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.