By Jacqueline Palank June 12, 2013
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.
Justice Department officials on Tuesday announced the first overhaul of existing attorney fee guidelines in 17 years will take effect Nov. 1. 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.
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.
“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,” Clifford J. White III, who leads the Justice Department office that monitors all bankruptcy cases for potential abuse and to enforce the Bankruptcy Code, said Tuesday.
“Bankruptcy premiums are not allowed,” he said.
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.
Concerns about the adequacies of the information that firms currently disclose in bankruptcy cases, in which transparency is the price debtors pay to gain protection from their creditors, also helped drive the updated guidelines.
“We don’t think…that we do have sufficient disclosures today,” Mr. White said. “We think that this can make for a more efficient process that ensures and gets public confidence that the standard laid down by Congress has been satisfied.”
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. Their provisions include a call for attorneys to submit budgets estimating the cost of the work they intend to perform. Significant deviations would have to be explained in subsequent court filings.
When first proposed, the budgets–standard for non-bankruptcy legal work–raised the hackles of most bankruptcy attorneys, who used the many months the guidelines were open to public comment to 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.
The U.S. Trustee Program held fast, though it conceded that budgets may be made public after the work has been performed and may be subject to limited redactions. If attorneys don’t agree to budgets, the individual trustee monitoring the case may ask the judge to order the attorneys to comply.
“We would not object to a fee application for lack of a budget, unless the court had first imposed the budget,” Mr. White said Tuesday.
The guidelines will roll out several months later than the original target date of July 1, which Mr. White said will allow time to make sure bankruptcy practitioners understand the new guidelines. Trustees will also use the time to encourage bankruptcy courts to make the guidelines, which aren’t automatically legally binding, part of the local rules that debtors must follow.
The new guidelines would solely apply to attorneys, though Mr. White expects the U.S. Trustee Program to later look at updating the fee guidelines when it comes to the “crowded field” of non-legal professionals who are typically employed in large Chapter 11 cases.
“Investment bankers, financial advisers and accountants are next,” Mr. White said, adding that there’s no set timeline for that process yet.
(Dow Jones Daily Bankruptcy Review covers news about distressed companies and those under bankruptcy protection. Go to http://dbr.dowjones.com)
Write to Jacqueline Palank at jacqueline.palank@dowjones.com

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