In-house Counsel: A “Glass Ceiling” for Credit Managers?
Written by Douglas G. Fox
Bosch Rexroth Corporation; Bethlehem, Pa.
Doug.Fox@BoschRexroth-US.com

Many companies start their existence with the assistance of outside counsel – there is simply not enough legal work to justify the expense of hiring in-house counsel.

However, as the company grows over the years, it gets to a “critical mass” where the legal work is now well into six figures, and the decision is made to hire the company's first inside counsel.

Consider the following possible scenario.

Company A has grown rapidly by acquiring complementary product lines; each of which functions somewhat autonomously under its traditional name. However, visibility in the marketplace is a problem, and new executive management decides that a major image makeover is needed.

The company adopts a single name, and new in-house counsel is hired in part to change all of the company registrations and records in all of the states where the company does business, as well as all other legal matters.

In order to gauge the cost-savings realized by employing in-house counsel, executive management might direct all of the divisions to compile a history of legal fees paid to outside counsel for the past few years, including name, address, and rationale for hiring the firm. Division managers would then be advised that all legal arrangements must be approved in advance by in-house counsel, as would be all subsequent legal fees.

Letters could then be sent out to all of the outside firms advising the firms that new in-house counsel has been hired, and that the outside firms may no longer bill fees unless at the direction of in-house counsel.

Many in-house counselors are generalists and/or have specialties other than what credit managers refer to as “creditors rights.” In one stunning blow, the credit manager might be cut off from his/her network of creditors' rights attorneys. That could be a big problem!

As an example, let’s suppose that the creditor sells equipment to a contractor supplying a new industrial facility located in California. If the contractor were to run into financial difficulty with the project, the creditor may need to find ways to protect itself.

In California, there is a requirement for a First Furnishing Notice if the creditor wishes to preserve any rights it may have under the state’s mechanics lien statutes.

In the event that in-house counsel did not have experience with lien statutes, in-house counsel would presumably read the statute dutifully, and comply exactly with its requirements. However, a problem may arise in that in-house counsel might not take the time to analyze how California courts have interpreted the mechanics lien statutes.

It turns out that California courts have been quite specific in what is required in order to comply with the First Furnishing Notice. Merely reading the statute may send in-house counsel down the wrong course of action. Multiply this scenario by 49 other states, and the credit manager has a prescription for disaster! No one person can possibly know the requirements, court interpretations and quirks in all 50 states! Arguably, what is needed is an expert in each state.

Meanwhile, executive management is probably monitoring in-house counsel in order to see that the investment in this new position is justified. In order to live up to these expectations, in-house counsel has every incentive to minimize the use of outside firms. Although this may at first sound very reasonable, a problem might arise if in-house counsel were to take on an assignment that should otherwise require a specialist, as in the above example.

In extreme cases, this “tension” in the working relationship between the credit manager and his/her in-house counsel might result in an apparent or actual conflict of interest. How might this conflict of interest arise?

In the event of a customer dispute, the credit manager may determine that he/she has good grounds to bring suit to recover a $400,000 indebtedness. In-house counsel for the creditor contacts the debtor’s in-house counsel, and absent the legal discovery process, in-house counsel may not really understand the true nature of the controversy. Together, they may decide that the best and most economical way to resolve the controversy is to try to reach a settlement.

The credit manager’s in-house counsel may say to the credit manager something like, “will you settle for $200,000?” That “solution” minimizes or eliminates outside legal fees, although greatly increasing the credit manager’s losses. Thus, “competing agendas” may exist on the part of the credit manager and its counsel. From the credit manager’s perspective, the proposed solution, if accepted, would be quite a customer discount and perhaps a “penny wise and pound foolish” business plan. But who is to say which is the proper course of action given the uncertainty of litigation!

Added to this uncertainty, is executive management’s perception and evaluation of both the credit manager and in-house counsel, perhaps in a total vacuum of the issues at hand.

Bankruptcy is also a specialized area of the law that may be beyond the comfort level of some in-house counsel. Consequently, it is incumbent upon bankruptcy practitioners to understand the strengths and weaknesses of their client’s personnel — which suggests that value-added marketing opportunities may exist.

Mr. Fox is not an attorney, and thus the foregoing is not intended to be, nor should it be construed as legal advice. Mr. Fox’s opinions are his alone, and not necessarily those of his employer, its affiliates, nor any other party. Mr. Fox’s background is more than 20 years business credit management experience, and he presently serves as Co-Chair of the UTC.

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