Trust-eze: US Trustees coming late to the bankruptcy legal fee party

usbankruptcy-courtBankruptcy used to be a quiet dead end street in the law.  Some lawyers specialized in the work, but it took a series of reforms, plus creative lawyering and a few decent-sized recessions to turn high end bankruptcy into a multi-billion dollar lawyer magnet.  In addition to overseeing larger and larger piles of cash, big time bankruptcy work also has an odd dynamic:  There’s a revolving door of lawyers and judges working the field.  Plus lawyers nominally on opposite sides may be looking to be paid out of the debtor’s estate, with court approval, which means there’s an incentive for the “opposing” lawyers (not necessarily their clients) to go easy on each other — short-circuiting the normal adversarial process.  Most of these bills are reams of boilerplate, vague descriptions hiding what’s really going on, much of it either nonbillable, excessive, or redundant.

The US Trustees — government employees who are supposed to oversee parts of bankruptcy and watch out for the government and public interest — are supposed to be keeping an eye on the legal fees, which have gone through the roof in the last couple of decades.  (Fees in Lehman Brothers, for example, are around $2 billion and counting, for a bankruptcy in which the major assets were sold off in the first week of the bankruptcy.)

The U.S. Department of Justice this fall will crack down on the millions of dollars of fees that attorneys charge for their work on large Chapter 11 bankruptcy cases.

… The product of months of deliberation and debate, the new guidelines seek to reflect the evolution in law-firm billing practices and technology that have since occurred.  [Since when?  The basic math of billing is universal.]

More important, they also seek to confront a perception that lawyers, some of whose rates top $1,000 per hour, take advantage of a bet-the-company moment to charge higher rates.  [Maybe this is just poor phrasing, but, rather than "confront a perception," which implies there's no underlying problem, the objective should be to correct the problem.  "Bet the company" mentality is a common problem because lawyers tend to fuel the panic, with no tangible benefit to the client and excessive, wasteful fees for the client, in or out of bankruptcy.]

“The cornerstone of the guidelines is a requirement that attorneys demonstrate they are not charging bankruptcy estates a premium above fees charged to clients outside of bankruptcy,” [according to the government's spokesperson].  [Unfortunately, attacking rates or comparing net fees even within bankruptcy, let alone projecting that into other types of matters, is almost impossible without much better, independent, and reliable data, unfiltered by the firms.  The firms tend to overstate rates and fees, hiding things like discounts, contested fees, and write-offs that are routinely taken by sophisticated clients under the table.]

“Bankruptcy premiums are not allowed,” he said.  [Well, they're not supposed to be.  In practice, they are in the larger cases, especially.  Part of the problem is the odd dynamic among bankruptcy judges -- who are not appointed for life -- and situations where creditor counsel and committees are also paid out of the debtor's money.]

The role of those bankruptcy monitors, called U.S. trustees, includes scrutinizing the fees of the lawyers, advisers and other professionals working for a debtor, all of whom must publicly disclose and seek court approval for their fees and expenses.  [Part of the problem here is that the US Trustees do not have any sophisticated tools for systematic bill review that my firm has created and used for decades.  The firms submitting bills know how to bury the government's spotty, manual reviews.  The data's all there, if you know where to look, but sometimes it's just hidden in plain sight.]…

The new guidelines, which apply in Chapter 11 cases in which the debtor has at least $50 million in assets and at least $50 million in liabilities, will govern how and when trustees request additional disclosures or object to legal fees.  [This is where the feeding frenzy of overstaffed, overpriced law firms looking for the big, easy money.  Meanwhile, there's another tier of lawyers toiling away for four figure or lower fees handling the smaller business and individual bankruptcies.]

Their provisions include a call for attorneys to submit budgets estimating the cost of the work they intend to perform. [My firm has been pushing for this for 20 years, including basic tools to build and implement budgets, including reconciliation of bills with budgets, task by task.]  …

… [Bankruptcy] attorneys … argue the unpredictability of most Chapter 11 cases would make budgets futile. They have also argued that such budgets could put them at a competitive disadvantage, revealing their bankruptcy game plan to their adversaries.  [Well, first off, everything can be predicted, with provision for typical options, but to make an accurate prediction you have to have experience and you have to be willing to manage your work.  And, even the most detailed budget, isn't going to tell an experienced opponent anything they don't already know -- there's no mystery to this nonsense.  Running an efficient case might also put pressure on opponents to be more conscious of their own waste.]…

This doesn’t do anything to actually control legal fees.  To control hourly fees you’ve got to manage rates, manage hours, manage tactics, manage staff, and manage expenses.  There’s no management in this proposal.  Talking about gathering more statistically worthless market data (when all markets have the same pressure by lawyers to increase fees, regardless of necessity) and requiring watered down, vague budgets is a step:  A very small step that, when if fails, may only lead to arguments that management of fees is futile or wrong.

WSJ: Justice Department to Crack Down on Bankruptcy Legal Fees This Fall

About JWT

John Toothman founded The Devil's Advocate, the legal fee management and litigation consulting firm, in 1993. He graduated from Harvard Law School, with honors, in 1981. John has been a lawyer with large and small law firms and the US Dept. of Justice. He's tried over sixty cases. He has testified as an expert witness in over sixty more. ... He is the author of several books and dozens of articles about lawyers, law firms, legal fees, ethics, litigation and trial practice, and related issues. Books include: Trial Practice Checklists 2d (West), Legal Fees: Law & Management (Carolina Acad. Press), and the Civilian's Guide to Lawyers series. His pro bono activities include teaching and speaking at seminars. ... John is admitted to practice law in DC and Virginia. More information:
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