Excerpt: "Even in the economic downturn, bankruptcy lawyers have been shielded from the market and client pressures that have forced lawyers in other specialties to cut their fees."
A federal statute passed in 1978 allows bankruptcy lawyers to be paid top hourly fees. (art: John S. Pritchett)
10 June 12
ankruptcy lawyers moved to the top tier of corporate practice in 1978 when a federal statute allowed them to be paid top hourly fees, which courts had traditionally limited in bankruptcy proceedings. In recent years, legal fees in Chapter 11 reorganization cases have soared as deals have grown bigger and more complex.
Even in the economic downturn, bankruptcy lawyers have been shielded from the market and client pressures that have forced lawyers in other specialties to cut their fees. Federal law gives payment of lawyers' fees priority over debt in a bankruptcy; the law firm handling the Lehman Brothers bankruptcy received $399 million through February, public records show.
Reports of very high fees in cases where employees lost jobs and creditors received pennies on the dollar have shaken public confidence, according to the Justice Department. To address this issue, a division of the department that oversees bankruptcy cases has proposed new rules for bankruptcy judges to use in approving lawyers' fees.
The sensible proposals cover how judges should determine compensation for lawyers representing the debtor, creditors and others involved in Chapter 11 reorganizations of companies with $50 million or more in assets. They would make the opaque world of bankruptcies more transparent and make law firms more accountable.
But at a contentious meeting at the Justice Department last week, law firms with big bankruptcy practices made clear that they were not about to accept the new guidelines willingly. They contend that high fees are needed to attract top talent to bankruptcy practices, which have helped keep the American economy sturdy. And they claim that the proposed changes "threaten to undermine a linchpin of the domestic and international restructuring services that have developed in the United States."
The proposals the lawyers find most upsetting would require them to provide data on what their firms charge in other specialties and submit budgets at the outset as a benchmark for any fee increases later in the process.
They insist that providing this kind of fee data means giving out "confidential client information." Budgeting for their work, they say, is "virtually impossible," though many firms do this routinely at clients' request. What the lawyers want to keep secret is actually required in the bankruptcy law, but such disclosures have not been explicitly demanded by courts.
By opposing these guidelines, the lawyers handling big bankruptcy cases show they are out of touch with economic realities. Worse, in resisting improvements in accountability, they undermine public confidence in the integrity of the bankruptcy process.
