The branch of the U.S. Department of Justice responsible for overseeing the federal bankruptcy process on Tuesday unveiled new guidelines aimed at ensuring that law firms charge clients they represent in Chapter 11 cases rates comparable to those they bill in other practice areas.
The new rules offered by the U.S. Trustee Program, which will go into effect for cases filed after November 1, are the product of a 18-month-plus process that represents the first thorough review in nearly 20 years of how attorneys in large bankruptcies are compensated. While the Trustee’s office routinely scrutinizes attorneys fees and expenses in Chapter 11 cases, only judges can withhold requested fees or require law firms to submit additional details as a condition of receiving payment for their work.
The guidelines, which are not legally binding, reflect a desire on the government’s part to bring bankruptcy-related fees in line with recession-driven changes to client expectations and law firm pricing practices that are affecting other types of legal work.
"We know that private industry has been demanding—for attorneys outside bankruptcy—discounts and other cost-containment mechanisms that haven’t been prevalent in bankruptcy," says Clifford White III, director of the U.S. Trustee Program. "We want to ensure that those market-driven approaches are in bankruptcy cases as the code requires."
In a statement, acting assistant attorney general, and former Morrison & Foerster partner, Tony West added that the revisions come "at a time when both the public and the most sophisticated participants in the bankruptcy process say bankruptcy attorneys’ costs are rising too rapidly."
The guidelines’ key provisions include asking firms to provide blended hourly rates they either billed or collected over a year’s time to all practices outside of bankruptcy. Lawyers working on large cases will also be asked to explain any rate increases, excluding fee bumps attributed to "step increases" that come when attorneys are promoted. The guidelines further warn firms against characterizing "actual rate increases" as step increases "in an effort to thwart meaningful disclosure or billing discipline."
The guidelines ask that when submitting fee requests in bankruptcy cases, law firms provide a database of searchable electronic billing records to the court and other parties working on the matter, and, if the court in question agrees, the creation of budgets and detailed staffing plans related to the case at hand. White said Tuesday law firms are also being encouraged to hire outside fee examiners to add a "certain deterrent value" to prevent bills from falling below the requested standards.
The rules released Tuesday differ in significant ways from a draft version introduced in November 2011 that drew fierce opposition from hundreds of attorneys at both large and small law firms, as well as from bar associations around the country. Many of those complaining argued that certain aspects of the rules were onerous and even bordering on unethical.
For instance, a controversial provision that would have required firms to submit high, low, and average rates charged to nonbankruptcy clients with every bankruptcy application was scrapped in favor of the request that blended hourly rates be submitted to the court. The Trustee’s office also limited the new guidelines to Chapter 11 proceedings involving debtors with more than $50 million in assets and $50 million in liabilities, a category that White has said includes roughly 180 cases per year, primarily in New York and Delaware. The guidelines do not apply to single-asset real estate cases.
Michael Bernstein, the Washington, D.C., based chair of Arnold & Porter’s national bankruptcy and corporate restructuring practice, said Tuesday that while he commended the Trustee’s office for trying to keep lawyers accountable and for soliciting comments on the changes along the way, the rules may prove overly cumbersome.
"I think the budgeting guideline and some of the other rules presuppose a level of predictability that doesn’t always exist," said Bernstein, who, on behalf of Arnold & Porter, joined with more than 120 other firms that filed a joint objection to an earlier draft of the guidelines. "I’m not sure professionals who should be focusing on the needs of their clients and the bankruptcy estate should be spending a lot of time making a budget that their clients didn’t ask for."
Victor Vilaplana, a bankruptcy of counsel with Foley & Lardner, said that in addition to being concerned that the preparation and filing of fee applications will be even more time-consuming under the new rules, he wasn’t sure exactly what the office means when it says it wants to prevent "premiums" from being charged in bankruptcies. "In bankruptcy work, it’s not a recurring client, and in many cases you don’t get paid full fees as you go along," Vilaplana says. "So it seems to me a premium of some sort is not unwarranted, because there are additional risks."
White said his office now plans to turn its attention to the rules that govern how bankers, financial advisers, and accountants are compensated in bankruptcy cases, though he doesn’t yet have a timeline in place for when that will happen.
Bernstein anticipates that the new rules for law firms may be applied piecemeal once they take effect. "As this plays out, the parts of this that are feasible in the real world, and are actually helpful and useful in evaluating fee applications, will serve their function," he said. "And if there are elements that over time prove burdensome or unhelpful or unrealistic given the unpredictability that sometimes exists in Chapter 11, perhaps we’ll find practical ways to deal with them."