* 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 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
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.