(Photo: Sergey Tryapitsyn/Fotolia)
Few tears will be shed for Weil, Gotshal & Manges after a federal judge slashed in half the firm’s $1 million fee payment in an Iowa bankruptcy case. U.S. Bankruptcy Judge Anita Shodeen of the Southern District of Iowa, who’s overseeing the case, blasted the firm for showing “a distinct lack of billing judgment.”
For those not in the 10-figure club, there’s a certain schadenfreude in seeing a global law firm with more than $1 billion in annual revenue taken down a peg by a judge in Des Moines.
But the episode also raises concerns for lawyers who say it demonstrates a risk high-priced coastal law firms face when they go to court in smaller markets and could make Big Law practitioners wary of practicing in smaller cities, particularly in cases where fees are subject to court scrutiny.
A Weil spokesperson declined to comment on Shodeen’s decision, reported last week by The Wall Street Journal.
“It’s always dangerous for a New York firm to go into the hinterlands,” said UCLA Law School professor Lynn LoPucki, who studies fees in corporate bankruptcies. “New York firms go out into areas where attorneys make a lot less money and the judges tend to not only reject fees, but to criticize their work.”
Weil had sought to collect fees on behalf of TCTM Financial FS, an affiliate of TerraMar Capital, the senior secured lender to the aerospace parts company Wellman Dynamics. The lender was seeking more than $30 million for the underlying loan it had purchased from Fifth Third Bank, as well as to purchase the company operations, after Wellman’s parent company defaulted, according to multiple media reports.
The more than 100-page itemized bill filed with the court shows that five Weil partners worked on the case from New York and Washington, D.C., billing at hourly rates that ranged from $1,035 to $1,350. The top rate was billed by New York partner Paul Wessel, co-chair of Weil’s tax practice. Counsel billed at hourly rates from $900 to $990, and associate rates ranged from $490 to $930.
According to the court-appointed bankruptcy trustee, Weil had 20 lawyers and other professionals working on the case, billing 1,251 hours over just two months. The trustee said the firm “engaged in extreme over-lawyering, over-litigation and overbilling, all of which were billed at excessive rates.”
LoPucki pointed to a footnote in Shodeen’s decision that took a shot at Weil’s failure to provide evidence to the court as to the reasonableness of its fees. That lapse, LoPucki said, may have struck Shodeen as arrogance. Splitting Weil’s fees exactly in half—down to the penny—seemed to be a signal to the firm rather than an objective calculation of appropriate fees, LoPucki said.
Jason Gottlieb, a partner at New York’s Morrison Cohen, agreed. The problem, Gottlieb said, is that “there’s no clear lesson lawyers can take from that other than, you’re a big firm and your fees are really high,”
Laura Fontaine, a Dallas-based bankruptcy lawyer with Gruber Elrod Johansen Hail Shank, said a lack of proportion between the financial stakes and the fees being sought likely drove the judge’s decision.
“That’s just optically—even if they were the most meritorious fees in the world—that’s going to be difficult for the judge to swallow,” she said.
Fontaine said she believed Shodeen was unlikely to allow “what she decided was an over-secured lender to drive the case,” adding, “the bank showed up with a bazooka to a water gun fight.”
Weil defended its fees in a January court filing, writing that the complexity and pace of the case “makes it entirely reasonable for parties to have sought assistance from professionals outside of Iowa.”
TCTM’s local bankruptcy attorneys with the law firm Davis, Brown, Koehn, Shors & Roberts “could only reasonably handle so much,” the firm wrote. “In both of the weeks prior to evidentiary hearings, local counsel billed 62.3 and 68.6 hours, respectively, and over 300 hours combined in September and October—all while managing their other matters. They could not possibly have handled all the things they did and all of the tasks that Weil’s team handled. Accordingly, it would have been impossible for TCTM to have addressed all of debtors’ filings and prepared for the hearings without Weil’s significant efforts. For this reason, courts have found that it is reasonable to retain counsel from outside the local jurisdiction, and compensate such counsel at its customary rates, when local counsel does not have the requisite capacity to handle a matter.”
Gottlieb of Morrison Cohen remembers being in a similar situation when his former firm, Cleary Gottlieb Steen & Hamilton, handled a copyright infringement case in the U.S. District Court for the Northern District of Ohio in 2005. A contempt motion was filed against the defendants, represented by a local Toledo firm, for a failure to heed Judge James Carr’s orders, and the judge awarded the plaintiffs sanctions that included Cleary Gottlieb’s attorney fees.
Gottlieb—the attorney, not the firm—to this day says he points with some pride at Carr’s rationale for awarding what were surely north of those charged locally.
“The quality of lawyering by all counsel has been first-rate, and first-rate counsel do not charge bargain-basement fees,” Carr wrote.
Given the known scrutiny in these kinds of cases, Gottlieb said most firms are careful in their billing to make sure their fees will pass muster before the bench.
“There’s obviously a premium on doing good work for reasonable rates,” he said.
That’s why a situation like Weil’s is seen as rare—and why Gottlieb found the halving of fees troubling. There are certainly good firms located everywhere, but if a company seeks out a Weil, there’s likely a reason.
“The last thing a judge should want to do is, if there’s a very complicated bankruptcy case outside of a major metro area, to send a message that company should not hire the best bankruptcy firm that they could hire,” he said.
A decision like Shodeen’s has a potential chilling effect—for companies and law firms alike. Partners in other top-flight New York firms that spoke with the New York Law Journal shared this concern in the wake of the case. For Gottlieb, an instructive way to handle concerns from the bench is to go through the fees and target specific areas of concern.
In the end, this has “adverse and unintended consequences” on the very people most in need of a Weil, Gottlieb said. “The result of that is less choice of law firm providers for folks in Iowa or Idaho, or anywhere that’s not the big cities.”
Copyright The American Lawyer. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.