Cap on Legal Fees in Bankruptcy Alarms Firms

Expressions of Surprise

Lawyers involved in the case, who agreed to speak anonymously, expressed surprise at the hourly rate cap, an unusual tactic in a bankruptcy proceeding. Still, moves involving hourly fees are becoming more common as judges in large bankruptcies have begun to question high billing rates.

“More and more judges are seeking to impose caps on hourly rates,” said Joseph Eisenberg, a partner at Los Angeles-based Jeffer, Mangels, Butler & Marmaro, one of the firms representing the IndyMac bankruptcy trustee. The caps are due in part to rates that have reached $1,000 per hour, he said.

A Trend?

In most bankruptcies, judges approve legal costs, but rarely interfere with a lawyer's hourly rates. But in February, a bankruptcy judge in Delaware refused to approve a $1,100 hourly fee requested by Sidley Austin in the Tribune Co. bankruptcy. The judge ultimately approved a top hourly fee of $925.

Lawyers involved in the IndyMac case said that they had not previously heard of any cap imposed on defense lawyers in bankruptcies. In most cases, discussions about hourly rates occur between lawyers and the directors-and-officers insurance carrier.

A decade ago, judges in bankruptcies frequently imposed caps on hourly rates, said Lynn LoPucki, a professor at the UCLA School of Law. But in recent years, many judges, in part because they feared lawyers would forum-shop to avoid caps, have been wary of rejecting a request for compensation based on a lawyer's hourly billing rate.

“Fee caps are a ghost of the past in the bankruptcy world,” LoPucki said. “So it probably sends a shudder down the spine of any lawyer who works in the bankruptcy court to hear that there's somebody out there imposing fee caps.”

Last fall, lawyers representing IndyMac's directors and officers, many of whom are named as defendants in related shareholder lawsuits, sought to obtain compensation from the bank's insurance carrier. U.S. Bankruptcy Judge Sheri Bluebond of the Central District of California referred the issue to Dickran Tevrizian, a retired federal judge for the Central District of California now at JAMS, a mediation and arbitration firm. In December, Tevrizian, as the court-appointed monitor, set an aggregate cap of $1 million per month and on his own initiative imposed an additional fee cap of $600 per hour.

In court papers, defense lawyers argued that such a restriction was “fundamentally unfair” to directors and officers, “who are entitled to the best possible counsel to defend them against the slew of lawsuits and investigations relating to IndyMac's failure.”

On Jan. 30, Bluebond refused to intervene.

Amanda Bronstad is a reporter for The National Law Journal, an Incisive Media sister publication of this newsletter, in which this article first appeared. She can be reached at [email protected].

Lawyers representing directors and officers of IndyMac Bancorp Inc. are attempting to remove a cap on their billing rates, the latest example of how judges are scrutinizing hourly fees in large bankruptcies.

IndyMac, one of the nation's largest mortgage lenders, filed for Chapter 7 protection on July 31, 2008. Six law firms representing more than a dozen directors and officers recently appealed to the bankruptcy judge in the case to overturn a court-appointed monitor's decision to cap their fees at $600 per hour. Four of the firms ' Washington's Covington & Burling and Williams & Connolly; Los Angeles-based Munger, Tolles & Olson; and New York's Willkie Farr & Gallagher ' charge top rates of between $750 and $995 per hour, according to court documents.The judge has declined to intervene.

Meanwhile, the trustee sought to reduce the hourly rates of some of its key lawyers for the remainder of the case. Most of their requests for compensation for the quarter that ended in March 2009 were approved on May 7.

Expressions of Surprise

Lawyers involved in the case, who agreed to speak anonymously, expressed surprise at the hourly rate cap, an unusual tactic in a bankruptcy proceeding. Still, moves involving hourly fees are becoming more common as judges in large bankruptcies have begun to question high billing rates.

“More and more judges are seeking to impose caps on hourly rates,” said Joseph Eisenberg, a partner at Los Angeles-based Jeffer, Mangels, Butler & Marmaro, one of the firms representing the IndyMac bankruptcy trustee. The caps are due in part to rates that have reached $1,000 per hour, he said.

A Trend?

In most bankruptcies, judges approve legal costs, but rarely interfere with a lawyer's hourly rates. But in February, a bankruptcy judge in Delaware refused to approve a $1,100 hourly fee requested by Sidley Austin in the Tribune Co. bankruptcy. The judge ultimately approved a top hourly fee of $925.

Lawyers involved in the IndyMac case said that they had not previously heard of any cap imposed on defense lawyers in bankruptcies. In most cases, discussions about hourly rates occur between lawyers and the directors-and-officers insurance carrier.

A decade ago, judges in bankruptcies frequently imposed caps on hourly rates, said Lynn LoPucki, a professor at the UCLA School of Law. But in recent years, many judges, in part because they feared lawyers would forum-shop to avoid caps, have been wary of rejecting a request for compensation based on a lawyer's hourly billing rate.

“Fee caps are a ghost of the past in the bankruptcy world,” LoPucki said. “So it probably sends a shudder down the spine of any lawyer who works in the bankruptcy court to hear that there's somebody out there imposing fee caps.”

Last fall, lawyers representing IndyMac's directors and officers, many of whom are named as defendants in related shareholder lawsuits, sought to obtain compensation from the bank's insurance carrier. U.S. Bankruptcy Judge Sheri Bluebond of the Central District of California referred the issue to Dickran Tevrizian, a retired federal judge for the Central District of California now at JAMS, a mediation and arbitration firm. In December, Tevrizian, as the court-appointed monitor, set an aggregate cap of $1 million per month and on his own initiative imposed an additional fee cap of $600 per hour.

In court papers, defense lawyers argued that such a restriction was “fundamentally unfair” to directors and officers, “who are entitled to the best possible counsel to defend them against the slew of lawsuits and investigations relating to IndyMac's failure.”

On Jan. 30, Bluebond refused to intervene.

Amanda Bronstad is a reporter for The National Law Journal, an Incisive Media sister publication of this newsletter, in which this article first appeared. She can be reached at [email protected].