The U.S. Trustee Program has announced its proposals requiring extensive disclosure about law firm fee requests would apply only to very large Chapter 11 bankruptcies.

In narrowing the scope of cases to those with $50 million or more in assets and $50 million or more in liabilities as opposed to cases with a combined $50 million in assets and liabilities, the agency was responding to intense criticism from firms calling “burdensome” and “ethically unacceptable” the agency’s new recommendations for attorney fee applications.

The trustee program modified proposals for disclosure of rates in nonbankruptcy practices and said it would continue to seek budgets and staffing plans either by consent of the parties or court order.

Unchanged from the originally proposed guidelines, firms would still have to submit in their fee applications the number of rate increases since the inception of the case and disclose the effect of any rate increases on the total compensation a firm is seeking.

Disclosure guidelines were proposed a year ago to address what the agency regarded as soaring attorney fees. In an era of $1,000-an-hour rates, it contended large fees are undermining public confidence in the bankruptcy process.

The disclosure guidelines are meant to elicit information that will help parties determine whether a fee application is reasonable, the agency said.

The latest proposals were released Nov. 2 and are open to public comment until Nov. 23. U.S. Trustee Program Director Clifford White said the new disclosure guidelines, which would take effect in mid-2013, would apply in about 180 Chapter 11 cases a year, with about half of those filed in Delaware and the Southern District of New York.
Reaction from attorneys to the updated proposal has been mixed.

Ropes & Gray bankruptcy partner Mark Bane said the revised guidelines are an improvement, but he said they “still impose significant administrative burdens on law firms.” He added there is a need for greater supervision of the fee process, but “the question is whether there can be some middle ground.”

Real Estate Exception

Some significant updates to the proposed rules include the exclusion of single asset real estate cases, an exception not specified in the original guidelines.

The proposal also eliminates a requirement that firms disclose high, average and low rates and rates billed by other practices within the firm. That has been replaced by a disclosure of group blended rates and blended rates for nonbankruptcy matters based on time billed or revenue collected.

The comparative rate proposal is likely to draw more criticism.

“Law firms have different areas of practice in which the market forces are different,” said Richard Levine of Nelson Kinder + Mosseau in Boston and a former head of the U.S. Trustee Program.

He cited differences in rates for workers’ compensation, insurance defense and estate planning. No matter the size of a law firm, “I would still find this to be oppressive,” he said. However, he added the updated guidelines still reflected some “careful listening” from the agency.

Budget and staffing plans would be used only by consent of the parties or a court order, and would not be mandatory.

If the parties do not consent, the agency said the U.S. trustee generally would move for the court to require budgets of estate-paid attorneys in larger Chapter 11 cases.

“The concern about the alleged unpredictability of bankruptcy engagements in particular is overstated,” the agency said.

The agency is encouraging the use of co-counsel for better staffing and fee efficiency.
“These arrangements include using less expensive co-counsel for certain routine, commoditized or discrete matters to avoid duplication, overlap and inefficiencies,” it said.

A new question on fee applications would ask: “Did your client agree when retaining the law firm to accept all future rate increases? If not, did you inform your client that they need not agree to modified rates or terms in order to have you continue the representation, consistent with ABA Formal Ethics Opinion 11-458.”

Clients also would have to provide a statement with information on the number of firms the client interviewed and steps the client took to ensure the firm is billing at market rates.

‘Nickels and Dimes’

The updated guidelines are an improvement from the original proposals, said law professor Stephen Lubben of Seton Hall University, an expert in corporate restructuring. But he added he still had concerns.

“They may have a tendency to push fee and retention applications to be very long, boilerplate documents,” longer that they are now, he said.

Some of the new disclosure rules “sweat the small details” instead of looking at the big picture, which would include the number and types of firms retained and why some firms are brought on. He said that’s more important than worrying about word processor time.

Pointing to more than $1.6 billion paid to professionals in the Lehman Brothers bankruptcy, Shearman & Sterling bankruptcy partner Douglas Bartner said large fees should be addressed, but the guidelines will have only a “nickels and dimes” effect. Instead, more thought should be given to making the bankruptcy process and its rules more efficient, he said.

Nancy Rapoport, a fee examiner in bankruptcy cases and interim law dean at the University of Nevada said the guidelines go in the right direction.

“If these big law firms [work on] a ton of bankruptcies, they have at least a guesstimate of how much things are going to cost,” she said. If circumstances change, “they should change their guesstimate.”

White, director of the U.S. Trustee Program, said in a statement, “The updated proposed guidelines will add needed accountability and transparency to the billing practices of bankruptcy lawyers who seek payment of fees and expenses from large Chapter 11 bankruptcy estates.”