* Lawyers must justify rate hikes, but not 'step-up'
* Will also be pushed to provide rough budgets
By Nick Brown
June 11 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
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
"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
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
"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