* 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 proposal.
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, due 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
Justice Department guidelines.
The overhaul stemmed from what some lawyers and academics
saw 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 $1,000 an hour or more
because their field is so specialized.
The issue is critical because 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
seek to ensure that bankruptcy costs reflect market rates for
legal work outside bankruptcy, rather than effectively creating
a premium for bankruptcy work, West said.
The new guidelines require lawyers to reveal the methodology
they use to establish 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 they exceed
those budgets by more than 10 percent.
During a comment period last year, large law firms
complained 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 and submit
statements showing that clients had agreed to an increase in
Clifford White, director of the Trustee Program, told
reporters in a conference call on Tuesday that the finalized
guidelines exempt traditional step increases, which is a change
from a draft released last November.
"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 associates' rate increases are
always small. They often raise rates as they gain experience.
For instance, Candace Arthur, an associate at Weil, Gotshal
& Manges, began work on Lehman Brothers' record-setting Chapter
11 case in 2010 at $395 an hour but by September of last year
her rate had risen 48 percent to $585 per hour, according to the
firm's public fee applications in the case. In contrast, Weil
partner Harvey Miller, who led Lehman through bankruptcy,
increased his rate by $50 over four years to $1,000 per hour
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 Trustee warned against rate increases that are disguised
as step-ups, saying in the guidelines that "applicants should
not attempt to characterize actual rate increases ... as 'step
increases' in an effort to thwart meaningful disclosure or
Under the guidelines, the Trustee will also regularly seek
to appoint examiners or committees to oversee fees in large
cases, a practice currently reserved for the most complex
bankruptcies. If fee examiners become more common, it could open
an avenue for professionals looking to get into the business of
"One might say we already have a cottage industry of fee
examiners in its budding stages," John Penn, a bankruptcy
partner at law firm Haynes & Boone, said on Tuesday.
The guidelines will apply only to lawyers. White said new
fee guidelines for investment bankers, financial advisers and
accountants could be introduced in the future.