* Lawyers must justify rate hikes, but not 'step-up' increases
* Will also be pushed to provide rough budgets
By Nick Brown
June 11 (Reuters) - Bankruptcy lawyers will soon have to make new disclosures on how they bill clients under guidelines finalized by the U.S. Department of Justice on Tuesday, the first overhaul of bankruptcy billing in 17 years.
Lawyers will have to justify any increases in their hourly rates and will be asked to provide rough budgets, requirements that were points of contention over the last year as the U.S. Trustee Program, the Justice Department's bankruptcy watchdog, rolled out early drafts of the new guidelines.
The move marks the first update to fee guidelines since 1996 as rising legal costs in bankruptcy cases come under scrutiny from regulators and academics.
In one key change from prior drafts, rate increases tied to associates' promotions -- so-called step increases -- will be excluded from disclosure requirements.
The guidelines, to take effect Nov. 1, will apply to bankruptcy cases for companies with more than $50 million in assets and $50 million in liabilities. Courts are not legally obligated to implement them, but in general, most courts follow guidelines laid out by the Justice Department.
The overhaul stems from what some industry professionals see as a disproportionate cost structure in bankruptcy billing. While many companies have looked to curb legal costs by demanding discounts from non-bankruptcy legal advisers, bankruptcy attorneys can still demand top rates - sometimes $1,000 an hour or higher - because the restructuring field is so specialized.
The issue is critical because of the fact that advisers of bankrupt companies and some of their creditors are paid out of the company's estate. Since legal fees are paid ahead of other creditor claims, higher legal costs mean less money for creditors.
"The costs of bankruptcy fall on the creditors and employees of the debtor companies," Tony West, U.S. acting associate attorney general, said in a statement on Tuesday. The guidelines, first proposed last year, seek to ensure that bankruptcy costs reflect market rates for legal work outside of bankruptcy, rather than effectively creating a premium for bankruptcy work, West said.
Among the new guidelines are disclosures requiring lawyers to reveal the methodology they use to come up with certain rates and to explain and justify rate increases.
The Trustee will also push for attorneys to provide budgets and will ask for an explanation if those budgets are exceeded by more than 10 percent.
During a comment period late last year, large law firms complained that the overhaul would ignore market pricing and impose burdensome tasks on lawyers, with little benefit to clients.
A major sticking point was a requirement that firms calculate how much clients' bills would rise as a result of rate increases and submit statements from clients saying they agreed to the higher fees.
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 & Manges, proposed that only annual, firm-wide rate increases of 10 percent or more be reported to the court.
The guidelines exempt traditional step increases, a change from a draft released last November, Clifford White, director of the Trustee Program, told reporters in a conference call on Tuesday.
"That's not a rate increase in the sense that the firm might be changing upward its overall hourly fees," White said. "It is instead a step in a natural progression."
That does not mean that such rate increases are not sometimes costly: It is often younger lawyers who raise rates the most, as they gain experience. For instance, in Lehman Brothers' record-setting Chapter 11 case, industry superstar Harvey Miller, of Weil, increased his rate only $50 over four years, from $950 to $1,000. In contrast, Candace Arthur, an associate at Weil, began work on the case in 2010 at $395 an hour but jumped to $585 per hour, a 48 percent hike, by September of last year, according to the firm's public fee applications in the case.
It is not clear whether Arthur's increases were purely step increases. When Reuters reported on the issue in September, Weil and Arthur declined to comment.
The U.S. Trustee makes special note in the guidelines of hefty rate increases disguised as step increases, warning that "applicants should not attempt to characterize actual rate increases that are unrelated to an attorney's advancing seniority and promotion as 'step increases' in effort to thwart meaningful disclosure or billing discipline."
At first, the guidelines will apply only to lawyers, not to financial advisers and other professionals. White said new fee guidelines for investment bankers, financial advisers and accountants could follow, but did not provide a timeframe.
"We do want to spend some time and resources to ensure that (lawyers) understand what will be expected" from the guidelines, he said. "We want to still keep the focus for a little while on the attorneys."