The Department of Justice’s U.S. Trustee Program is proposing controversial new guidelines to rein in what some see as out-of-control attorneys’ fees in large corporate restructurings.
The guidelines, aired at a hearing on Monday in Washington, D.C., would affect any lawyer whose fees are paid by the bankruptcy estate — whether representing the debtor, creditors’ committee or any other court-appointed committee — in Chapter 11 cases with combined assets and liabilities of $50 million or more.
Bankruptcy judges approve fee applications, but the trustee’s office can file objections or comments that carry weight with the court.
The new guidelines, which would revise those in place since 1996, are meant to increase transparency in bankruptcy billing, subject legal fees to “the same client-driven market forces, scrutiny and accountability that apply in nonbankruptcy engagements” and keep the burden on lawyers to show fees are reasonable even if no one objects.
At the opening of Monday’s hearing, Clifford White III, director of the U.S. Trustee’s executive office, said public confidence in the bankruptcy system had been “shaken by reports of fees that run into the hundreds of millions of dollars in cases in which employees have lost their jobs, pension fund investors have largely been wiped out, and creditors have been paid pennies on each dollar of debt.”
White did not give names, but one example is Lehman Brothers, the largest Chapter 11 case in history. By the time the company emerged from bankruptcy in March, its lawyers at Weil Gotshal & Manges had been paid nearly $383 million.
The trustee’s office wants fee requests to be supported by detailed time entries in a searchable electronic format.
The requests would have to indicate not only the billings for every lawyer and paralegal but their current hourly rate for all other matters and their highest, lowest and average billing rate for the preceding year for bankruptcy and all other matters, as well as any rate increase during the application period or since the start of the case.
In the event of a rate increase, the firm would have to state who approved it and when, and calculate the bill under the original rate for comparison purposes.
Lawyers would have to disclose whether they or their firm charged a higher or lower rate or offered any variations from the usual terms for their services during the previous 12 months.
They would also have to say whether the fee request includes time spent on time records, billing or redacting confidential matter from bills.
Lawyers would be expected to prepare budgets and staffing plans and provide an explanation if they went 10 percent or more over budget or sought fees for someone not included in the staffing plan.
Debtors’ attorneys would have to provide a figure for the fees the debtor would have incurred without the bankruptcy, such as for tax advice.
An explanation would be expected when more than one lawyer attends a hearing or conference, and lawyers who bill fewer than 15 hours in 120 days would be deemed “transitory.”
When seeking to be retained, firms would have to disclose variations in billing rates based on the location of the forum and other factors.
Clients, for their part, would have to certify whether they approved a budget and staffing plan and discussed with counsel reasons for going over budget.
They would also be expected to say whether they approved any rate increase and reviewed the fee request to make sure the case was staffed with lawyers who had “the appropriate seniority or experience commensurate with the complexity, importance and nature of the problem, issue or task addressed.”
Regarding expenses, the guidelines say trustees will consider whether in-house expenses reflect actual costs and deem air travel charges objectionable if not done in coach class, among other provisos.
Critics Call Action Ultra Vires
The proposals, published for comment last November, have sparked opposition in the commercial bankruptcy bar. A group of 119 law firms across the country, led by Latham & Watkins, complain that the guidelines require billing disclosures that would jeopardize client confidentiality, impose huge administrative burdens and treat bankruptcy lawyers differently from other lawyers.
In comments submitted on Jan. 30 and supplemented twice, the group claims the proposal amounts to a substantive change in the requirements for compensating professionals in bankruptcy cases and thus exceed the office’s authority to adopt procedural guidelines.
They argue that preparing budgets and staffing plans will consume time and resources better used to stabilize the debtor in the early stages of a case without doing anything to ensure fees are reasonable.
They also contend that having to disclose what they charge other clients “would interfere with contractual requirements to keep such information confidential and create significant business issues and difficulties for a firm’s private practices.”
They term “especially troubling” a provision that would require a lawyer applying for employment in a Chapter 11 matter who has a prior or existing relationship with the client, including a member of the creditors’ committee, to disclose any difference in billing terms or compensation from the prior retention.
The opposing firms also challenge what they see as presumptions that deny compensation for sending more than one lawyer to a hearing or reviewing fee applications, or for a lawyer who bills less than 15 hours in 120 days.
They initially advocated raising the guideline threshold to $250 million and 250 unsecured creditors, but later lowered that to $100 million and 100 unsecured creditors.
The opposing firms include Cleary Gottlieb Steen & Hamilton, Debevoise & Plimpton, Fulbright & Jaworski, Jones Day, Milbank Tweed Hadley & McCloy, O’Melveny & Myers, Proskauer Rose, Stroock Stroock & Lavan, Sullivan & Cromwell and Weil Gotshal.
Among the New Jersey firms are Roseland’s Lowenstein Sandler, Morristown’s Riker Danzig Scherer Hyland & Perretti and Hackensack’s Cole Schotz Meisel Forman & Leonard.
Lowenstein’s Bruce Buechler refers to the guidelines as an “overbearing” attempt at micromanagement that does not comport with the Bankruptcy Code concept that “professionals in the bankruptcy arena should be compensated as they are outside the arena.”
Outside of bankruptcy, there is no requirement to disclose all time entries or what you charge other clients, or if you give accommodations or use volume billing, he says.
He sees risk in providing confidential data to trustees who are subject to Freedom of Information Act requests and predicts litigation over the enforceability and scope of the guidelines if they are adopted.
Dennis O’Grady of Riker Danzig says the current fee review process works well, and the guidelines would add a costly and complicated layer of administration to the process.
He scoffs at the budget idea, stating that his experience in 35 years of practice is that “budgets have no relationship to reality as the case begins to develop.”
Several law professors have commented, including Seton Hall University’s Stephen Lubben, who says he generally supports an update because the old guidelines are out-of-date and cumbersome. But he urges a fresh approach that focuses on such factors as the retention choices by corporate debtors and more efficient allocation of duties once lawyers and firms are retained.
Lubben also suggests a $100 million threshold.
Unlike those who thought the guidelines went too far, Professor Nancy Rapoport of the University of Nevada-Las Vegas Law School, urged the trustees’ office to provide consequences for noncompliance, expand them to other professionals and make fee applications even more searchable.
U.S. Trustee spokeswoman Jane Limprecht says all the comments will be reviewed, adding it is premature to predict when final guidelines will be issued.