Attorney Fees
Study Claims Bankruptcy Lawyers Are Billing Illegally
Posted May 7, 2009 7:00 AM CST
By Debra Cassens Weiss
A new study claims bankruptcy lawyers are billing their clients illegally by failing to get court approval before collecting fees.
The study found that the lawyers bill bankrupt companies for about 80 percent of their fees without first submitting the charges to a judge as required by the U.S. Bankruptcy Code, Bloomberg reports. The study says the fees are instead reviewed later, but the payments “are harder to reverse than to prevent," according to accounts in the American Lawyer and the Wall Street Journal Law Blog.
The conclusion was based on a study of fee payments in 102 of the largest bankruptcies of public companies from 1998 to 2007. The authors of the study were Joseph Doherty, director of the law-research group at the University of California at Los Angeles, and UCLA law professor Lynn LoPucki.
Bankruptcy lawyers have a “cavalier attitude toward the laws that regulate them,” LoPucki told Bloomberg. “They don’t seem to think the illegality of their practices is important.”
Nancy Rapoport, a law professor at the University of Nevada, Las Vegas, told Bloomberg she thinks judges approve the fees after payment because they are overwhelmed, especially in big cases. “I agree that the foxes are guarding the henhouse, because lawyers don’t want to challenge other lawyers’ fees,” she said.
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Comments
fed up
May 7, 2009 6:39 PM CST
“The study says the fees are instead reviewed later, but the payments “are harder to reverse than to prevent”
More like impossible to reverse.
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LILawyer
May 8, 2009 6:18 AM CST
I have been working in bankruptcy courts in SDNY & EDNY for over 10 years and the Bar, the Judges and most particularly the US trustee’s office are VERY thorough and careful about this. Every good lawyer I know follows the rules and gets Court permission before getting paid, it’s simply not worth the tarnish to the reputation. So I too question this survey.
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usclawyer
May 8, 2009 7:42 AM CST
The allegation that the fees are “illegal” is shady at best. In all big cases, the debtors file a motion to allow monthly payment of 80% of submitted fees upon the circulation of a monthly fee report by all court approved professionals. The court generally grants the motion, adopting this as the practice for the case. How is it against the law if the court has entered an order allowing the practice?
In addition, final fee statements are sent through to the court for final approval according to Bankruptcy Code sections 328 and 331. The bankruptcy court - which is its own little dictatorship - can easily deny fees or order disgorgement if there is a problem. What is so difficult?
It may be that the fees are large and objectionable, and I even agree that other lawyers have little incentive to object to other professionals’ fees. But it is not accurate to characterize them as “illegal” when they are expressly approved by court order and finalized in strict compliance with the Code. Professor Lopucki has long been a gadfly on the wall of large chapter 11s. His role is important, but he should take care not to be reckless in his allegations.
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usclawyer
May 8, 2009 7:47 AM CST
There is an additional flaw in Lopucki’s argument. Lopucki alleges that the problem is the monthly payment of fees through this expedited procedure. But his solution—using the court to directly review all fees on a fixed schedule—would, by his own acknowlegement, not fix anything. He points out that “courts are overwhelmed.” If the expedited procedure is not used, courts then are required to review all the fee applications on their own in a limited time. Once approved by the court, it would then be REALLY difficult to reverse.
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So-Cal bankruptcy lawyer
May 8, 2009 9:18 AM CST
Essentially, lopucki asks that debtor’s counsel finance big cases by borrowing to pay their overhead and costs.
Moreover, though I haven’t had reason to look at it lately, the Knudsen case specifically approves the practice of collecting 80% of fees prior to the order.
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Miami Bankr Lawyer
May 8, 2009 10:22 AM CST
I’d add that in the largest cases, the Court appoints a fee auditor in review all fees so as to address any perceived lack of incentive that attorneys may have to object.
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Seth Rogers
May 8, 2009 1:43 PM CST
Just watch…
Congress will get wind of this and pass a law that cracks down on small personal Chapter 7 bankruptcy firms and leave the big firms pretty-much untouched.
Once again, small town lawyers will get screwed for the deficiencies of our BigLaw colleagues.
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Hadley V. Baxendale
May 8, 2009 2:11 PM CST
Inaccuracy and sensationalism—the hallmarks of bad journalism. If the study called the practice “illegal” it’s incorrect. If this publication assigned the term, it’s wrong and sensationalism. You’d think the ABA would kno who to call to check facts like this. It’s no more “iliegal” than filing a proof of claim without a power of attorney attached.
Many large fees have been set aside or recovered. Most lawyers do it right the first time so there’s no need to claw back. And the whole bankruptcy process is creditor-driven: if a creditor or other party in interest doesn’t object, the court need not launch its own oversight, except in extreme or unusual situations.
Seth you’re right—Congress moves in mysterious ways/its blunders to perform.
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R. Woodke
May 10, 2009 3:51 PM CST
As a professional publication it would behoove the Journal to investigate the validity of the fclaims of the individuals they quote. Bankruptcy courts permit a partial payment in appropriate circumstances. Without knowing the cases referred to its difficult to know, but doubtful that there were any irregularities. Courts can and do order disgourgment of excessive fees and firms do obey those orders.
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