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Category: Bankruptcy Fees / Expenses

Article: Actual and Necessary: A Guide to Keeping Time So You Get Paid

June 6, 2021

A recent ABI Journal article by Brittany B. Falabella and Allison P. Klena, “Actual and Necessary: A Guide to Keeping Time So You Get Paid,” reports on good billing practices in large Chapter 11 bankruptcy.  This article was posted with permission.  The article reads:

Billing time is one of the most dreaded aspects of private practice in any field of law, but not because it is hard or overly time-consuming. The extra step of recording discrete, detailed time entries is much more than an annoyance. For bank­ruptcy practitioners employed under §§ 327, 1103 and 1051 of the Bankruptcy Code and certain credi­tors’ counsel,2 it is a step that cannot be done in a sloppy, haphazard way — at least, if the attorney wants to be paid.

In non-bankruptcy areas of practice, an attorney may have to explain generic, unclear and blocked billing to a client. However, a bankruptcy practi­tioner’s bills are subject not only to this review, but also to that of multiple other parties, including the U.S. Trustee’s Office, debtors, committees, interest-holders and, most importantly, the court, before the practitioner will be awarded compensation under §§ 330 and/or 331. Developing proper billing habits from the start will pay for itself — literally.

Although most new attorneys who enter an established bankruptcy practice will have standard forms for fee applications, taking the time to under­stand the law informing a court’s analysis is the first step in understanding how to effectively and proper­ly keep time for easy approval. The first part of this article discusses the Code sections and cases that likely apply to every fee application. The second part discusses the common pitfalls that can result in a court reducing a fee request, and easy and practi­cal tips to avoid them. By making proper billing a habit rather than a dreaded task, the foundation will be laid to get paid in full.

The Laws of Getting Paid: Section 330 of the Bankruptcy Code

Under § 330, after notice and a hearing an attor­ney may be awarded (1) “reasonable compensa­tion for actual, necessary services rendered” and (2) “reimbursement for actual, necessary expens­es.”4 On the court’s own motion or that of any party-in-interest, a court can, however, reduce the com­pensation requested.5 In making the determination of whether and how much to reduce a request, the court is directed to

consider the nature, the extent, and the value of such services, taking into account all rel­evant factors, including —

(A) the time spent on such services;

(B) the rates charged for such services;

(C) whether the services were neces­sary to the administration of, or ben­eficial at the time at which the service was rendered toward the completion of, a case under this title;

(D) whether the services were per­formed within a reasonable amount of time commensurate with the com­plexity, importance, and nature of the problem, issue, or task addressed;

(E) with respect to a professional per­son, whether the person is board cer­tified or otherwise has demonstrated the skill and experience in the bank­ruptcy field; and

(F) whether the compensation is rea­sonable based on the customary com­pensation charged by comparably skilled practitioners in cases other than cases under this title.6

In addition, the court “shall not allow compensation for — (i) unnecessary duplication of services; or (ii) services that were not (I) reasonably likely to benefit the debtor’s estate, or (II) necessary to the administration of the case.”

The Lodestar Method

The lodestar method is a court’s starting point for deter­mining whether fees billed were reasonable. The “lodestar” equals a reasonable amount of time for the matter multiplied by a reasonable hourly rate.8 Reasonable time is the time that the court believes a billing attorney should have spent on the matter. Then, a “reasonable hourly rate” is calculated with reference to a billing attorney’s experience and skill, as well as prevailing rates in the community for similar services provided by reasonably comparable attorneys. The sum (i.e., the lodestar) may then be adjusted to account for the specific demands of the case, often with reference to some or all of the 12 Johnson factors.

The Johnson Factors

The Johnson factors are derived from the Fifth Circuit’s decision in Johnson v. Georgia Highway Express Inc.,9 and consist of the following: (1) the time and labor expended; (2) the novelty and difficulty of the questions raised; (3) the skill required to properly perform the legal services rendered; (4) the attorney’s opportunity costs in pressing the instant litigation; (5) the customary fee for like work; (6) the attor­ney’s expectations at the outset of the litigation; (7) the time limitations imposed by the client or circumstances; (8) the amount in controversy and the results obtained; (9) the expe­rience, reputation and ability of the attorney; (10) the unde­sirability of the case within the legal community in which the suit arose; (11) the nature and length of the professional relationship between attorney and client; and (12) attorneys’ fee awards in similar cases.

However, courts have not taken a uniform approach to the Johnson factors. Some courts view the factors as already subsumed into the lodestar method,10 while others apply the lodestar method and then look to the Johnson factors to decide whether the lodestar amount should be modified.11 Still other courts consider the Johnson factors in conjunction with calculation of the lodestar.12 Although these distinctions may matter in some cases, the one- and two-step processes will often generate essentially similar results, especially given that enhancement of the lodestar is a rare occurrence.

Biggest Pitfalls and Strategies to Avoid Them

Even with an understanding of the law, unless time records are maintained in anticipation of bankruptcy court review, a practitioner will often fall into some of the pitfalls discussed below. In many cases, a simple fix can nip errors in the bud. This avoids the headache of reviewing and editing voluminous invoices at the end of a fee-application period or the end of a case, and, most importantly, permitting the court to allow fees in full and without objection.

Not Enough Detail/Excessive Billing

Vague time entries are virtually always a problem. A gen­eral, shorthand description might be easy to understand for the time-keeper doing the work and making a contemporane­ous record (it goes without saying to always keep contem­poraneous time). However, the court and other parties who analyze vague, generic time entries do not have the benefit of the billing attorney’s on-the-spot thoughts.

Time entries should be drafted with an eye toward explaining and justifying why the work was “reasonable and necessary,” and how it benefited the estate or a constituent. Entries such as “reviewed emails” are certainly insufficient, but even additional details, such as “conference with X con­cerning research and strategy” or “conference with X con­cerning pending matter related to debtor” might not provide enough detail for a court to determine whether the time was justified.14 Vague entries can cause the court to spend time attempting to decipher the context, conduct an evidentiary hearing,15 or simply deny the compensation.

While courts frequently complain that counsel have engaged in excessive billing, the heart of the issue is fre­quently that the court does not understand how the amount of time billed was “reasonable and necessary.” In other words, the billing entry was not specific or detailed enough to explain to the court that the full amount of time delegated to a task benefited the estate or was necessary to the admin­istration of the case. This issue is often remedied if detailed descriptions are crafted with an eye toward the benefit to the case as previously explained.

Vague and ambiguous entries are a common and costly mistake. No attorney, particularly a new associate, wants their entries to be the reason that the firm’s fee application is reduced or its approval delayed. Taking the time to carefully prepare time entries is essential, not optional.

Tip: Have an attorney or professional assistant who is not working on the case review the time entries. If that person cannot understand the value of the time billed or the task that was completed, more detail should be included until it becomes clear. If it becomes necessary to bill significant time to certain tasks, make sure the explanation is particularly thorough to explain the circumstances.

Block-Billing

Similar to time entries that are insufficiently detailed, time entries that are block-billed — multiple tasks com­bined in a one-time entry — do not establish for the review­er (1) how much time was spent on a particular task, or (2) whether the time spent on each task was reasonable. For example, if an attorney records 3.0 hours total for “review of a motion for approval of DIP financing; telephone call with debtor’s counsel concerning alternative financing sought; and email to client regarding financing options for debtor’s continued operation under chapter 11 and recommendation not to object to the filed DIP financing motion,” the court has no idea whether the review of the motion took 0.6 hours (presumably reasonable) or 2.7 hours (perhaps unreason­able absent additional undescribed factors). According to the U.S. Trustee’s guidelines, while block-billing is gener­ally not allowed, a single daily entry that combines de mini­mus tasks can be combined, provided that the entry does not exceed 0.5 hours.16

A consequence of block-billing is that the court may conclude that it lacks the information to trim excessive time from a particular task among those blocked, and may choose to reduce the total time billed by a discretionary percentage.17 The goal is to establish that your work was reasonable and necessary. Do not give a court an “excuse” to question the reasonableness of your time by block-billing.

Tip: Break up time entries so that each task corresponds to the amount of time spent on that task — even if the amount of time is modest. Making use of time-tracking software or timers and developing good habits can be quite helpful in mastering detailed task-billing.

Not Delegating to Proper Staff/Duplicative Billing

Whether certain tasks are properly completed by senior-level attorneys, lower-level attorneys or support staff is largely out of the control of an associate. Nevertheless, there will be times when tasks that would be more suitable for a junior-lev­el attorney must be completed by a senior attorney, or where an attorney may need to complete a task that would ordinar­ily be delegated to a staff person. Similarly, there are times when multiple attorneys must participate in the same hearing or conference, which reviewing courts often view skeptically.

In such situations, courts are more inclined to allow the “double billing” if the exigent circumstances are explained in the entry and such staffing situations are kept to a mini­mum.18 When matters are not explained or apparent from the time description, the court is left to question how the time and/or rates are reasonable and necessary.

Tip: While a junior associate might not have much con­trol over the delegation of tasks, associates typically draft the fee applications, so they should keep this issue in mind when reviewing bills and flag any issues with a supervising attorney prior to filing. A good-faith reduction for certain tasks might go a long way with the court and other parties-in-interest. At a minimum, make sure your own time is not subject to objection or reduction. If you find yourself bill­ing time to routine tasks, be sure the circumstances are fully explained in the entry.

Conclusion

Given the consequences of failing to record time properly, it is well worth the time to develop the habit ofrecording specific time entries that are separated by each task performed and that indicate that how the time spent was both reasonable and necessary. With such a “reason­able and necessary” standard as a guide, a professional can ensure that the court and other interested parties under­stand the value being added to the case and that the fees requested are fully warranted.

NRA Agrees To Pay Creditors’ Chapter 11 Fees

May 15, 2021

A recent Law 360 story by Vince Sullivan, “NRA Reaches Deal To Pay Creditors’ Ch. 11 Fees” reports that days after the National Rifle Association's Chapter 11 case was dismissed, the organization told a Texas bankruptcy judge that it had reached an agreement with the official committee of unsecured creditors to handle payments of professional fees.  During a status conference requested by the committee, its attorney Louis Strubeck Jr. of Norton Rose Fulbright said the committee had pending fee applications in the case and would likely have at least a further request for payment of professional fees, which are typically paid for by the debtor in a Chapter 11 case.

Since the case was dismissed via an order from U.S. Bankruptcy Judge Harlin D. Hale, Strubeck said he wanted to present the situation to the court to be sure it was being handled properly.  "We wanted to make sure there was full transparency around this," Strubeck said.  "We didn't want to agree to anything that wasn't going to be discussed with the court to make sure we weren't doing something differently."  After the dismissal order came down, Strubeck said he engaged in discussions with Patrick J. Neligan Jr. of Nelligan LLP, the NRA's bankruptcy counsel, to figure out how to move forward.

At the hearing, Nelligan said he was of the legal opinion that once the Chapter 11 dismissal order was issued, the bankruptcy court relinquished its jurisdiction over the parties and restored them to their prebankruptcy circumstances.  That means, he said, that the NRA would treat any invoices from the committee's professionals incurred before the dismissal as it would treat any other unsecured obligation.

"The impact of a dismissal ... is that as we put the entities into their prebankruptcy positions, we need to go forward with payment of the unsecured creditors on their prep claims," Nelligan said.  "The NRA is preparing to make those payments.  Out of an abundance of caution we have not gone forward with those payments until this status conference."  Any disputes among the parties about any invoices will be resolved as they normally would as if the bankruptcy had never occurred, Nelligan said.

The dismissal also restores the parties to their prebankruptcy standing with regard to the litigation in which the NRA is involved, Nelligan said.  As he understands it, the case brought by the New York attorney general seeking to dissolve the organization will continue uninterrupted in New York state court, he said.  The NRA's litigation against its former media consulting firm Ackerman McQueen will also resume in Texas state court, he said.

Attorneys for NRA board member Phillip Journey — whose motion seeking the appointment of an examiner in the Chapter 11 case was denied — said their client is considering whether to appeal the denial of his motion, or whether to pursue an administrative expense claim against the NRA for the fees incurred in litigating the examiner and dismissal motions.

Ackerman McQueen attorneys also said they were exploring whether the dismissal of the Chapter 11 case for a lack of good faith in making the bankruptcy filing could give rise to the shifting of legal fees.  After taking some time to consider the issues, Judge Hale said he wouldn't be altering his dismissal order to retain jurisdiction over the fee issues, saying he trusted the parties and their counsel to resolve any disputes professionally and amicably.

Fee Requests in Boy Scouts Bankruptcy Exceed $100M

May 12, 2021

A recent ABA Journal story by Debra Cassens Weiss, “Fee Applications in Boy Scouts Bankruptcy Exceed $100M; Judge Calls Total ‘Staggering’” reports that the court overseeing the Boy Scouts of America bankruptcy case has appointed an examiner to review fees that have become a point of contention.  Professional and attorney fee applications filed with the court exceed $100 million, and the total could reach $150 million by August, according to the New York Times.

The total includes fees sought by professionals working on behalf of the Boy Scouts of America and sexual abuse victims but does not include fees that will be paid to victims’ lawyers on a contingency basis.  The fee applications also include legal work that would be done for the Boy Scouts of America even if the group had not filed for bankruptcy, including trademark litigation with the Girl Scouts, fee examiner Justin Rucki told the New York Times.

U.S. Bankruptcy Judge Laurie Selber Silverstein of Delaware called the $100 million total “a staggering number” during a virtual March 17 hearing in which she urged the parties to reach a resolution.  “Every dollar to professional fees is a dollar that comes out of some creditor’s pocket,” Silverstein said.

One lawyer billed $267,435 in just one month, according to the New York Times. Another billed at $1,725 per hour.  Associates with little experience are billing more than $600 per hour.  Fourteen lawyers at White & Case, which represents the Boy Scouts of America, are billing at more than $1,000 per hour.  Lawyer fees of more than $1,000 per hour are almost routine in complicated bankruptcy cases, according to Lynn LoPucki, a professor at the University of California at Los Angeles School of Law, who spoke with the New York Times.  White & Case has said the billing rate is reasonable given the complexity of the case.

One of the insurance companies involved in the litigation, the Century Indemnity Co., has proposed that Silverstein hold back 20% of legal fees pending a review.  Tancred Schiavoni, a Century Indemnity Co. lawyer, criticized high billing rates, as well as the number of highly paid people working on the case.  Paul Mones, a lawyer representing about 400 clients, said that the fees and number of professionals working on the case are proportional to the case complexity.  Insurers are just looking for ways to limit their exposure, Mones told the New York Times.

NALFA: Hourly Rates Above National Averages in Large Chapter 11 Cases

May 6, 2021

A recent The American Lawyer story by Dan Roe, “Kirkland and Weil’s Fees in Chapter 11 Work Highlight Big Law Allure to Bankruptcy,” reports that even as the number of commercial Chapter 11 bankruptcies has dropped in recent months, large bankruptcies have continued to churn out big fee packages for some law firms—one reason why firms are continuing to invest and hire in their bankruptcy practices.  For instance, a glance at law firm fees in two cases—the Chapter 11 bankruptcy of Sears, filed October 2018, and the May 2020 J.C. Penney bankruptcy—reveal the cases have totaled more than $150 million for law firms since they beganMost of the money has gone to Am Law 200 firms, with some partners billing for more than $1,500 per hour.

Representing Sears Holdings Corp., Weil, Gotshal & Manges emerged as the biggest fee-earner in the Southern District of New York bankruptcy case, with more than $80 million in fees and expenses paid through the end of February 2021. Its partners billed between $1,695 and $1,200 per hour, while associates charged $1,100 to $595.  Akin Gump Strauss Hauer & Feld also made out big on the Sears bankruptcy.  Representing the bankruptcy’s unsecured creditors, the law firm received $48 million in total compensation through the end of February 2021 with a blended rate of $853 per hour.

Paul, Weiss, Rifkind, Wharton & Garrison, representing Sears, received almost $20 million, although most of it was completed before last year.  Its attorneys averaged $790 per hour, with partners topping out at $1,650.  And Wachtell, Lipton, Rosen & Katz did $873,000 worth of work representing Sears, with a blended rate of $1,287 and partners billing up to $1,500.  Meanwhile, the J.C. Penney bankruptcy has generated more than $28 million in fee revenue for law firmsRepresenting J.C. Penney, Kirkland & Ellis took most of the spoils with two massive fee applications totaling $20.9 million, with a blended attorney rate of approximately $1,000.

Cooley and Cole Schotz represented the creditor committee, with the former firm taking home $4.2 million in fee revenue with a blended rate of $970 average billing rate.  Cole Schotz earned $2.1 million for work it performed in the second half of the year, maintaining a $643 average hourly rate per attorney.  Katten Muchin Rosenman put in 1,318 professional hours to earn $1.1 million in fee revenue while representing J.C. Penney, averaging $960 per attorney per hour, while Quinn Emanuel Urquhart & Sullivan, representing the store’s subsidiaries, cleared $827,000 for its work in the second half of 2020, averaging just over $1,000 for its hourly rate.

The J.C. Penney restructuring also benefitted smaller-sized firms such as the New York law firm Herrick Feinstein, whose attorneys billed around $500 per hour for $1.5 million in fees.  The opportunity for large fee awards in Chapter 11 work continues to drive a flurry of bankruptcy partner hires.  In the last week, Willkie Farr & Gallagher added a three-partner bankruptcy group from Morrison & Foerster who represent creditor committees in high-profile cases and Sidley Austin hired Tom Califano, previously global co-chair and U.S. chair of DLA Piper’s restructuring group.  Last month, Kirkland brought on Christine Okike from Skadden, Arps, Slate, Meagher & Flom.

"Our analysis, from our most recent litigation hourly rate survey, shows that all these Chapter 11 bankruptcy rates are well above the approximate national averages," said Terry Jesse, Executive Director of NALFA.  "In fact, hourly rates in large Chapter 11 bankruptcies, may be one of the highest rate-charging practice areas, " Jesse wondered.

For more on NALFA's national averages, visit NALFA Releases 2020 Average Hourly Rates in Litigation.

3 Firms Give Up $1M in Fees in Purdue Bankruptcy

May 1, 2021

A recent Law 360 story by Justin Wise, “3 Firms Give Up $1M in Fees From Purdue Ch. 11,” reports that Skadden Arps Slate Meagher & Flom LLP, WilmerHale and Dechert LLP have agreed to a settlement with the U.S. Department of Justice to relinquish $1 million in fees earned in their representation of Purdue Pharma in its ongoing bankruptcy cases, after concerns were raised about the adequacy of the firms' disclosures.

The DOJ Trustee Program said that the firms failed to disclose a joint defense and common interest agreement between Purdue and the Sackler family, the company's owners, in their retention applications.  The agreement created obligations for the firms to the Sacklers in their defense of hundreds of lawsuits relating to Purdue's opioid sales, the DOJ said.  Purdue had invoked the agreement in an effort to avoid turning over documents to unsecured creditors reviewing debtors' conduct.  The settlement is subject to approval by the Bankruptcy Court for the Southern District of New York.

"These disclosure violations are particularly concerning because a central question in these cases has been the independence of Purdue from the Sackler families," Cliff White, director of the DOJ's Trustee Program, said in a statement.  "This agreement reflects the USTP's ongoing efforts to police law firms and other bankruptcy professionals who fail to disclose connections that may raise questions about their ability to perform their duties free of conflicts of interest."

Law firms are required under bankruptcy laws to disclose their connections to other parties who may have a stake in a case.  The three firms did not consider the common interest agreement to represent a "connection" requiring disclosure at the time of their applications, but agreed to the settlement to resolve a dispute with the U.S. Trustee, according to a court filing.  The U.S. Trustee first raised concerns about the firms' disclosures in early March.

The U.S. Trustee said it discovered no "evidence that the failure to disclose in this case was intentional or that there was an effort by any of the firms to mislead."  Under the settlement, Skadden, WilmerHale and Dechert will collectively reduce their pending or future fees by $1 million and file supplemental retention applications to reflect any agreements entered on behalf of debtors and other parties.