US bankruptcy lawyers resist scrutiny over fees

Mon Jun 4, 2012 7:38pm EDT

* Big spending is 'in their DNA' at some law firms-lawyer

* Justice Department trustee program wants new guidelines

By David Ingram

WASHINGTON, June 4 (Reuters) - The bankruptcy lawyers who handle the biggest U.S. corporate restructurings responded with hostility on Monday to new scrutiny of their fees, which can reach hundreds of millions of dollars at the expense of creditors.

The lawyers told officials of the U.S. Justice Department they do not want to keep a budget, they do not want to disclose details of their billing practices and they do not want to justify expenses under $500.

The lawyers tried to make their case on the 7th floor of Washington's Justice Department at a rare public meeting called to consider whether bankruptcy fees are inflated, unjustified or wasteful.

The airing of ideas took place amid tales of limousine rides and clothing put on expense accounts, and in the face of questions about what exactly lawyers do to bill at rates up to and above $1,000 an hour.

In one recent example, during the two-and-a-half-year restructuring of Lehman Brothers, payments to the law firm Weil Gotshal & Manges totaled $383 million, according to a securities filing in March.

Legal fees are at issue also in the bankruptcy of MF Global Holdings Inc, whose estate has paid $17 million to lawyers in four months, according to court filings on Monday.

Bankruptcy lawyers bill at higher rates than lawyers in most other specialties, although the reason is in dispute. The top billers say the market values their experience and knowledge in restructuring companies such as Chrysler Group LLC. Critics say it is because managers of bankrupt companies are less aggressive than other clients in asking for discounts.

The Justice Department's U.S. Trustee Program is considering changes designed to impose what it considers financial discipline.

INACCURATE DATA

At Monday's meeting, lawyer Richard Levin said the data that the U.S. Trustee Program wanted to collect about hourly rates would be useless. He said legal billing records often were inaccurate because he and colleagues forgot to write down time they spent on cases.

"Lawyers are notoriously bad at administrative tasks, including putting data in properly," said Levin, a partner at Cravath, Swaine & Moore in New York and vice chairman of trade group the National Bankruptcy Conference.

In bankruptcy cases, lawyers' fees are at the mercy of the bankruptcy courts. Lawyers submit applications for compensation and objections may come from creditors, many of whom lose out in a bankruptcy, or from trustees, who are federal officials.

The final decision on fees is up to a bankruptcy judge, guided by what U.S. law says is "necessary" and "reasonable."

The U.S. Trustee Program wants to know whether law firms inflate their rates in bankruptcy cases - for example, by using more lawyers than necessary, or by dragging their feet - knowing they are unlikely to be challenged by the court.

"It cannot possibly be, can it, that everyone works through budgets except bankruptcy lawyers?" asked Clifford White, director of the Executive Office of U.S. Trustees.

Damian Schaible, one of five private lawyers who answered questions in person from White and his staff, said the process of budgeting was often useless, especially in the context of a legal team working on an unpredictable bankruptcy.

"How can anyone budget in the real world what they're going to spend?" asked Schaible, a partner at Davis Polk & Wardwell in New York, dismissing budgets also in personal bankruptcies.

LARGE FIRMS' DNA

Big law firms, which can throw scores of lawyers at a single case, cannot help but splurge on a major bankruptcy, said Albert Togut, managing partner of a boutique law firm that specializes in bankruptcy.

"It's in their DNA that, when they approach a project, they bring every resource at their disposal to the project," he said.

He urged the trustee staff to make a change that would encourage greater use of small, specialized law firms.

There has been a disproportionate number of major bankruptcy cases in recent years - including Lehman, General Motors, Washington Mutual - and the proposed new scrutiny from the U.S. Trustee Program is aimed at big cases, those with combined assets and liabilities of $50 million or more.

But there is disagreement even on that threshold. A group of 118 law firms opposed to the trustee proposal wants to set the line at $250 million.

A lawyer was scheduled to speak on behalf of those 118 firms on Monday, but he did not appear. D.J. "Jan" Baker of Latham & Watkins had, in written comments, assailed the trustee proposal as illegal and wasteful.

Baker preferred to meet in private, White said, adding that he was disappointed by the absence.

"Private meetings do not afford the level of transparency that today's meeting will provide," he said early on.

Baker did not respond to a request for comment later on Monday.

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