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Category: Bankruptcy Fees / Expenses

Demand Grows for Hourly Rate Data in Big Bankruptcy

May 26, 2020

A recent Legaltech News story by Rhys Dipshan, “Reorg Launches New Database to Bring Big Data Analytics to Bankruptcy Fees” reports that the recession is already choosing its winners and losers: The once-strong appetite for M&A work is increasingly being replaced by a growing demand in bankruptcy services.  And due to efforts started in advance of the current economy, some in the legal tech space are looking to capitalize on this new opportunity.

Financial intelligence provider Reorg has announced the launch of its Legal Billing Rates Database, which aims to provide corporations and law firms with benchmarks regarding outside counsel’s bankruptcy fees.  The goal is to help general counsel and other corporate officers make informed bankruptcy hiring decisions, as well as help law firms competitively set their rates.

Darby Green, Reorg’s senior director of product, strategy and innovation, explained that the database pulls interim, monthly, and final fee applications from U.S. Bankruptcy Court dockets in the Southern District of New York and the District of Delaware, which she called the “preeminent jurisdictions for these types of large Chapter 11 [bankruptcy cases].”  She noted that “the attorneys involved in these [cases] come from all over … and also fee examiners expect that from jurisdiction to jurisdiction you’re not changing your fee, so it can become a good place to get an overall sense of what these fees look like.”

To be sure, while demand for bankruptcy services has grown in recent weeks, the new database was not built in response to the current market.  “When you build a data science-driven tool, it actually takes a very long time to do; we’ve been working on this behind closed doors for more than a year,” Green said.

She added that the development was “really a time-consuming process” given the need to structure docket data that was obtained via PACER.  For example, “even something as simple as figuring the department [took time].  Since every law firm is structured a little bit differently, you’re not going to necessarily find ‘bankruptcy lawyers’ at every firm, you might find ‘restructuring,’ you might find ‘financial insolvency,’ etc.”

Of course, Reorg is far from the only company offering legal spend or bankruptcy analytics, with LexisNexis, Bloomberg, Wolters Kluwer, Bodhala and Brightflag, among others, competing in the market.  What’s more, legal research providers such as Fastcase and Casetext are also planning on expanding their bankruptcy analytics and services.

Green, however, believes that where Reorg stands out is in its sole focus on bankruptcy fees.  “Our understanding is that we are the only company that is applying machine learning and this type of analysis to bankruptcy dockets.  There are a lot of providers looking at district court dockets, but what is unique about us is that because we’re so focused on the high yield and stress and distress markets that we are really embedded in bankruptcy dockets, and that provides an advantage,” she said.

Associate Hourly Rates Inch Over $1K in Big Bankruptcy

May 22, 2020

A recent American Lawyer story by Samantha Stokes, “Associate Hourly Billing Rates Surge Past $1K as Firms Snap Up Bankruptcy Work” reports that the coronavirus pandemic quickly upended the economy and sent already struggling companies into free-fall, with retailers such as J.Crew, Neiman Marcus and J.C. Penney among those filing for Chapter 11 protection in recent weeks.  Recent court filings highlight the avalanche of fees these new cases are already generating for Big Law restructuring practices.

Take J.Crew, which was the first major retailer to succumb during the pandemic.  In the 90 days leading up to the company’s Chapter 11 petition May 4, it paid or advanced its lawyers at Weil, Gotshal & Manges close to $12 million, according to court papers filed this week seeking formally to hire the firm as debtor’s counsel.  The Weil team is led by New York partner and restructuring practice co-chair Ray Schrock.

The fees were bolstered by the firm having just recently increased its hourly rate for lawyers and paraprofessionals alike.  Signaling a new era, some Weil associates are now billing more than $1,000 per hour—a milestone that was surpassed only about a decade ago at the level of Big Law partners—making it one of the first firms to break that pricey barrier.

Weil said in the J.Crew filing that it had increased its standard billing rates in October 2019.  Members and counsel are now billing from $1,100 to $1,695 at the firm; associates are billing $595 to $1,050; and paraprofessionals are billing between $250 and $435 per hour.  Previously, the firm’s rates topped out at $1,600 for partners and $995 for associates, according to the filing.

While the partner and associate rates stand out, the paraprofessional fees can add up too.  Last November, when the firm billed $10 million for one month of work on the Sears bankruptcy, a single paralegal’s billings added up to 431 hours at $405 per hour—more than 14 hours for every day of the month.

Weil isn’t the first firm whose associate rates have topped $1,000 per hour, and its rates aren’t even the highest.  When Kirkland & Ellis signed on to represent Barney’s New York—one of last pre-pandemic retail bankruptcies—it said in a filing that associates’ rates reached $1,125 per hour.  At Skadden, Arps, Slate, Meagher & Flom, at least two associates working on the McClatchy newspaper company bankruptcy have also billed over $1,000 per hour.

Efforts to reign in ballooning law firm fees have received little traction in recent years, though creditors, shareholders and employees occasionally raise alarms.  A group of small Sears creditors awaiting payment filed an objection to Weil’s fees in that company’s Chapter 11 late last year.  Weil, which did not respond to a request for comment, is just one of a growing gaggle of fee-earning firms in the new retail bankruptcies filed so far in May.  Neiman Marcus and J.C. Penney both turned to Kirkland & Ellis in those cases, though the firm has yet to disclose pre-petition fees.

Bankruptcy Court Denies Fee Enhancement Under Common Fund Doctrine

January 17, 2020

A recent Legal Intelligencer article by Rudolph J. DiMassa, Jr. and Geoffrey A. Heaton, “Bankruptcy Court Denies Motion for Fee Enhancement Under ‘Common Fund Doctrine’,” reports on a bankruptcy court that recently denied creditors’ counsel’s motion for a fee enhancement under the common fund doctrine.  This article was posted with permission.  The article reads:

In a bankruptcy case filed 91 years ago (and reopened 85 years later), the U.S. Bankruptcy Court for the Western District of Virginia recently denied creditors’ counsel’s motion for a fee enhancement under the “common fund doctrine,” finding it could not award the requested fees absent statutory authority.  In particular, the court determined it would be an abuse of its equitable powers to award fees beyond the scope of applicable bankruptcy law in In re Yellow Poplar Lumber, Case No. 605 B.R. 416 (Bankr. W.D. Va. 2019).

Background

In July 1928, White Oak Lumber Co. filed an involuntary Chapter 7 petition in the U.S. District Court for the Western District of South Carolina, seeking to have Yellow Poplar Lumber Co., Inc. “adjudged a bankrupt” under the Bankruptcy Act of 1898.  n 1931, the district court adjudged Yellow Poplar as bankrupt and closed the case.

In 2013, the case was reopened in connection with a dispute over ownership rights in certain gas estates on parcels of land in Virginia, and it ultimately found its way to the U.S. Bankruptcy Court for the Western District of Virginia.  The dispute resulted in a settlement whereby Yellow Poplar’s bankruptcy estate stood to receive approximately $2 million in gas royalties.  The Chapter 7 trustee appointed in the reopened case, with the assistance of a genealogist, identified several of the original creditors’ existing heirs or successors-in-interest.  The bankruptcy court, in turn, directed the trustee to file a brief addressing the appropriate interest rate on the anticipated distribution to creditors, and invited any other party-in-interest to do the same.  While the trustee contended that the interest rate should be 2.4%, counsel for the heirs of two creditors advocated a 7% rate, which reflected the legal rate in effect in South Carolina when Yellow Poplar’s bankruptcy case was filed.  The court ultimately ordered the application of a rate of 3.6%.

Creditors’ counsel, however, successfully appealed the court’s ruling, which resulted in general unsecured creditors receiving 7% interest on their distributions, and increasing the asset pool to be distributed to general unsecured creditors by approximately $740,000.  Notably, the efforts of creditors’ counsel did not increase the amount of funds in the bankruptcy estate, but rather increased just the proportion of estate funds going to the class of general unsecured creditors, effectively diverting funds from one class of constituents to another.  Creditors’ counsel then filed a motion with the bankruptcy court seeking a fee enhancement of $164,164.90 under the “common fund doctrine.”  The trustee opposed the motion, arguing, among other things, that the common fund doctrine does not apply in bankruptcy cases.

Common Fund Doctrine

The common fund doctrine is an exception to the American Rule, i.e., the general rule prevailing in the United States that each litigant is responsible to pay its own attorney fees.  The doctrine generally applies where a litigant, acting to recover on its own claim, recovers property from which others may satisfy their claims as well, entitling the litigant to payment of attorney fees and costs from the “common fund” used for payment of all claims.

Based upon principles of equity, the common fund doctrine recognizes that one who benefits from a lawsuit without contributing to its cost is unjustly enriched at the expense of the successful litigant who bore the costs.  In addition to payment of a litigant’s attorney fees and costs, the doctrine also allows the litigant’s attorney to collect an extra award of fees from the common fund, even if the attorney is merely performing services for his client per the terms of his engagement.

Court Analysis

The court determined that the operative question was not whether the common fund doctrine applies, but rather whether the court had authority to grant the requested fee enhancement from estate assets.  To that end, the court considered precedent under both the Bankruptcy Act of 1898 and the Bankruptcy Code currently in effect: although the Bankruptcy Act governed Yellow Poplar’s case, the court considered cases applying the Bankruptcy Code for additional guidance.

Quoting at length from In re Fesco Plastics, 996 F.2d 152 (7th Cir. 1993), a case filed under the Bankruptcy Code that denied a fee request under the common fund doctrine, the court highlighted the central problem with counsel’s requested fee enhancement: a bankruptcy court cannot award attorney fees without statutory authority, such as that found in Bankruptcy Code Sections 327-330, 1103 and 503(b)(4).  The court concluded that an award of fees outside the context of applicable statutory provisions is beyond a bankruptcy court’s mandate.  In the words of the Fesco Plastics court, “a bankruptcy court is simply not authorized to do whatever is necessary to reach an equitable result; it may only do whatever is necessary to enforce the Code.”

The court noted that prevailing case authority decided under the Bankruptcy Act was in accord with Fesco Plastics.  In particular, the court highlighted Cox v. Elliott (In re Calhoun Beach Club Holding), 122 F.2d 851 (8th Cir. 1941), which rejected the argument that a bankruptcy court “has inherent equitable power” to authorize payment of a creditor’s attorney fees from estate assets.  As the U.S. Court of Appeals for the Eighth Circuit explained in Cox, the Bankruptcy Act “carefully regulates the compensation and expenses that may be allowed in bankruptcy,” and contains an implied exclusion of other fee allowances not expressly set out in the Bankruptcy Act.

After considering Fesco Plastics, Cox and several other cases under both the Bankruptcy Act and the Bankruptcy Code, the court concluded it could not “abuse the equitable power Congress bestowed upon it to award fees for services outside the scope of applicable bankruptcy law.”  The bankruptcy court noted that, even were it to conclude that it had the authority to award fees under the common fund doctrine, counsel might nonetheless remain ineligible for the additional fees: as noted above, counsel’s efforts did not increase funds flowing into the bankruptcy estate, but rather reallocated estate funds among classes of creditors.

Although acknowledging that the common fund doctrine might apply in exceptional circumstances, the court confirmed that a fee award or enhancement would still have to be made pursuant to statutory authority, such as section 64(b)(3) of the Bankruptcy Act, allowing a “reasonable attorney fee” to petitioning creditors in an involuntary case, or section 64(b)(2), allowing for payment of “reasonable expenses” of creditors who recover property transferred by a bankrupt.

Here, however, no provision of the Bankruptcy Act or the Bankruptcy Code existed to authorize “fees for creditor’s attorneys whose actions incidentally benefited some creditors, to the detriment of others, while pursuing their clients’ best interests.”  The court noted, moreover, that counsel had not identified any provision of the Bankruptcy Act or the Bankruptcy Code that authorized the fee award, and the authorities it did cite were either distinguishable, were not on point, or supported the court’s analysis.  Accordingly, the court denied counsel’s motion for a fee enhancement.

Conclusion

Viewed through the equities of the case, it is arguably unfair that all members of the general unsecured creditor class benefited without having to contribute to the legal fees and expenses incurred by just a few creditors in the class.  Indeed, the court confessed that it was “not unsympathetic” to counsel’s fee request.  Nevertheless, Yellow Poplar provides valuable guidance to creditors seeking payment of attorney fees from estate funds: asserting equitable theories such as the “common fund doctrine” may engender judicial sympathy, but they are no substitute for statutory authority.  Consequently, creditors’ counsel seeking any fee enhancement should make their request pursuant to a Bankruptcy Code section that explicitly authorizes such an enhancement.

Rudolph J. Di Massa, Jr. is a partner at Duane Morris in Philadelphia.  Geoffrey A. Heaton, is a special counsel at Duane Morris in San Francisco.

Hourly Rates and Billing Practices Questioned in Ditech Bankruptcy

December 13, 2019

A recent American Lawyer story by Samantha Stokes, “Weil Facing Sharp Fee Objections in Ditech Bankruptcy,” reports that a U.S. trustee is asking a New York bankruptcy judge to slash fees of Weil, Gotshal & Manges and other law firms, criticizing their billing tactics and invoices in the ongoing reorganization of a mortgage origination and servicing business.  The fee applications in the Chapter 11 case of Ditech Holding Corp. “reflect numerous instances of questionable billing judgment and overstaffing,” said the U.S. Trustee’s Office in New York in court documents.   In all, professionals in the Ditech bankruptcy in the Southern District of New York billed $49.46 million for several months of work in 2019—including nearly $26 million by six law firms.

William Harrington, the Region 2 U.S. trustee, had sharp objections to fees and expenses from Weil, debtor’s counsel, as well as Pachulski Stang Ziehl & Jones, counsel to the committee of unsecured creditors.  The trustee sought to cut $451,081 from Weil’s bill and $82,779 from Pachulski Stang’s.  For its part, Weil billed $17.85 million in fees and about $443,800 in expenses for work done from Feb. 11 to Sept. 30 of this year, according to the filing.  But the trustee found the firm’s partners charged Ditech an average of $116 an hour more than it charges non-bankruptcy clients and that associates also billed higher rates than they do in other cases.

Bankruptcy rates “must be held commensurate with those charged by other practice areas” and Weil “failed to meet” the burden to demonstrate these higher fees were reasonable, the trustee said.  “Absent a sufficient justification for the discrepancy … the requested fees should not be approved.”  In specific fee objections, the trustee sought to cut $65,082 reduction for block billing, in which the firm lumped together two or more tasks without specifying the total time spent on each task; $374,824 reduction for vague billing entries; and $11,175 for excessive conference staffing.

The trustee, finding instances where Weil professionals billed for meals and local travel on days when they billed for fewer than four hours, also requested a $25,000 reduction in expenses.  California-based restructuring boutique Pachulski Stang also overbilled, according to the trustee.  The trustee sought reductions of $53,653.25 for vague billing entries; $23,446.50 for transitory professionals, who bill small amounts in a case and might provide questionable benefit, as well as “grazing,” or billing nonproductive hours such as attending meetings or reviewing correspondence; and $5,697.50 for unexplained duplicate fee entries.  The trustee sought an expense reduction of $2,001.26 for local travel, airfare and meals exceeding limits.

From Feb. 26 to Sept. 30 of this year, Pachulski Stang has billed about $2.1 million in fees and $41,074 in expenses.  Two law firms—Bradley Arant Boult Cummings, as special counsel to debtors, and Rich Michaelson Magaliff, as special industry counsel to committee of unsecured creditors—agreed to reduce fees and expenses after the trustee raised concerns, according to court papers.  Bradley Arant, which billed just over $2 million in fees and $13,329.14 in expenses from Feb. 11 to Sept. 30, reduced expenses so no meal was billed at more than $20, the maximum allowed by the Southern District of New York.

Rich Michaelson had significant time billed under “case administration,” according to the trustee, and after a discussion, it agreed to a $10,000 fee reduction for this work. In all, the firm billed $365,880 in fees and $7,803.15 in expenses from Feb. 26 to Sept. 30.  Other law firms involved in the case include Orrick, Herrington & Sutcliffe, serving as special securitization counsel for debtors and billing nearly $1 million in fees and $3,476.45 in expenses from April 1 to Sept. 30; and Quinn Emanuel Urquhart & Sullivan, which is counsel to the official committee of consumer creditors and which billed about $2.49 million and $87,092 in expenses from May 6 to Sept. 30.  The trustee did not request any reductions from either firms’ applications.

Weil Gotshal Seeks $2M in Fees in PG&E Bankruptcy

October 22, 2019

A recent Law 360 story by Ryan Boysen, “Weil Gotshal Seek $2M for Work on PG&E Case,” reports that Weil Gotshal & Manges LLP is asking for $2 million in fees and costs for its work in August on the massive bankruptcy of California’s Pacific Gas and Electric Co., with billable hours from just two partners accounting for nearly half of the haul.  In a fee application, the firm said it put in about $2.5 million worth of work into the PG&E case throughout August, just as a proposed $24 billion Chapter 11 reorganization plan came into focus.  After a customary 20% haircut is applied, it brings the total to about $2 million.

Nearly $1 million of that comes from the billable hours of just two attorneys: Weil Gotshal’s Stephen Karotkin, who worked 300 hours, and Jessica Liou, who worked 275 hours.  While Weil Gotshal is the primary firm representing PG&E, the nation’s largest power utility has retained lawyers at several other firms in various capacities.  One report estimated in March that PG&E had spent at least $84 million in attorney fees up to that point.  It’s not clear how much more overall the utility has since spent.  That's not to mention the powerhouse restructuring attorneys representing the committees, creditors and other stakeholders who are all vying for an advantage in the massive case.

Earlier this month PG&E criticized the court-appointed fee examiner for attempting to put its attorneys on too tight of a leash, saying the examiner's suggested cost-cutting measures and fee caps were too strict.  PG&E, the nation's largest utility, filed for bankruptcy in January after racking up more than $30 billion in potential liabilities tied to its alleged role in causing a series of wildfires that tore through the Golden State in 2017 and 2018, killing 130 people and destroying billions of dollars in property.