Peter Lattman (Jun. 6) notes a judge’s approval of $10.5 million in legal fees for 4 1/2 months’ work in the Delta Air Lines bankruptcy (see Apr. 1). “According to the AP, the overall fees and expenses for all advisors (lawyers, bankers, consultants) working on the case could reach $205.9 million if the bills continue at the same rate until Delta exits bankruptcy, which it expects to do by next summer.”
Also, back on Mar. 28, Tom Kirkendall noted the trimming of a fee request in the Enron bankruptcy (see Jul. 23, 2004).
More: Carolyn Elefant writes, “It’s cases like these, where the client is captive and using other people’s money, i.e., its creditors’, that drive rates up and perpetuate the billable hour….Why is a firm charging $420 an hour for kids just out of law school?” (Jun. 7).
4 Comments
With electronic case filing now ubiquitous in the bankruptcy courts, one would expect the legal fees in Chapter 11 cases to decrease somewhat. Quite the contrary is true. As the cost of filing court papers falls, lawyers file more papers and bill more hours.
In enacting the 2005 bankruptcy reform legislation, Congress paid insufficient attention to Chapter 11. Far too many bankruptcy judges just rubber stamp the lawyers’ fee applications. By statute, a special master should be appointed to scrutinize fee applications in all Chapter 11 cases exceeding a certain size threshold. Unsecured creditors would benefit, while holding the bankruptcy bar accountable (which is undoubtedly why such a reform will never come to pass).
“Why is a firm charging $420 an hour for kids just out of law school?”
Um, because they CAN?!? Just like so many other unethical things they do…
Believe it or not, $420/hour is the market rate for kids a few years out of law school. That reflects the real opportunity cost for New York law firms doing bankruptcy work.
Even with these rates, and the presumed profitability from the heavy leverage he had as a Kirkland partner and rainmaker, Sprayregen left bankruptcy practice to go work at Goldman Sachs.
The problem is, of course, the larger one that there is such huge demand for lawyers across the economy, because of the billions of dollars of wealth transfers they potentially control, that corporations feel the need to demand so much corporate law firm work that it’s plausible to charge so many hundreds of dollars an hour. And e-mail has made litigation that much more expensive, because no single thought in a corporate environment goes unrecorded, and thus requires attorney review in the process of civil discovery. The bankruptcy fees are merely a symptom, rather than the problem in and of itself; the fees are scrutinized rather closely before they get to the judges precisely because of the potential embarrassment and publicity from a less-than-reasonable fee request.
I’m pleased to hear that Ted, or someone he knows, is aware of firms that scrutinize their fee applications closely before submitting them to the bankruptcy judge. I’ve run across one or two such firms. And I know a couple of bankruptcy judges who flyspeck fee applications. But careful scrutiny of fee applications is not the representative scenario.
Sprayregen’s $700/hour is cheap compared to NY and DC large firm bankruptcy partners, who bill out at well over $800/hour. What does the bankruptcy system get for this?
Flagrant overstaffing, for example. Why does a Chapter 11 debtor or a creditors’ committee need to have 10-11 counsel appear for a motions hearing? Why must five attorneys attend a deposition? (Mind you, this was the side defending, not taking, the deposition.) And why must the five attorneys travel by first class and charge the fare to the bankruptcy estate? (I blew the whistle successfully on the first class travel, but could do this only because I chanced to spot opposing counsel seated in first class while I was proceeding to my seat in steerage.)
Why do lead bankruptcy counsel (the big NY or DC firms) not register for electronic filing with the court, and instead have local bankruptcy counsel handle the electronic filings? It surely cannot be because local counsel has some special knowledge, cultivated over the years, of the local bankruptcy court’s computer system. Lead counsel drafts the papers, then forwards them to local counsel for electronic filing, thus adding a needless additional layer of billable hours. Lead counsel could certainly handle the electronic filing themselves, as they are already admitted pro hac vice and it is not hard to register for the CM/ECF system used by the bankruptcy courts.
Or take large firm bankruptcy counsel who withholds documents as privileged in discovery, and tells the bankruptcy judge in open court the privilege claims are “iron clad.” After in camera inspection of the documents, it turns out the privilege claims are purely bogus because many documents on their face indicate distribution to third parties. The seasoned law firm that made those frivolous privilege arguments hasn’t offered to repay the hundreds of thousands it billed the bankruptcy estate in making the arguments.
Once in a while, a law firm gets caught with its hand in the cookie jar, such as the firm recently ordered to disgorge $9 million of fees in the Congoleum bankruptcy. But for the most part, it’s death by a thousand cuts as the major bankruptcy law firms bleed dry the other creditors (including employees of the debtor corporation).
With all respect, the outrageously excessive legal fees in large Chapter 11 cases cannot be dismissed as merely a symptom. No competing creditor views them so.