A recent AM Law Daily story, “DOJ Bankruptcy Watchdog Unleashes Tough New Fee Rules,” reports that attorneys in big bankruptcy cases will soon have to make an array of disclosures on how they bill clients under new fee guidelines finalized by the DOJ.  Lawyers will have to justify any increases in their hourly rates of more than 10 percent and will be asked to provide rough budgets.  This is the first overhaul of the bankruptcy billing system in 17 years.

The new fee guidelines, to go into effect Nov. 1, will apply to bankruptcy cases for companies with more than $50 million in assets and $50 million in liabilities, a category that includes roughly 180 cases per year, primarily in New York and Delaware.  The guidelines do not apply to single-asset real estate cases.  Courts are not legally obligated to implement them, but in general, most courts follow guidelines laid out by the DOJ.  Among the new guidelines are disclosures requiring lawyers to reveal the methodology they use to come up with certain rates, and explain and justify rate increases.

The fee guidelines reflect a desire on the government’s part to bring bankruptcy-related fees in line with recession-driven changes to client expectations and law firm billing practices that are affecting other types of legal work.  “We know that private industry has been demanding—for attorneys outside bankruptcy—discounts and other cost-containment mechanisms that haven’t been prevalent in bankruptcy,” says Clifford White III, director of the U.S. Trustee Program.  “We want to ensure that those market-driven approaches are in bankruptcy cases as the code requires.”

Lawyers were torn on the potential impact of the fee guidelines.  Bernstein Shur’s Robert Keach, a fee expert who serves as a fee examiner in ARM Corp’s Chapter 11, said the fee guidelines merely institutionalize what is already done in many large bankruptcy cases.  “I wouldn’t characterize this as overly burdensome or unhelpful,” Keach said.  But bankruptcy lawyer John Penn of Haynes & Boone said the guidelines are unnecessary because the market already keeps hourly rates competitive.  “You have seen the downturn in big cases,” he said.  “Well when supply exceeds demand, rates fall.”

The U.S. Trustee will seek to bolster the use of fee examiners or committees to oversee attorney fees in big cases.  Keach is serving in such a capacity in AMR’s case, and says most large, complex cases already utilize fee examiners.  “In cases of this size, even the most diligent judge cannot do this alone,” Keach said.  An uptick in fee examiners would pose an added cost to bankruptcy estates but would theoretically save money by regulating and supervising fees.