Justice Department Takes Aim at Attorney Fees in Large Chapter 11 Cases

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The U.S. Department of Justice's Trustee Program is expected to promulgate new disclosure rules this month for law firms regarding the fees they charge debtors in Chapter 11 bankruptcy cases.

Professional fees in these cases have ballooned in recent years, leaving many creditors wondering how debtors' attorneys can bill such exorbitant costs to firms that are already in financial straits. Among the rules expected to be proposed by the Trustee Program are provisions that would require firms to disclose rate increases and justify them as cases go on, as well as measures that require firms to prove that their rates are aligned with other members of their industry.

The actual debtor's cost for a Chapter 11 bankruptcy filing has long been criticized but was thrown into the public eye in the wake of the liquidation of Lehman Brothers. Court filings in March of this year revealed that the holding company paid a whopping $1.6 billion to lawyers, accountants, advisers and other professionals over the course of their case.

Opposition to the potential for increased disclosure requirements has been rampant among law firms and other legal advocates. "At the outset, the National Bankruptcy Conference (NBC) reiterates its position...that the NBC believes that the market controls the proposed fee guidelines seek to promote are not likely to be materially enhanced by the detailed, intrusive additional reporting requirements for both the professionals and the client that the proposed fee guidelines would impose," said the NBC in a comment to the Trustee Program earlier this year. "The proposed fee guidelines do not address—and, in all likelihood, cannot address—the cost drivers that have caused professional fees in large Chapter 11 cases to grow since the existing guidelines were promulgated, including that the cases themselves have, for a variety of reasons, become larger, more litigious and more complex."

Many arguments against the guidelines note that increasing disclosure requirements is likely to put upward pressure on rates, rather than rein them in as many in the bankruptcy community might've hoped. "The NBC believes that the proposed fee guidelines are more likely to engender challenges and litigation throughout the country over the extent to which courts will require compliance with those guidelines," they added. "Ironically, those challenges and litigation, and the additional burden of compliance with the proposed guidelines to the extent they are enforced as written, are likely to add to the cost of the professional fees in larger Chapter 11 cases."

The Trustee Program accepted public comment on the proposed guidelines throughout the summer, and is expected to release a new, updated plan by the end of September. Another comment period will follow the publication of the plan.

- Jacob Barron, CICP, NACM staff writer

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