Reuters: Regulatory News: UPDATE 1-Fee overhaul for US bankruptcy lawyers to start Nov. 1

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UPDATE 1-Fee overhaul for US bankruptcy lawyers to start Nov. 1 Jun 11th 2013, 18:27 Tue Jun 11, 2013 2:27pm EDT * Lawyers must justify big rate hikes, but not 'step-up' increases * Will also have to provide rough budgets By Nick Brown June 11 (Reuters) - Attorneys in big bankruptcy cases will soon have to make an array of disclosures on how they bill clients under new fee guidelines finalized by the U.S. Department of Justice on Tuesday. Lawyers will have to justify any increases in their hourly rates of more than 10 percent and will be asked to provide rough budgets. Those were points of contention over the last year as the U.S. Trustee Program, the Justice Department's bankruptcy watchdog, rolled out early drafts of the new guidelines. The move marks the first update to fee guidelines since 1996 as rising legal costs in bankruptcy cases come under scrutiny from regulators and academics. In one key change from prior drafts, rate increases tied to associates' promotions -- so-called step increases -- will be excluded from disclosure requirements. The guidelines, to go into effect Nov. 1, will apply to bankruptcy cases for companies with more than $50 million in assets and $50 million in liabilities. Courts are not legally obligated to implement them, but in general, most courts follow guidelines laid out by the Justice Department. Bankruptcy lawyers can command top rates - sometimes $1,000 an hour or higher - because the field is so specialized. The issue is made even hotter by the fact that advisers of bankrupt companies and some of their creditors are paid out of the company's estate. Since legal fees are paid ahead of other creditor claims, higher legal costs mean less money for creditors. As corporate capital structures become more complex, restructuring has become a more specialized and labor-intensive process, leading to high professional costs. Under the new guidelines, lawyers will have to get used to disclosing the methodology they use to come up with certain rates, provide budgets in certain situations, and show that their prices are not out of line with market rates. During a comment period late last year, large law firms complained that the overhaul would ignore market pricing and impose burdensome tasks on lawyers, with little benefit to clients. A major sticking point was a requirement that firms calculate how much clients' bills would rise as a result of rate increases and submit statements from clients saying they agreed to the higher fees. Law firm Foley & Lardner has characterized the plan as "excessive micro-management," saying it would ignore market pricing and "impose very burdensome tasks" on lawyers without a large benefit to the parties in the case. Marcia Goldstein, a top bankruptcy partner at Weil, Gotshal & Manges, proposed that only annual, firm-wide rate increases of 10 percent or more be reported to the court. Goldstein appears to have gotten her wish, as the new guidelines require disclosure only of actual increases in rates by 10 percent or more, not step-ups for associates whose job descriptions are changing. "That's not a rate increase in the sense that the firm might be changing upwards its overall hourly fees," Clifford White, director of the Trustee Program, told reporters in a conference call on Tuesday. "It is instead a step in a natural progression." That is a key distinction, because most rate hikes in big bankruptcy cases come from step increases. In Lehman Brothers' record-setting Chapter 11 case, industry superstar Harvey Miller, of Weil, increased his rate only $50 dollars over four years, from $950 to $1,000. In contrast, Candace Arthur, an associate at Weil, began work on the case in 2010 at $395 an hour, but her rate jumped 48 percent, to $585 per hour, by September of last year, according to the firm's public fee applications in the case. At first, the guidelines will apply only to lawyers, not to financial advisers and other professionals. White said new fee guidelines for investment bankers, financial advisers and accountants could be in the offing, but did not provide a timeframe. "We do want to spend some time and resources to ensure that (lawyers) understand what will be expected" from the guidelines, he said. "We want to still keep the focus for a little while on the attorneys." Link this Share this Digg this Email Reprints

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