According to Financial Times News, the bankruptcy of auto parts maker First Brands has revealed staggering professional fee arrangements, with investment bank Lazard potentially earning up to $150 million in transaction fees. The complex fee structure includes seven different transaction types with a sliding scale that pays 0.75% up to $11 billion in sale value, then 2.25% above that threshold. Major advisers including law firm Weil, Gotshal & Manges, Lazard, and consulting firm Alvarez & Marsal filed retention applications in Houston bankruptcy court, with Weil already receiving $9 million pre-bankruptcy and top partners now billing over $2,500 per hour. The case draws parallels to the FTX bankruptcy where total professional fees reached $950 million, raising concerns about how such costs impact creditor recoveries.
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Table of Contents
The Bankruptcy Industrial Complex
What we’re witnessing in the First Brands case is the maturation of what critics call the “bankruptcy industrial complex” – a self-perpetuating ecosystem where professional fees increasingly consume the value that should flow to creditors. The bankruptcy process was originally designed to maximize value for stakeholders, but the sheer scale of modern professional fees suggests the system may be prioritizing adviser compensation over creditor recoveries. When a single investment bank like Lazard can potentially earn $150 million from a distressed company sale, it raises fundamental questions about whether the current fee structures align with the original intent of bankruptcy protection.
The Creditor Recovery Crisis
The most troubling aspect of these escalating fees is their direct impact on creditor recoveries. As one lender correctly noted, “The attorneys and advisers always win” – and the numbers bear this out. In complex bankruptcies with allegations of fraud, like First Brands and FTX, professional fees can consume 10-20% of the estate’s value. This creates a perverse incentive structure where advisers may prolong proceedings or pursue complex strategies that maximize their fees rather than efficiently resolving the situation. The fact that bankruptcy courts in jurisdictions like Houston have developed reputations for approving generous fee arrangements only exacerbates the problem.
Structural Incentives and Misaligned Interests
The fee structures themselves create problematic incentives. Lazard’s arrangement, where they earn different percentages based on transaction type and size, could theoretically encourage them to push for a sale even when reorganization might better serve creditors. Similarly, consulting firms like Alvarez & Marsal seeking both hourly rates AND success fees creates potential conflicts. The timing is also telling – these fee arrangements were negotiated before fraud allegations surfaced, when expectations for a “blowout sales price” were more realistic. Now that the company’s situation has deteriorated, the original fee structures may no longer reflect economic reality.
Broader Industry Implications
This case reflects a broader trend affecting the entire investment banking and legal industries. The breaking of the $2,000 per hour barrier for top partners just a few years ago, and now surpassing $2,500, indicates a fee inflation that outpaces general economic measures. For distressed debt investors and hedge funds, these escalating professional costs are becoming a material factor in recovery calculations. The situation at First Brands, following similar patterns in other major bankruptcies, suggests we may be approaching an inflection point where creditors become more aggressive in challenging fee applications, potentially through the U.S. Trustee’s office or official creditor committees.
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The Regulatory and Market Outlook
Looking forward, the First Brands case could become a catalyst for reform in bankruptcy fee practices. As professional costs continue to consume larger portions of bankruptcy estates, we’re likely to see increased scrutiny from both regulators and creditor groups. The leadership transitions and complex capital structures common in modern corporate bankruptcies create fertile ground for fee inflation, but also increasing awareness among stakeholders. The key question is whether market forces – through more aggressive creditor challenges – or regulatory intervention will ultimately address what appears to be a systemic issue in major Chapter 11 proceedings.
