Professional Fees: How to Get a Bankruptcy Judge's Attention

The United States Trustee Is Watching

The objection in Fleming was made by the U.S. Trustee, not by a disgruntled litigant. The U.S. Trustee is required to monitor fee applications, and may comment on these applications at any fee hearing. 28 U.S.C. ' 586(a)(3)(H). According to the court, the U.S. Trustee is “the 'watchdog' of the Chapter 11 system, charged with the duty to assure that the spirit and substance of the Bankruptcy Code is followed.” Id. at 6. We can only speculate as to what drove the U.S. Trustee, aside from a statutory directive, to make the objection here. Based on the court's description of its repeated and unheeded warnings to the professionals, the U.S. Trustee probably had no choice.

The Bankruptcy Judge Is Also Watching

The court noted its own “independent duty to review fee requests of all professionals … to assure that the services rendered were necessary and appropriate and that the fees requested are reasonable.” Id. at 6-7, citing In re Busy Beaver Building Centers, Inc., 19 F.3d 833, 841, 844 (3d Cir. 1994) (court “must protect the estate, lest overreaching attorneys or other professionals drain it of wealth which by right should inure to the benefit of unsecured creditors”). Citing Bankruptcy (Code) ' 30(a)(4)(A), the court also stressed that it “should not allow compensation for 1) unnecessary duplication of services, or 2) services that were not i) reasonably likely to benefit the debtor's estate; or ii) necessary to the administration of the case.” The court's inquiry should be objective, it explained, “based upon what services, a reasonable lawyer or legal firm would have performed in the same circumstances,” citing In re Ames Department Stores, Inc., 76 F.3d 66, 72 (2d Cir. 1996).

Listen to the Court's Warnings

The court stressed that “many of the actions taken by Debtors' counsel … were improper or appeared to be designed to frustrate the legitimate rights of the other parties in this case.” Id. at 7-8. More important, the court had warned counsel “on numerous occasions … that it considered their actions inappropriate.” Id. Still, “at virtually every hearing … the court was presented with additional evidence of improper actions by counsel,” resulting in a further warning that the court intended “to reduce their fees because of this activity.” Id.

The court still gave the affected professionals a chance to submit further evidence. Regardless of the eventual outcome, however, there is an important truth for professionals who apply to the court for compensation in a bankruptcy case: Until and unless the court finally allows fees, the professional firm cannot consider itself paid. In re Taxman Clothing, Inc., 49 F.3d 310, 316 (7th Cir. 1995) (held, trustee's counsel breached fiduciary duty to estate by pursuing suit that reasonable attorney would have known was not cost-effective; although claims pursued worth $33,000, counsel received interim fees of $85,000; services worth only $7000, and counsel forced to disgorge balance; “Even after the passage of [Code] ' 330(a)(1), bankruptcy is not intended to be a feast for lawyers.”); In re A.H. Robins Co., Inc., 86 F.3d 364, 378 (4th Cir. 1996) (court had “obligation to investigate” complaints about large fees paid to claimants' counsel, plus “jurisdiction and authority to remedy the situation …”). In short, a bankruptcy professional must satisfy not only its client, but also the court.

Overstaffing Won't Work

The U.S. Trustee in Fleming objected that the “number of attorneys for the debtors … was excessive, particularly the number present at each hearing,” constituting an “unnecessary duplication of effort … ” Id. at 8-9. Indeed, the court found that “on average there were five to six attorneys representing the Debtors at every hearing …” Id. According to the court, “counsel for the Debtors have not adequately demonstrated that each attorney present contributed to the hearing in a meaningful way.” Id. One firm had at least two attorneys in attendance at every hearing: one attorney coordinating the matter, and another handling discrete tasks. One of the firms identified specific tasks performed by each attorney, but described one of them as the “leading hearing attorney.” Again, the court found that unless a lawyer handles a specific matter, “the estate should not be charged with her time,” nor should the estate be “charged for attorneys whose matters have concluded with the time spent by them waiting for other matters to end.” Id.

Coordinate the Team's Efforts

Professionals often argue that intra-office conferences are necessary for coordination, but the court found here that “their coordination ha[d] been abysmal … [O]pposing counsel had often represented in court that an agreement had been reached “with one particular lawyer, but the debtor's courtroom counsel had disclaimed knowledge of any agreement. Id. at 9-10. “The situation became so grave that at one hearing, a recess was ordered while counsel for the Debtors was directed to put additional counsel, who had actually been dealing with a specific creditor, on the phone.” Id. According to the court, in “most instances, the creditor was correct and counsel for the Debtors in the courtroom was incorrect.” Id. The court was not troubled by the concept of intra-office conferences for the sake of efficiency, but found it lacking here. Judge Walrath was troubled also by the huge number of time entries (3700 for one firm, and 1600 for the other) showing conferences, and directed the parties to provide additional detail in order to “assess the reasonableness” of meetings. Id.

Higher Billing Rates for Bankruptcy Professionals Won't Work

One of the debtor's law firms, according to the U.S. Trustee, “charged higher rates for the services of bankruptcy attorneys than for services of comparable non-bankruptcy attorneys with similar experience.” Id. at 11. The court agreed with the U.S. Trustee. The law firm, however, said “the issue was whether the specific attorney with bankruptcy expertise charges the same rate for debtors, creditors or other interested parties in a bankruptcy matter, not whether another attorney with the same experience in another practice area charges the same rate.” Id at 12. Rejecting that argument, the court found that “the hourly rates of bankruptcy practitioners must be commensurate with the hourly rates charged by their peers in other practice areas.” Id. at 12-13, citing Busy Beaver, 19 F.3d at 855-56.

Too Many High-Priced Professionals Won't Work

The U.S. Trustee argued that one of the Debtor's law firms “staffed the case with a disproportionate number of senior personnel, “asserting that senior professional time “constituted approximately 85% of the total hours worked …” Id. at 13, citing Zolfo Cooper v. Sunbeam-Oster Co., Inc., 50 F. 3d 253, 260 (3d Cir. 1995); Ursic v. Bethlehem Mines, 719 F.2d 670, 677 (3d Cir. 1983) (“routine tasks, if performed by senior partners in large firms, should not be billed at their usual rates. A Michelangelo should not charge Sistine Chapel rates for painting a farmer's barn.”). The firm disputed this assertion, but the court asked for more supporting data. Regardless of the outcome, however, the point is clear: senior professionals should be doing high level work, and more routine tasks should be handled by junior professionals.

Professionalism Still Matters

On its own, the court complained about the professionals' “overall conduct,” describing it as “contentious, disorganized and wasteful of the time and efforts of both this court and other counsel.” Id. at 11. Warnings from the court apparently went “unheeded.” Id. The result, of course, would be not only a fee reduction, but also possible disgorgement of fees. Id. The court gave numerous examples of unprofessional conduct:

• Over-litigating. Despite warnings from the court about its interpretation of an order, counsel “continued to argue” in support of a different interpretation, requiring unnecessary hearings, with a waste of “innumerable hours of” court and other lawyers' time. Id. at 12-13. And, on another matter, counsel insisted on discovery and a trial, before conceding at the end of a hearing that “most of the items sought were in fact due by the Debtors.” Id. At 13.
• Flouting Procedural Safeguards. After the court denied the debtors' proposed abbreviated procedure for rejecting leases (short notice, without further court order), counsel continued to seek the summary rejection of leases and to make last-minute changes in the relief sought. Id. at 13-14.
• Shifting Positions. An “inordinate number of pleadings” were belatedly “modified by counsel for the Debtors,” in an apparent “effort … to gain an advantage over opposing parties.” Id. at 14-15. Worse, the debtors sought “relief to which … [they] may not be entitled in the hope that it will be granted when no one objects.” Id. Aside from any ethical issue, these tactics, in Judge Walrath's view, wasted the time of the court and other counsel. Id.
• Delaying Tactics. In response to claims by reclamation claimants, the Debtors moved for a streamlined procedure, but the court later had to reject their modified procedure as inadequate. Id. at 15-16. When the debtors belatedly came back again with a blanket legal attack,” the court described the professionals' prior factual “analysis” as “simply academic and of no value to the estate — a delaying tactic, wasting the Debtors' and this court's precious time.” Id.
• Deliberately Misleading, Pre-judicial Flouting of Court Orders. The Debtors had agreed to submit an order consistent with a Canadian court's ruling on the applicability of a claim filing deadline to Canadian creditors. On two occasions, however, counsel submitted proposed orders inconsistent with the ruling of the Canadian court, requiring Judge Walrath herself “to modify the order” submitted by debtor's counsel. Id. at 16. Because the Canadian order was only three pages long, the court found the professionals' conduct to be “deliberate and an effort to mislead or prejudice the Canadian creditors.” Id.
• Inappropriate Litigation Tactics. In the sale of the Debtors' assets, some 500 nondebtor contracting parties were unnecessarily forced by the Debtors to litigate the “cure amount” of their contracts. Id. at 26-27. Noting the debtor's recalcitrance, the court “declined” to preside over trials involving “literally thousands of contracts, numerous factual and legal issues,” requiring “advisory” opinions. When the court did schedule a trial, however, “the Debtors filed a last minute request for a continuance, asserting” a need for “additional discovery.” Id.
• Unnecessary Work. The Debtors filed “emergency” motions 30% of the time, when many “were routine motions” with no conceivable “excuse.” Id. at 18. The “estate should not have to pay attorneys' fees … necessitated by counsel's failure to act timely.” Id.
• Unnecessary Expenses. The court found unnecessary copies of pleadings in hearing binders — “copies of certificates of service and the extensive service lists and related pleadings … no longer relevant to the matter … to be heard, “plus “copies of objections which had already been resolved … ” Id. at 17-18. Aside from the expense, the court noted its having “continually reprimanded counsel for this” conduct. Id.

Conclusion

Judge Walrath described an ugly problem. Its apparent existence in the Fleming case affects the rest of the profession. How does the problem get fixed? A court ruling such as this one only deals with the particular facts before the court. Legislating common sense will not work. Nor did the court's warnings to the professionals here apparently work.

Other judges and other U.S. Trustees have to be encouraged, when they do their job, as they did here. Parties often do not want to spend the necessary money on a fee attack, and their professionals usually do not want to attack their colleagues. It is also naive to think that clients will always rein in their lawyers. In the end, lawyers have to discipline themselves or face the possibility of a fee reduction, sanctions or an unflattering judicial ruling. But the bar cannot engage in the proper critical self-evaluation unless it is regularly reminded to steer clear of conduct that hurts clients and the profession. Judge Walrath gave us that detailed reminder in Fleming with plenty of concrete examples, and it hurts.

How does a bankruptcy professional get the court's attention on fees? Chief Bankruptcy Judge Mary F. Walrath of the District of Delaware answered the question with a detailed 33-page opinion on Dec. 23, 2003. In re Fleming Companies, Inc., et al, 2003 Bankr. LEXIS 1727 (Bankr. D. Del. 2003). Disposing of an objection by the United States Trustee to interim professional fee applications, Judge Walrath said she would “reduce the fees requested by the Debtors' professionals.” Id. at 5. Not exactly the kind of attention any lawyer wants.

The affected professionals still have an opportunity to supplement the record, and the facts may eventually be restated. But it is the court's perception of the facts that has the greatest impact for all practitioners. The identities of the professionals are not important, and will not be discussed. Rather, the focus here is on the conduct that will cause an experienced judge to cut professional fees.

Common sense apparently drove the court's scolding of the professionals in Fleming. Even so, a quick review of the facts shows that professionals have to be reminded regularly of some common pitfalls:

• Not listening;
• Overstaffing;
• Lack of team coordination;
• Inflated hourly rates;
• Unnecessarily high-priced staffing; and
• Unnecessary litigation.

Set forth below are the details of the court's findings with a checklist of practical tips.

The United States Trustee Is Watching

The objection in Fleming was made by the U.S. Trustee, not by a disgruntled litigant. The U.S. Trustee is required to monitor fee applications, and may comment on these applications at any fee hearing. 28 U.S.C. ' 586(a)(3)(H). According to the court, the U.S. Trustee is “the 'watchdog' of the Chapter 11 system, charged with the duty to assure that the spirit and substance of the Bankruptcy Code is followed.” Id. at 6. We can only speculate as to what drove the U.S. Trustee, aside from a statutory directive, to make the objection here. Based on the court's description of its repeated and unheeded warnings to the professionals, the U.S. Trustee probably had no choice.

The Bankruptcy Judge Is Also Watching

The court noted its own “independent duty to review fee requests of all professionals … to assure that the services rendered were necessary and appropriate and that the fees requested are reasonable.” Id. at 6-7, citing In re Busy Beaver Building Centers, Inc., 19 F.3d 833, 841, 844 (3d Cir. 1994) (court “must protect the estate, lest overreaching attorneys or other professionals drain it of wealth which by right should inure to the benefit of unsecured creditors”). Citing Bankruptcy (Code) ' 30(a)(4)(A), the court also stressed that it “should not allow compensation for 1) unnecessary duplication of services, or 2) services that were not i) reasonably likely to benefit the debtor's estate; or ii) necessary to the administration of the case.” The court's inquiry should be objective, it explained, “based upon what services, a reasonable lawyer or legal firm would have performed in the same circumstances,” citing In re Ames Department Stores, Inc., 76 F.3d 66, 72 (2d Cir. 1996).

Listen to the Court's Warnings

The court stressed that “many of the actions taken by Debtors' counsel … were improper or appeared to be designed to frustrate the legitimate rights of the other parties in this case.” Id. at 7-8. More important, the court had warned counsel “on numerous occasions … that it considered their actions inappropriate.” Id. Still, “at virtually every hearing … the court was presented with additional evidence of improper actions by counsel,” resulting in a further warning that the court intended “to reduce their fees because of this activity.” Id.

The court still gave the affected professionals a chance to submit further evidence. Regardless of the eventual outcome, however, there is an important truth for professionals who apply to the court for compensation in a bankruptcy case: Until and unless the court finally allows fees, the professional firm cannot consider itself paid. In re Taxman Clothing, Inc., 49 F.3d 310, 316 (7th Cir. 1995) (held, trustee's counsel breached fiduciary duty to estate by pursuing suit that reasonable attorney would have known was not cost-effective; although claims pursued worth $33,000, counsel received interim fees of $85,000; services worth only $7000, and counsel forced to disgorge balance; “Even after the passage of [Code] ' 330(a)(1), bankruptcy is not intended to be a feast for lawyers.”); In re A.H. Robins Co., Inc., 86 F.3d 364, 378 (4th Cir. 1996) (court had “obligation to investigate” complaints about large fees paid to claimants' counsel, plus “jurisdiction and authority to remedy the situation …”). In short, a bankruptcy professional must satisfy not only its client, but also the court.

Overstaffing Won't Work

The U.S. Trustee in Fleming objected that the “number of attorneys for the debtors … was excessive, particularly the number present at each hearing,” constituting an “unnecessary duplication of effort … ” Id. at 8-9. Indeed, the court found that “on average there were five to six attorneys representing the Debtors at every hearing …” Id. According to the court, “counsel for the Debtors have not adequately demonstrated that each attorney present contributed to the hearing in a meaningful way.” Id. One firm had at least two attorneys in attendance at every hearing: one attorney coordinating the matter, and another handling discrete tasks. One of the firms identified specific tasks performed by each attorney, but described one of them as the “leading hearing attorney.” Again, the court found that unless a lawyer handles a specific matter, “the estate should not be charged with her time,” nor should the estate be “charged for attorneys whose matters have concluded with the time spent by them waiting for other matters to end.” Id.

Coordinate the Team's Efforts

Professionals often argue that intra-office conferences are necessary for coordination, but the court found here that “their coordination ha[d] been abysmal … [O]pposing counsel had often represented in court that an agreement had been reached “with one particular lawyer, but the debtor's courtroom counsel had disclaimed knowledge of any agreement. Id. at 9-10. “The situation became so grave that at one hearing, a recess was ordered while counsel for the Debtors was directed to put additional counsel, who had actually been dealing with a specific creditor, on the phone.” Id. According to the court, in “most instances, the creditor was correct and counsel for the Debtors in the courtroom was incorrect.” Id. The court was not troubled by the concept of intra-office conferences for the sake of efficiency, but found it lacking here. Judge Walrath was troubled also by the huge number of time entries (3700 for one firm, and 1600 for the other) showing conferences, and directed the parties to provide additional detail in order to “assess the reasonableness” of meetings. Id.

Higher Billing Rates for Bankruptcy Professionals Won't Work

One of the debtor's law firms, according to the U.S. Trustee, “charged higher rates for the services of bankruptcy attorneys than for services of comparable non-bankruptcy attorneys with similar experience.” Id. at 11. The court agreed with the U.S. Trustee. The law firm, however, said “the issue was whether the specific attorney with bankruptcy expertise charges the same rate for debtors, creditors or other interested parties in a bankruptcy matter, not whether another attorney with the same experience in another practice area charges the same rate.” Id at 12. Rejecting that argument, the court found that “the hourly rates of bankruptcy practitioners must be commensurate with the hourly rates charged by their peers in other practice areas.” Id. at 12-13, citing Busy Beaver, 19 F.3d at 855-56.

Too Many High-Priced Professionals Won't Work

The U.S. Trustee argued that one of the Debtor's law firms “staffed the case with a disproportionate number of senior personnel, “asserting that senior professional time “constituted approximately 85% of the total hours worked …” Id. at 13, citing Zolfo Cooper v. Sunbeam-Oster Co., Inc. , 50 F. 3d 253, 260 (3d Cir. 1995); Ursic v. Bethlehem Mines , 719 F.2d 670, 677 (3d Cir. 1983) (“routine tasks, if performed by senior partners in large firms, should not be billed at their usual rates. A Michelangelo should not charge Sistine Chapel rates for painting a farmer's barn.”). The firm disputed this assertion, but the court asked for more supporting data. Regardless of the outcome, however, the point is clear: senior professionals should be doing high level work, and more routine tasks should be handled by junior professionals.

Professionalism Still Matters

On its own, the court complained about the professionals' “overall conduct,” describing it as “contentious, disorganized and wasteful of the time and efforts of both this court and other counsel.” Id. at 11. Warnings from the court apparently went “unheeded.” Id. The result, of course, would be not only a fee reduction, but also possible disgorgement of fees. Id. The court gave numerous examples of unprofessional conduct:

• Over-litigating. Despite warnings from the court about its interpretation of an order, counsel “continued to argue” in support of a different interpretation, requiring unnecessary hearings, with a waste of “innumerable hours of” court and other lawyers' time. Id. at 12-13. And, on another matter, counsel insisted on discovery and a trial, before conceding at the end of a hearing that “most of the items sought were in fact due by the Debtors.” Id. At 13.
• Flouting Procedural Safeguards. After the court denied the debtors' proposed abbreviated procedure for rejecting leases (short notice, without further court order), counsel continued to seek the summary rejection of leases and to make last-minute changes in the relief sought. Id. at 13-14.
• Shifting Positions. An “inordinate number of pleadings” were belatedly “modified by counsel for the Debtors,” in an apparent “effort … to gain an advantage over opposing parties.” Id. at 14-15. Worse, the debtors sought “relief to which … [they] may not be entitled in the hope that it will be granted when no one objects.” Id. Aside from any ethical issue, these tactics, in Judge Walrath's view, wasted the time of the court and other counsel. Id.
• Delaying Tactics. In response to claims by reclamation claimants, the Debtors moved for a streamlined procedure, but the court later had to reject their modified procedure as inadequate. Id. at 15-16. When the debtors belatedly came back again with a blanket legal attack,” the court described the professionals' prior factual “analysis” as “simply academic and of no value to the estate — a delaying tactic, wasting the Debtors' and this court's precious time.” Id.
• Deliberately Misleading, Pre-judicial Flouting of Court Orders. The Debtors had agreed to submit an order consistent with a Canadian court's ruling on the applicability of a claim filing deadline to Canadian creditors. On two occasions, however, counsel submitted proposed orders inconsistent with the ruling of the Canadian court, requiring Judge Walrath herself “to modify the order” submitted by debtor's counsel. Id. at 16. Because the Canadian order was only three pages long, the court found the professionals' conduct to be “deliberate and an effort to mislead or prejudice the Canadian creditors.” Id.
• Inappropriate Litigation Tactics. In the sale of the Debtors' assets, some 500 nondebtor contracting parties were unnecessarily forced by the Debtors to litigate the “cure amount” of their contracts. Id. at 26-27. Noting the debtor's recalcitrance, the court “declined” to preside over trials involving “literally thousands of contracts, numerous factual and legal issues,” requiring “advisory” opinions. When the court did schedule a trial, however, “the Debtors filed a last minute request for a continuance, asserting” a need for “additional discovery.” Id.
• Unnecessary Work. The Debtors filed “emergency” motions 30% of the time, when many “were routine motions” with no conceivable “excuse.” Id. at 18. The “estate should not have to pay attorneys' fees … necessitated by counsel's failure to act timely.” Id.
• Unnecessary Expenses. The court found unnecessary copies of pleadings in hearing binders — “copies of certificates of service and the extensive service lists and related pleadings … no longer relevant to the matter … to be heard, “plus “copies of objections which had already been resolved … ” Id. at 17-18. Aside from the expense, the court noted its having “continually reprimanded counsel for this” conduct. Id.

Conclusion

Judge Walrath described an ugly problem. Its apparent existence in the Fleming case affects the rest of the profession. How does the problem get fixed? A court ruling such as this one only deals with the particular facts before the court. Legislating common sense will not work. Nor did the court's warnings to the professionals here apparently work.

Other judges and other U.S. Trustees have to be encouraged, when they do their job, as they did here. Parties often do not want to spend the necessary money on a fee attack, and their professionals usually do not want to attack their colleagues. It is also naive to think that clients will always rein in their lawyers. In the end, lawyers have to discipline themselves or face the possibility of a fee reduction, sanctions or an unflattering judicial ruling. But the bar cannot engage in the proper critical self-evaluation unless it is regularly reminded to steer clear of conduct that hurts clients and the profession. Judge Walrath gave us that detailed reminder in Fleming with plenty of concrete examples, and it hurts.