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Category: Bankruptcy Fees / Expenses

Judge Questions $75M in Fees in Puerto Rico Bankruptcy

March 21, 2018

A recent Big Law Business story by Elizabeth Olson, “Judge Pushes Back Against $75M in Fees for Puerto Rico Bankruptcy,” reports that Puerto Rico’s debt reorganization is not a year old, but officials are already expressing dismay at $75 million in fees that some law, accounting, and consulting firms are charging to the taxpayer’s tab.

The court-appointed fee examiner has negotiated to pare some fees that law firms, like Paul Hastings, have lodged. This came after U .S. District Court judge Laura Taylor Swain, overseeing the island’s $70 billion plus debt proceedings, politely scolded them and suggested they figure out ways to curb legal costs.

“People in Puerto Rico cannot afford the billions of dollars in fees,” she said. Congress set up the Financial Oversight and Management Board for Puerto Rico to oversee the island’s financial restructuring, review fees and pay “reasonable compensation for actual, necessary services” and expenses.

Battling over the tangled finances of Puerto Rico, which also was battered by Hurricanes Irma and Maria after the reorganization started, is likely to last several years. Lawyers for debtors, creditors, bondholders, public employees and retirees seek to assure the best outcomes for their clients.

And it could be a bonanza for professional firms. Five law firms, which also include O’Melveny & Myers, Paul Hastings, Greenberg Traurig, Proskauer Rose and Wilkie Farr & Gallagher, filed nearly $50 million in fees out of the total fees requested by 30 law firms, consulting and financial firms.

At a hearing in San Juan earlier this month, Swain approved close to $48 million in payments, which cover a four-month period between May 3, 2017, and Sept. 30, 2017. She urged restraint, likely mindful of other major bankruptcies, like Detroit’s, where lawyers, financial consultants and others amassed $178 million in fees from the city’s restructuring.

Time and Expense

Puerto Rico’s bankruptcy likely will exceed that of Detroit, and, by some estimates, could run as high as $120 billion. Rather than calling out excessive or frivolous expenditures by firm name, fee examiner Brady Williamson, a lawyer with Wisconsin firm Godfrey & Kahn, broadly listed practices that will leave some squirming.

Williamson, who was a fee examiner in bankruptcies for Lehman Brothers and for General Motors, reviewed time and expense entries from more than 760 lawyers, financial professionals, paraprofessionals and staffs, and recommended payment – or not – over the four-month period last year.

His report, compiled earlier this year, said that the legal issues presented by Puerto Rico’s bankruptcy are “profound,” and the “financial and legal professionals working on these cases have confronted massive challenges of time and distance, analysis and advocacy, with little directly applicable precedent.”

Even so, he specified wide hourly rate differences as a factor of concern. The average hourly rate for attorneys in firms working on the bankruptcy case who are outside of Puerto Rico was just shy of $775, with the highest rate at $1,425.

The rates are more than three times the $245 average hourly rate for lawyers in firms in Puerto Rico. In his report, Williamson conceded that the hourly rates for lawyers from New York or Los Angeles were at or below the going rates for experienced Chapter 11 bankruptcy counsel in those cities.

At the outset, few firms gave rate discounts, which are common in the current overall legal market, and Williamson said he had the power to suggest such lower rates. Since then, many firms volunteered discounts, according to the fee examiner’s official spreadsheet of payments.

Too Many Lawyers

Another problem, he said, was an excess of lawyers.

“Many firms are sending too many officials to attend – by almost any standard – bankruptcy hearings,” and they have “significant hourly and travel expenses,” he said in the report.

It is “unreasonable,” he noted, “to expect compensation for 12 attorneys from a single firm to attend an omnibus hearing at which only one or two were expected to speak.”

While expenses were “relatively little when compared to the professional fees that accompany them,” Williamson said that “inappropriate expenses of any kind cannot be overlooked.” There is a need, he said, for “a great deal more care by the professionals and their clients before requesting reimbursement,” citing the example of a $50 hotel charge for personal laundry.

Some law firms have promptly addressed concerns about fees and making adjustments, he said. He mentioned O’Melveny, which represents more than one entity, but its key role is representing the commonwealth’s independent public corporation called the Puerto Rico Fiscal Agency and Financial Advisory Authority, and Greenberg Traurig, whose main responsibility is the Puerto Rico Electric Power Authority – which is approximately $20 billion in debt.

O’Melveny billed just under $10 million for its first-period fees for work for the Puerto Rico Sales Tax Financing Corporation and, after negotiated adjustments, was approved for $9.7 million. Its other billings – totaling more than $5 million – also passed the examiner’s muster. The firm gave voluntary discounts as did Greenberg Traurig, which also won approval for nearly all of its $3.4 million in fees.

Wilkie Farr & Gallagher, which also offered voluntary discounts, had about $240,000 shaved off its $4.7 million fee total. It is the bankruptcy counsel to the Official Committee of Unsecured Creditors. Also winning approval of most of its fees was Paul Hastings, counsel for the Puerto Rico at the Official Committee of Unsecured Creditors. The firm, which was also a voluntary discounter, had its $9.3 million bill receive a recommendation of a nearly $81,000 reduction.

Cost-Saving Measures Put in Place

Left unresolved at the time the examiner’s report was filed earlier this month were Proskauer Rose’s nearly $16 million in fees— with voluntary discounts—for work as bankruptcy counsel for an array of debtors. The firm had no comment.

However, its bills—and other firms that were deferred for more consideration—appear likely to be worked out before a new set of fees and expenses are filed for the second billing period, from Oct. 1, 2017, through Jan. 31, 2018.

Proskauer and each of the other law firms were emailed and telephoned by Big Law Business for the details of their fees and expenses and adjustments made. No firm agreed to discuss them.

Going forward, however, Judge Swain has decreed there will be fewer lawyers and other professionals traveling to Puerto Rico. She said, at the hearing, that lawyers speaking at hearings can travel, but the rest can listen to the hearings remotely.

In another cost-saving move, the court also said it will pay for only two lawyers per client to attend meetings or hearings unless the court decides otherwise.

How firms react to such cost-cutting measures will become public in the next set of bankruptcy billings.

Fee Examiner Says Too Many Attorneys at Puerto Rico Hearing

March 2, 2018

A recent Law 360 story by Alex Wolf, “Fee Examiner Says Too Many Attys at Puerto Rico Hearings,” reports that the firms representing Puerto Rico’s public debtors and creditor committees in the territory’s restructuring cases are sending too many professionals to court hearings and mediation sessions and are seeking excessive coverage for travel expenses, according to a fee examiner report filed Thursday.

For their work over the first five months of what amounts to the largest municipal bankruptcy in history, the legal and financial professionals hired to represent Puerto Rico’s government, public corporations, pensioners and committee of unsecured creditors have requested $77 million in fees and expenses. Of that amount, nearly $50 million should be approved by the federal judge overseeing the territory’s restructuring cases while another $26 million is under further review, an appointed fee examiner said in his first initial report, identifying several problematic practices and areas of concern.

While expressing an understanding that there are bound to be areas of confusion and disagreement in a massive and complex reorganization, examiner Brady Williamson said he encountered “problematic billing practices” that ought to be addressed, like professionals charging disparate rates or failing to provide discounts for their services where others have.

Notably, the average attorney hourly rate for applying firms based in Puerto Rico is about $245, while the average rate for firms based in New York or in other major U.S. cities is just under $775, with one reported rate at $1,425 an hour, Williamson said. His report shows that all of the BigLaw firms filing requests for payment – O'Melveny & Myers LLP, Greenberg Traurig LLP Willkie Farr & Gallagher LLP, Paul Hastings LLP, Jenner & Block LLP and Proskauer Rose LLP - have voluntarily discounted their service fees.

The entities billing the commonwealth have also employed multiple firms and professionals to conduct seemingly duplicate types of work and have been sending too many people to attend mediation sessions and court hearings, Williamson said.

“The remarkable number of professionals in attendance, both in the aggregate and from individual firms, cannot be ignored and may lead to formal objection,” he said. “It is unreasonable, whether the clients or the professionals make the staffing decisions, to expect compensation for 12 attorneys from a single firm to attend an omnibus hearing at which only one or two were expected to speak.”

Williamson also said some professionals charged for unnecessary electronic research and travel while others “routinely fail to observe applicable caps and prohibitions” on expenses, citing bills for first-class airfare and charges for hotel laundry service. He identified more than $680,000 in “apparently excessive or undocumented expenses” out of just over $2 million being sought.

Despite these findings, “almost every firm that was asked to do so adjusted their requested fees and expenses,” according to Williamson’s report.

The fees and expenses recommended for approval Thursday encompass the work done by the majority of professionals employed by the debtors and committees, but do exclude compensation requested by counsel for the federal board appointed to oversee the island’s debt overhaul and some of its hired professionals. Williamson said that consideration for payments requested by Proskauer Rose and McKinsey & Co. Inc., among a few others, is being deferred until April.

Puerto Rico began its court-monitored restructuring process last May with about $74 billion in public debt and an additional $49 billion in pension liabilities. Officials are using the bankruptcy-like process created under Title III of the Puerto Rico Oversight, Management and Economic Stability Act to address a flurry of competing claims for payment while attempting to keep the struggling territory afloat.

The bankruptcy case is In re: Commonwealth of Puerto Rico, case number 3:17-bk-03283, in the U.S. District Court for the District of Puerto Rico.

Approval of Attorney Fee Defense Provisions Post-Asarco

February 19, 2018

A recent Legal Intelligencer article by Rudolph J. DiMassa Jr. and Jarret P. Hitchings, “Approval of Fee Defense Provisions in Retention Agreements Post-ASARCO,” on recent approval of fee defense provision in retention agreements post-Asarco.  The article reads:

The Bankruptcy Code authorizes a debtor (or its bankruptcy trustee) to retain and compensate attorneys and other professionals during the course of the debtor’s bankruptcy case. Specifically, Section 327 allows a debtor, with bankruptcy court approval, to employ attorneys, accountants or other professionals to represent or assist the debtor in connection with its bankruptcy case. Section 328, in turn (and again subject to court approval), allows the debtor to retain such professionals “on any reasonable terms and conditions of employment, including on a retainer, on an hourly basis, on a fixed or percentage fee basis or on a contingent fee basis.” Finally, Section 330 permits a court to award to a professional retained under Section 327 “reasonable compensation for actual, necessary services” and “reimbursement for actual, necessary expenses.” Given this framework, the retention and compensation of professionals in a bankruptcy case is often a routine affair. The debtor will seek, and usually receive, authority to retain its professionals on specified terms. Thereafter, professionals may periodically file applications seeking payment of fees and expenses incurred during the course of the bankruptcy case. If the court concludes that the requested compensation is reasonable, it will award payment by the debtor’s estate. However, if any party objects to a professional’s fee application, this process can take an unwelcome turn.

Contested fee application litigation can result in additional professional fees and expenses. Vexingly for the professional, these “fee defense” costs may not be payable from the debtor’s bankruptcy estate: In Baker Botts v. ASARCO (135 S. Ct. 2158 (2015)), the U.S. Supreme Court held that fees and costs incurred by a professional on account of fee-defense litigation are not compensable under Section 330. To mitigate this risk, bankruptcy professionals have begun to include fee-defense provisions in their retention agreements. While these types of provisions have been met with objection, the U.S. Bankruptcy Court for the District of New Mexico in In re Hungry Horse, Case No. 16-11222 (Bank. D.N.M. Sept. 20, 2017) recently approved a retention agreement between a debtor and its counsel that entitled counsel to payment of all reasonable fees incurred in defending its fee applications. Importantly, the bankruptcy court determined that such a provision was not barred by the Supreme Court’s holding in ASARCO.

In ASARCO, the Supreme Court began its analysis by recognizing the “bedrock principle known as the American Rule” which requires each litigant to pay its own attorney fees—win or lose—unless a statute or contract provides otherwise. Because none of the parties in ASARCO relied on the contract exception to the American Rule, the Supreme Court considered whether Section 330 of the Bankruptcy Code provides a statutory exception to the American Rule in the context of fee defense litigation. On this point, the Supreme Court concluded that nothing in Section 330 warranted an exception to the American Rule. Indeed, the Supreme Court recognized that Section 330(a)(1) authorizes compensation only for “actual, necessary services rendered” by the professional. The Supreme Court therefore concluded that because “litigation in defense of a fee application is not a ‘service’ [to the debtor’s estate] within the meaning of Section 330(a)(1),” fees and expenses incurred in connection therewith are not allowable as compensation under Section 330.

In response to ASARCO, bankruptcy professionals have incorporated fee defense provisions into their retention agreements. By including such provisions, the professionals hope to come within the contract exception to the American Rule. Unfortunately, this approach was analyzed—and rejected—by the Delaware Bankruptcy Court in In re Boomerang Tube, 548 B.R. 69 (Bankr. D. Del. 2016).

In Boomerang Tube, proposed counsel for the unsecured creditors’ committee included a term in its retention agreement that provided for payment of expenses incurred defending counsel’s fee applications. The U.S. trustee objected to the inclusion of this fee defense provision as contrary to Section 328 and ASARCO. The court sustained the trustee’s objection on several grounds. First, relying on ASARCO, the court concluded that Section 328 does not contain a statutory exception to the American Rule because it lacks any specific and explicit language awarding litigation fees or costs to a prevailing party. Second, the court determined that the retention agreement between the unsecured creditors’ committee and its counsel was insufficient to trigger the contract exception to the American Rule. The court noted that the retention agreement was “not a contract between two parties providing that each will be responsible for the other’s legal fees if it loses a dispute between them.” Rather, the court found, the retention agreement provided that a third party (i.e., the debtor’s estate) would pay counsel’s defenses, even if the estate were not the objecting party. Because the retention agreement could not bind the debtor’s estate, it failed to establish a contract exception to the American Rule. Finally, the court determined that fee defense provisions could not be approved under 328 because such a provision could never be deemed reasonable. According to the court, fee defense provisions are de facto unreasonable since they inure to the benefit of the professional and not the professional’s client.

The bankruptcy court in Hungry Horse considered a similar issue but reached a different conclusion. There, the debtor sought court authorization to retain bankruptcy counsel. The parties’ retention agreement expressly provided that the debtor agreed “to pay all reasonable legal fees incurred in obtaining court approval of all employment and fee applications including dealing with any objections to any of the applications.” The debtor’s unsecured creditors’ committee objected to the approval of this fee defense provision as contrary to ASARCO.

The Hungry Horse court overruled the objection and approved the fee defense provision. In doing so, the court concluded that nothing in ASARCO prevents approval of a fee defense provision in a retention agreement as a “reasonable term and condition” under Section 328(a). As the bankruptcy court pointed out, the Supreme Court in ASARCO construed Section 330 as limiting an attorney to compensation for services rendered to the client. However, the ASARCO court did not consider any contractual fee defense provision or consider whether such a provision could be approved under Section 328. The court also rejected the Boomerang Tube holding that a fee provision can never be a reasonable term under Section 328, since nothing in the Bankruptcy Code requires that all the terms of a professional’s employment directly benefit the estate.

The court distinguished Sections 328 and 330, noting that “if employment terms and conditions are approved by a bankruptcy court under Section 328(a), then the professional’s compensation is governed by those terms and conditions, rather than the general ‘reasonable compensation for services rendered’ language of Section 330(a)(1)(A).” The court specifically relied on the fact that the authority of the bankruptcy court to award compensation under Section 330 is expressly subject to the provisions of Section 328. As a result, the court held that Section 330 does not preclude payment of fee defense costs if the terms and conditions of a professional’s compensation include a fee defense provision approved under Section 328.

The court also considered practical realities to reach its conclusion. It recognized that in smaller bankruptcy cases with smaller fees, fee defense costs can become a sizeable percentage of the total amount of fees billed in a case. Consequently, “if estate counsel were forced to successfully defend its fees ‘on its own dime,’ the net compensation in a bankruptcy case could be substantially reduced,” minimizing the incentive for counsel to undertake a debtor representation. Moreover, allowing a professional to recover fee defense costs from the estate limits objections to fee applications to bona fide disputes.

In conclusion, the court in Hungry Horse offered an example of a fee defense paragraph that might be approved as reasonable under Section 328(a): “Fee Defense. The client agrees to pay all reasonable legal fees and expenses incurred by the firm, and also by any counsel retained by the unsecured creditors’ committee (if one is formed in the client’s bankruptcy case) for successfully defending their respective fee applications. The bankruptcy court must approve all of such fees as reasonable. The client will have no obligation to pay for any fees or expenses the firm incurs defending fees that are not allowed.”

Whether such language will be approved by other courts remains to be seen. In the meantime, in order to reduce the risk that they bear the expense of their own fee defense, bankruptcy professionals should consider specifically providing for the payment of such costs in their retention agreements.

Fees for Defending Fees – Post-Asarco Cases

December 4, 2017

A recent article by Benjamin Feder, “Fees for Defending Fees – Recent Rulings Permit Contractual Circumvention of Supreme Court’s Baker Botts v. Asarco Decision,” reports on post-Asarco cases.  This article was posted with permission.  The article reads:

The Supreme Court two years ago ruled in Baker Botts v. Asarco that bankruptcy professionals entitled to compensation from a debtor’s bankruptcy estate had no statutory right to be compensated for time spent defending against objections to their fee applications.  Since then, “estate professionals,” i.e., those retained in a bankruptcy case by a trustee, debtor in possession or an official committee of creditors, have sought ways to limit the potentially harsh impact of that decision.  A subsequent opinion in a Delaware bankruptcy case, In re Boomerang Tube, declined to allow Baker Botts to be circumvented by contract.  However, decisions in another Delaware case, Nortel Networks, and more recently in a New Mexico case, Hungry Horse LLC, have distinguished Boomerang Tube and permitted contractual provisions that allow payment for the defense of fees.  The pragmatic approach taken in Hungry Horse in particular offers a template that other courts will likely be urged to adopt.

In every bankruptcy case, the retention of estate professionals must be approved by the bankruptcy court. Their fees and expenses are paid out of the debtor’s bankruptcy estate and are subject to review and approval by the bankruptcy court pursuant to Section 330 of the Bankruptcy Code.  Objections from other parties have always been a recognized hazard for such professionals.  Prior to Baker Botts a majority of courts permitted the recovery of fees incurred in defending against such challenges.

The Court’s analysis in Baker Botts was straight-forward.  Under American jurisprudence, each side in a litigated dispute bears its own attorneys’ fees unless there is an applicable statute or agreement that provides otherwise.  Section 330(a)(1) of the Bankruptcy Code states: “After notice to the parties in interest and . . . a hearing . . . the court may award to . . . a professional person . . . reasonable compensation for actual, necessary services[.]”  The Court ruled that the plain text of Section 330(a) does not support a deviation from the “American Rule” regarding attorneys’ fees.  The Court’s majority stated, “[t]he word ‘services’ ordinarily refers to ‘labor performed for another.’”  Since Baker Botts was litigating to defend its own fees, the Court reasoned that it was not providing an “actual, necessary service” to the bankruptcy estate and therefore was not entitled to compensation for such time.

Baker Botts makes clear that the Bankruptcy Code does not provide a statutory exception to the American Rule.  The question remaining is whether estate professionals can sidestep it by contract.

In Boomerang Tube, Judge Mary Walrath answered that question in the negative.  The law firm chosen in that case to represent the official committee of unsecured creditors, in its application to the bankruptcy court, asked for the approval order to include a provision that would entitle it to be compensated from Boomerang Tube’s bankruptcy estate for fees incurred in defending its fees against any challenges.  The firm pointed to Section 328 of the Bankruptcy Code, which allows for the retention of estate professionals “on any reasonable terms and conditions.”  It argued that the Supreme Court in Baker Botts had noted that parties could and regularly did contract around the American Rule.

Judge Walrath denied the request. She first held that Section 328 does not create a statutory exception to the American Rule, as it makes no mention of awarding fees or costs in the context of an adversarial proceeding. She observed in contrast that several discrete Bankruptcy Code provisions do contain express language providing for payment of fees to a prevailing party.  She next rejected the law firm’s argument that Section 328 permitted a contractual agreement for the payment of defense fees.  The retention agreement was between the law firm and the official creditors’ committee, but it would be Boomerang Tube’s bankruptcy estate, a non-party to such agreement, that would bear the costs.  Finally, she determined that the proposed fee shifting provisions were simply not “reasonable” terms of employment of professionals with the meaning of Section 328.

In view of the extent to which challenges to estate professionals’ fees (or at least the threat of doing so) are ingrained in chapter 11 practice, it was unlikely that Boomerang Tube would be the last word on this issue.  Recent decisions in two cases, Nortel Networks and Hungry Horse, have distinguished Boomerang Tube.

Judge Kevin Gross, a Delaware colleague of Judge Walrath, ruled in Nortel Networks that Baker Botts and Boomerang Tube did not apply to a fee dispute between an indenture trustee and certain bondholders, and permitted the trustee to recover its attorneys’ fees for defending against the challenge.  Although this case is not directly on point as it did not involve an estate professional, and Judge Gross was not opining on whether Section 328 would permit such an agreement, he held that the bond indenture qualified as a contractual exception to the American Rule, noting that, unlike the retention agreement in Boomerang Tube, it was an agreement directly between the debtor and the trustee.

In Hungry Horse New Mexico Bankruptcy Judge David Thuma looked to Nortel Networks for support in holding that a retention agreement in a chapter 11 case between proposed debtor’s counsel and the debtor could pass muster under Section 328, thereby permitting a contractual work-around to Baker Botts.  Judge Thuma first determined that nothing in Baker Botts prevented a bankruptcy court from finding a fee defense provision in a retention agreement to be “reasonable” within the meaning of Section 328.  In his reading of Baker Botts, the Court simply limited the compensation an estate professional could receive under Section 330 to fees for services to the client, rather than on its own behalf, and noted that Section 328 had no applicability to that issue.

He then considered various other provisions typical of retention agreements, and observed that several were “reasonable” under Section 328 even if they were intended to favor the professional, rather than the client. He pointed to provisions, among other things, setting out retainer requirements, permitting an attorney to withdraw under certain conditions, and granting a lien on certain recoveries.  “A typical employment agreement between a lawyer and a client has many terms; some benefit the client, while others benefit the lawyer.  Considered together, they may be reasonable.”  The overall effect, he noted, is that “the client obtains the services of needed, able professionals.”

Judge Thuma concluded that Section 328 therefore can permit contractual exceptions to the American Rule, and outlined the terms of a fee defense provision in a retention agreement that he believed was “reasonable” and “violat[ed] neither the letter nor spirit of [Baker Botts].”  He stated that, among other things, it needed to be agreed to by the bankruptcy estate, in order to avoid the issue highlighted by Judge Walrath in Boomerang Tube, and provided also that it extended to the creditors’ committee’s professionals, in order to “level the playing field.”  He suggested sample language that he believed could be acceptable under Section 328:

The Client agrees to pay all reasonable legal fees and expenses incurred by the Firm, and also by any counsel retained by the unsecured creditors’ committee (if one is formed in the Client’s bankruptcy case) for successfully defending their respective fee applications. The bankruptcy court must approve all of such fees as reasonable. The Client will have no obligation to pay for any fees or expenses the Firm incurs defending fees that are not allowed.

Disputes over payment of estate professionals’ fees will invariably remain part of the bankruptcy landscape. Estate professionals in chapter 11 cases are likely to ask bankruptcy judges in other jurisdictions to follow the pragmatic approach of Judge Thuma in Hungry Horse in order to blunt the detrimental impact of Baker Botts.

Benjamin Feder is Special Counsel at Kelley Drye & Warren LLP in New York.

NALFA Analysis: Partner Bankruptcy Rates

October 27, 2017

NALFA conducted a survey of partner hourly rates in bankruptcy cases.  NALFA examined dozens of court filings in bankruptcy cases over the past couple years.  The following results of our survey are the average of partner hourly rate ranges in major legal markets:

2017: $1005-$878
2016: $921-$807
2015: $886-$783

Key findings:  Not only have partner rates increased every year, but the variance (i.e. the range of rates) has increased as well.

$925M in Fees in Madoff-Related Matter

September 10, 2017

A recent American Lawyer story by Roy Strom, “Madoff-Related Fees Grow to $925M for Baker & Hostetler,” reports that last month, a federal judge approved a nearly $36 million payment for four...

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$32M More in Fees in Madoff Bankruptcy

September 4, 2017

A recent Law 360 story by Ryan Boysen, “Baker Hostetler Gets $32M More in Fees in Madoff Bankruptcy,” reports that BakerHostetler will receive $32 million for four months of work managing the...

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