Lawyers under fire for boosting fees on bankrupt companies

Wed Sep 19, 2012 6:59am EDT

* U.S. Trustee's office set to update fee rules for lawyers

* Critics say bankrupt companies lack leverage on fees

* Law firms fear 'micromanagement'; defend billing practices

By Nick Brown

NEW YORK, Sept 19 (Reuters) - Bankruptcy lawyers may soon have to make an array of new disclosures on how they bill clients - and they aren't happy about it.

One of the biggest points of contention is a proposal for firms to disclose and justify rate increases charged as a case goes on, drawing complaints from big law firms wary of more government oversight of their client agreements.

It is part of a proposed overhaul of bankruptcy fee practices to be announced at the end of this month by the U.S. Trustee Program, an arm of the Justice Department that oversees how companies spend money during a court-supervised liquidation or restructuring.

Bankruptcy fees have long been under scrutiny and the new fee guidelines are aimed at reining in legal costs for troubled companies. Fees in large cases routinely reach hundreds of millions of dollars. In the liquidation of Lehman Brothers Holdings - the largest Chapter 11 case ever -- fees paid to lawyers, accountants, financial advisers and other professionals have topped $1.6 billion.

It's a fact of life that lawyers raise rates over time. But proponents of the government proposals say bankruptcy attorneys - compared, say, with litigators or deal lawyers - too often increase fees disproportionately. Critics also argue that rate hikes while a company is in the thick of bankruptcy are particularly troublesome because beleaguered companies lack leverage to complain.

"Most folks are not repeat players in bankruptcy, so when their professionals tell them that something is normal, they have no reason to question it," said Nancy Rapoport, a law professor at the University of Nevada, Las Vegas, who has served as a court-appointed fee examiner in Chapter 11 cases.

Companies also lack incentive to challenge fee hikes because money they save on lawyers won't always be theirs to keep, Rapoport said. Instead, it will likely go to creditors, who are paid from the same pot as attorneys.

The Trustee's office, whose guidelines would only cover lawyers, wants law firms to be more accountable by giving notice of rate increases, calculating how much clients' bills would rise as a result, and submitting statements from clients saying they agreed to the higher fees.

The proposals, the first fee rule overhaul by the Trustee's office since 1996, would also require a showing that rates are in line with the rest of the legal market.

Rapoport, who supports the new guidelines, cited the 2010 bankruptcy of Las Vegas casino operator Station Casinos as an example of the need for greater disclosure.

As fee examiner in that case, she challenged bills submitted by law firm Brown Rudnick, which represented Station's creditors' committee until a judge effectively disbanded it. Among her criticisms, she said, was an increase of billing rates by some lawyers despite a five-week stint in the case. Those lawyers charged a higher rate for the time spent preparing fee applications than for their substantive legal work.

The higher rates only added about $3,500 to Brown Rudnick's $1 million bill, but Rapoport said the episode reflected the wider problem of law firms raising bankruptcy rates without justification. The sides eventually settled, in an agreement that also addressed Rapoport's other fee concerns.

Brown Rudnick declined to comment on fee issues in the case, as did Station Casinos.

SUPPLY AND DEMAND

Bankruptcy lawyers can command top rates - sometimes $1,000 an hour or higher - because the field is so specialized. But there is no comprehensive data publicly available on how their rate increases compare with the rest of the legal market.

Overall, across all practice areas, large law firms raised their negotiated rates - the rate actually charged for their work, which can reflect discounts negotiated with clients - by 3.1 percent in the second quarter from the same period in 2011, according to data from 135 of the top 200 law firms by revenue compiled by Peer Monitor, a division of Thomson Reuters.

Courts were once authorized to enforce discounts in bankruptcy cases to reflect the troubled state of bankrupt companies and preserve value for creditors. But the establishment of the Federal Bankruptcy Code in 1978 allowed lawyers to bill consistent with, though not higher than, market rates for non-bankruptcy legal work.

Clifford White, director of the Trustee's office in Washington, D.C., has argued that bankruptcy lawyers now effectively bill at a premium. At a bankruptcy conference last November, he said clients in the broader legal world often demand discounted rates and alternative billing methods. But in bankruptcy, he said, those discounts are rarely granted.

White's office declined to comment on the proposed guidelines. Courts have historically followed principles set out by the Trustee's office but are not bound by them.

The fee increases passed on to clients often come from newer lawyers who raise rates as they gain experience. Law firms are quick to point out the difference between annual, firm-wide rate increases, which are often small, and step-up increases that associates get when they are promoted.

Industry superstar Harvey Miller, a Weil Gotshal & Manges partner who has led Lehman through its bankruptcy, increased his hourly rate by only $50 over four years on the case, jumping to his current $1,000 fee from $950 in 2008, according to fee applications filed with the U.S. Bankruptcy Court in Manhattan.

In contrast, Candace Arthur, an associate at Weil, began work on the case in 2010 at $395 an hour, but her rate has jumped 48 percent, to $585 per hour, in two years, according to the fee applications.

Andrew Young, an associate at Milbank Tweed Hadley & McCloy, began the Lehman case in 2008 billing at $420. He increased rates on four occasions, and as of March billed at $675 -- a 61 percent increase, according to fee applications. Milbank represents Lehman's creditors' committee.

Bankruptcy lawyers in the Lehman case have largely been paid but are still awaiting court approval on final fees.

Weil representatives declined to comment, while Milbank did not return calls. Arthur declined comment through a Weil spokeswoman. Young did not respond to a request for comment.

More than 100 big law firms have joined in a counter-proposal to the government's recommendations. They oppose calculating the added costs of rate increases and requiring approval statements from clients.

Law firm Foley & Lardner has characterized the plan as "excessive micro-management," saying it would ignore market pricing and "impose very burdensome tasks" on lawyers without a large benefit to the parties in the case.

Marcia Goldstein, a top bankruptcy partner at Weil Gotshal, has said the new disclosures could "prove more cost-causing than cost-saving." Goldstein proposed that only annual, firm-wide rate increases of 10 percent or more be reported to the court.

The Trustee's office has said it expects to release an updated draft of its guidelines by the end of September.

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