

“I’ve known people who have put in $600,000 to $1 million in fees for work they did and then not get paid,” Neilson says. “That is a terrible way to learn a lesson.”

‘IT COULD BE A MINE FIELD’

Stephen Darr, a managing director at Huron Consulting Group in Boston, typically serves debtors in bankruptcy proceedings. He agrees that the uninitiated should turn to veterans for help before moving headlong into the space. “Get with somebody who knows the ropes,” he counsels. “Otherwise, it’s very dangerous. It could be a mine field.”

As a rule, advisers should recognize that they are not allowed to charge any markup because they happen to know bankruptcy law, he says. “They are supposed to be the same fees that you charge other clients for the same services.” Darr further cautions against expecting Wyly-size paydays. “Although I enjoy it, it’s no pot of gold at the end of the rainbow,” he says of the work.

Even so, James Peko warns that advisers face heightened competition for bankruptcy work, and increasing hostility from creditors. “There could be heavy objections to fees,” says Peko, a national managing principal in the corporate advisory and restructuring services division of Grant Thornton in New York. With more than 20 years of experience working with troubled, underperforming and bankrupt entities, Peko has seen a marked shift in how fees are approached by creditors.

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“There is always room in the field for people who have a reasonable fee rate structure and familiarize themselves with the bankruptcy rules.”

For years, commercial banks almost always ranked as the major creditors in bankruptcies large enough to draw advisers. But in the recent low-interest environment, with so many investors seeking alternative high-yield lending opportunities, the banks are often supplanted by other types of lenders, such as hedge funds. “They are much more aggressive, and they don’t want to pay fees,” Peko says. It amounts, ultimately, to what Peko calls “a shakeout in the industry.”

Unless the Fed strays significantly from its long-held monetary easing practices, prompting interest rates to climb sharply, Peko predicts downward pressure will continue to keep competition stiff for advisers pursuing bankruptcy work. The more aggressive creditors will be seeking high yields on the bankruptcy debt they purchase, and will be scouring advisory-fee applications for possible reasons to raise objections.

As in any field, advisers may feel justified in demanding certain fees based on past work and unique experiences they bring to the table, Peko says. But that’s not to say advisers with little or no bankruptcy experience should rule out the bankruptcy world. “There always has to be a first time for everyone,” he says. His firm recently won a bankruptcy court’s approval to have one of its advisers serve as interim CEO to a bankrupt company; that represents a first for the adviser, Peko says.

Neilson is similarly encouraging. “There is always room in the field for people who have a reasonable fee rate structure and familiarize themselves with the bankruptcy rules.” His parting advice to newcomers: “Take a case or two.”

TEN TASKS FOR WHICH BANKRUPTCY JUDGES WILL TAP ADVISERS

1. Assistance in preparation of reports filed by Office of the U.S. Trustee; reviewing schedule of assets and liabilities; statements of financial affairs and month operation reports.
2. Analysis of debtor’s cash receipts and disbursements; financial statement items; and proposed transactions for which bankruptcy court approval is sought.
3. Advice and assistance regarding tax-planning issues.
4. Assistance with identifying and implementing potential cost-containment opportunities.
5. Assistance with identifying and implementing asset-redeployment opportunities.
6. Review and critique of the debtor’s financial projections and assumptions.
7. Preparation of enterprise, asset and liquidation valuations.
8. Assistance in preparing documents necessary for confirmation.
9. Litigation consulting services and expert witness testimony regarding confirmation issues, avoidance actions or other matters.
10. Other tasks as requested by the debtors or their counsel.

Miriam Rozen

Miriam Rozen, a Financial Planning contributing writer, is a staff reporter at Texas Lawyer in Dallas.