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The $675 per hour that Harold Novikoff at New York’s Wachtell, Lipton, Rosen & Katz is getting to represent W.R. Grace & Co. in its Delaware bankruptcy these days is 200 percent more than the $225 per hour that Edward Maxwell of Young Conaway Stargatt & Taylor in Wilmington, Del., made in 1990 in the same venue to counsel Continental Airlines Inc. Such a meteoric rise in the hourly rates of attorneys representing bankrupt companies in Delaware speaks not only to the pre-eminence of the court there, but to the swelling fortunes and workloads of those who practice there. Just as telling: The hourly fee inflation involving associates and paralegals working for debtors that have filed in Delaware. According to a Daily Dealstudy of 17 major cases filed in Wilmington, Del., and the Southern District of New York in 1990, 1995, 2000, and 2001, associates today in Delaware bankruptcies make 150 percent more than their counterparts did in 1990. Paralegals have experienced a 183 percent hike. What about New York? In 1990 the Southern District was the bankruptcy court of choice and Delaware was a relative Chapter 11 backwater. As a result, partners in New York cases haven’t experienced such a dramatic rise in fees. Thus, while Sidley Austin Brown & Wood, which is representing Warnaco Inc. in New York, has disclosed that its partners’ rate, too, is $675, that’s only 35 percent higher than the $500 that Weil, Gotshal & Manges’ Harvey Miller billed on the Best Products case in 1990 there. Pay rates in bankruptcy proceedings have come under increasing scrutiny, but mostly over fees to financial advisers and restructuring specialists. Except for a few episodes, legal fees haven’t been as controversial. Judge Marilyn Shea-Stonum in Akron, Ohio, was appalled last spring when Weil Gotshal asked that Republic Technologies International pay its paralegals as much as a $245 hourly rate. (Weil Gotshal later said that the high end of its hourly pay range for paralegals was a mistake and should really have been $155 per hour.) And for the most part, debtor attorney fees have caused little stir. Until bankruptcy reform in 1978, bankruptcy lawyers were typically more poorly paid than other legal specialties because the notion was that they needed to suffer along with the debtor. That is no longer the case. “Bankruptcy counsel shouldn’t be compensated any differently from someone else in the firm who practices labor law or tort law,” says John W. Ames, chairman of the American Bankruptcy Institute’s professional compensation committee and a partner at Greenebaum Doll & McDonald in Louisville, Ky. “The No. 1 ingredient is to have competent counsel.” That’s not to say that the people with the most to lose in a bankruptcy — the creditors — don’t get miffed at the fees. “If unsecured creditors are looking at a recovery of 10 percent while a partner in a law firm is getting $650 an hour, they are likely to become irritated,” Ames says. A mitigating factor in debtor attorney fees is that creditor attorneys often bill at similar, or even higher, rates. For example, in one Delaware case filed this year involving Winstar Communications Inc., seven partners at debtor counsel Shearman & Sterling are charging $650 per hour. Yet Bruce Zirinsky, a partner at the unsecured creditors’ counsel, Cadwalader, Wickersham & Taft, is charging the same. And in the Delaware bankruptcy of Safety-Kleen Corp. filed in 2000, debtor counsel David Kurtz of Skadden, Arps, Slate, Meagher & Flom is charging $670 an hour. But Safety-Kleen’s secured creditors’ counsel, Luc Despins of Milbank, Tweed, Hadley & McCloy, is billing $675. Even so, bankruptcy attorneys recognize that hourly rates have swelled handsomely. They blame the fee inflation on competition for associates and paralegals fueled by Silicon Valley law firms who, just a few short years ago, had more Internet-related work than they could handle. Even though the tech boom has faded, salaries that bankruptcy law firms had to pay to land talent haven’t. “The dot-com law firms on the West Coast screwed us when they juiced up their rates and forced us to increase our rates for associates merely to stay competitive,” says a bankruptcy partner at a large Midwest law firm, who asked not to be named. This lawyer pointed to Cooley Godward of Palo Alto, Calif., Brobeck, Phleger & Harrison of San Francisco, and Wilson Sonsini Goodrich & Rosati in Palo Alto as the firms that drove the increase in associate pay throughout the legal industry. Inflation begets inflation. As associates’ pay rose, so, too, did that of the partners who supervised them. “The dramatic upturn in associates’ fees inflated the entire lawyer fee structure. Higher associates’ salaries generated higher partner fees when they rippled up through the entire firm,” says Sandra Mayerson, the head of restructuring at New York law firm Holland & Knight. That tide has also raised the pay of paralegals, who are doing more grunt work. In Delaware, the $60 an hour that Terri Kessel at Young Conaway was billing on the 1990 Continental case had turned to as much as the $190 per hour that Skadden, Arps’ Catlin Urban billed out for on the Safety-Kleen case filed last year. Bankruptcy clients have inadvertently contributed to this inflation in associate and paralegal fees, says Martin Zohn, a partner in the Los Angeles office of Proskauer Rose. “I find that clients more and more insist that the junior lawyer who’s qualified should do the lesser tasks at the much lower rate than partners,” he says. “[Clients] even realize that paralegals don’t need a law degree to do [even some] complicated tasks, [especially] when [such work can be] done at a much lower rate.” Zohn says the days are over when bankruptcy partners performed chores they were clearly overqualified to assume. “The senior lawyer can no longer do it all,” he says. “But now he plans things out, provides quality control, and must coordinate between associates and paralegals to avoid duplication of efforts to keep costs down.” One high-powered New York bankruptcy partner, who spoke on condition of anonymity, maintains that partners spent a lot of time in the prosperous mid-1990s creating unnecessary litigation to help their firms and themselves build up fees. “A lot of partner time piled up in 1995 due to litigation that didn’t need to happen,” the partner says. “But the economy has turned and partners are now back doing the serious work of seeking consensual restructuring.” Looking at pay rates in bankruptcies is hardly cut and dried. The Daily Dealstudy involved eight cases in the Southern District and nine in Delaware. We couldn’t get every fee application in every case. Instead, where figures were available in fee applications, we sought the most hours logged by partners, associates and paralegals. Then, we took the top three of each based on that criteria, and the highest hourly rate each did that work for. There are cases in which some partners, associates and paralegals actually billed at hourly rates higher than the professionals we have noted, but we dropped them because they didn’t log as many hours. In some of the 2001 cases, fee applications haven’t yet been filed, so we used ranges that the firms submitted to the court. In doing this study, we also focused on debtor counsel and co-counsel, but we passed over litigation counsel, special counsel and other attorneys that might be hired by a debtor. Although The Daily Dealanalyzed only 17 cases, they can be considered bellwethers in their particular years. While for 2001 we didn’t include Pacific Gas and Electric Co., the year’s largest bankruptcy by virtue of its $21.5 billion in assets, we did, by concentrating on Delaware and the Southern District, capture the upper threshold of bankruptcy attorney fees. (In the PG&E case, heard in San Francisco, James Falk Jr. and James Lopes at Howard, Rice, Nemerovski, Canady, Falk & Rabkin are billing at $475 per hour, the highest among its partners on the case.) In comparing the shifting balance between Delaware and the Southern District in bankruptcy filings, 1995 seems to be a defining year. We found that in New York the highest partners’ rate went from $500 in 1990 to $395 in 1995 (Albert Togut of Togut, Segal & Segal, representing Rockefeller Center Properties Inc.), representing a 21 percent drop. Meanwhile, the pay scale in Delaware went from Maxwell’s $225 in the Continental case to $500 in 1995 (Robert Levine of Davis Polk & Wardwell, which represented Lomas Financial Corp.), a 122 percent gain. Last year, however, the Southern District made a comeback, its top rate rising to $650 (Stuart Hirschfield of Dewey Ballantine, representing UniCapital Corp.). Delaware didn’t do badly, either. Its top rate rose to $670 (Jan Baker of Skadden Arps representing Owens Corning.) For associates and paralegals, the power shift from the Southern District to Delaware can also be seen in 1995 pay rates. In Delaware, the paralegal high rate rose to $120 — double 1990′s $60 — in the Lomas case (Davis Polk’s Rosemarie Davis) and Burlington Motor Holdings case (Dewey Ballantine’s George Medina.) Rates jumped in the Southern District, too, but by just 20 percent (in 1990, Fried, Frank, Harris, Shriver & Jacobson’s S. Curtis billed at $92 per hour, and in 1995, Togut Segal’s Daniela Levarda and Derek Fessler charged $110 in the Rockefeller Center case.) A similar scenario occurred with associates. The big jump occurred in 1995 in Delaware — the $335 that Richard Potok of Davis Polk made in the Lomas Financial case represented an 86 percent jump from the $180 per hour Laura Davis Jones billed at Delaware’s Young Conaway Stargatt & Taylor in the Continental case. (Jones is perhaps the most prominent bankruptcy attorney in Delaware now, as a partner at Pachulski, Stang, Ziehl, Young & Jones.) The Southern District’s highest rate, in contrast, rose only 12 percent. Weil Gotshal’s Kevin Barrett billed $250 in the Best Products case, while Parker Chapin Flattau & Klimpl’s John Carlson did so at $280 in the 1995 Caldor Corp. case. Despite rising rates, however, some observers believe that overall average legal fees per bankruptcy are probably down. Lynn LoPucki, Security Pacific Bank professor of law at UCLA School of Law, said total debtor counsel fees in general appear to be lower than 10 or 20 years ago because debtors want to quickly exit from Chapter 11 and attorneys have learned to build upon procedural paths forged after the 1978 Bankruptcy Code. “My guess is that total counsel fees are lower because things have become more routine and lawyers have learned to get cases through the court more quickly,” he says. LoPucki is researching fee applications and has data on 27 large cases. His goal: comparing professional rates on entire cases and the relative time involved in filings. “Some of the cases are taking maybe half as long as they did in the mid-80s, for instance, because there’s many more lawyers,” he says. Debtor clients have become increasingly sophisticated and play a larger role in outlining the nature of the restructuring issues, Zohn says. The resulting shift of some of the workload away from partners to associates and even paralegals, when possible, can be cost-efficient and the lower cost can be passed onto the debtor, he says. “The associates and paralegals can be a tremendous bargain if the law firm is functioning at peak efficiency.” According to the ABI’s Ames, law firms have tried to keep their fee applications in check by parceling more work out to associates and paralegals. They have to. The bankruptcy code requires that work be done at the lowest pay scale possible, while being done competently. So it’s not likely that a partner that charges $475 an hour for tasks such as research, filing or basic motions work would be reimbursed at his full rate, Ames says. Only in bankruptcy law must attorneys hang out their fee laundry. Tasks performed in a Chapter 11 case are reported down to the tenths of the hour, and attorneys must report with whom they had phone calls and meetings and the topic of the discussion. To keep law firms honest, a cottage industry of fee auditors has cropped up. Auditors evaluate how much bankruptcies attorneys billed and for what tasks. Jim Donohoe, a partner at one such auditing firm, Donohoe, Jameson & Carroll, which merged with Dallas-based Winstead Sechrest & Minick in August, acknowledges the rise in rates. But unless fees and expenses requested are unreasonable or excessive, there is no reason to dispute them. “Half of the time,” Donohue says, “there is no adjustment.” Ask James L. Patton Jr., chairman of Young Conaway in Wilmington and a partner in its bankruptcy practice. He was billing $220 in 1990 when helping on the Continental case. Now he bills exactly double that as debtor co-counsel in the Winstar case. “Legal rates,” he says, “are market driven just like any other thing.” At today’s rates, bankruptcy attorneys’ fees can easily run up to seven figures, even eight in major cases. “One can assume that, across the board, lawyers are either finding the rates they are charging are what clients are willing to pay, or they are pricing themselves out of the market,” Patton says. So far, given the rising case volume of bankruptcies, it seems the former is holding the day. To download charts from the The Daily Deal that detail its study, click on the links below. Please note that the charts are in an Excel format. � 1990 Cases1995 Cases2000 CasesCurrent Cases Copyright (c)2001 TDD, LLC. All rights reserved.

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