The DOJ's New Fee Application Guidelines

The new guidelines become effective Nov. 1, 2013 and apply to all attorneys retained under sections 327 or 1103 of the Bankruptcy Code in Chapter 11 cases with at least $50 million in aggregate assets and liabilities. Phrased differently, the new guidelines do not apply to single-asset real estate cases, non-attorney applicants, Chapter 7 liquidations and cases involving less than $50 million in total assets or liabilities.

Most notably, the new guidelines introduce a different standard for evaluating the “reasonableness” of an applicant's fees, require the submission of complete electronic billing records in searchable format, impose new disclosure obligations, and call for attorneys to provide detailed budgets and staffing plans.

Among the more controversial changes, fees will now be scrutinized using a “comparable services standard,” which compares the compensation requested to “market” prices, determined by analyzing the billing practices of the applicant firm and its peers for both bankruptcy and non-bankruptcy engagements. In particular, applicants must provide two blended hourly rates to demonstrate the “reasonableness” of their requested compensation compared with the “market rate” for such services.

First, applicants must provide the blended hourly rate, either billed or collected during the preceding year (on either a fiscal or 12-month rolling basis), for the aggregate of either: 1) all domestic timekeepers; or 2) all timekeepers in each domestic office that billed at least 10% of the hours to the bankruptcy case during the application period.

To calculate this rate, divide the sum of all fees billed/collected during the applicable time period by the number of hours billed during that period. Applicants must also provide the blended hourly rate for each category of professional billing time to the estate.

When calculating these rates, full-service firms should exclude hours billed: 1) on bankruptcy engagements; and 2) by bankruptcy professionals. Specialized bankruptcy firms should exclude hours spent on the case at hand. And, all applicants can exclude time billed to pro bono engagements and materially discounted work for employee-clients and charitable organizations.'

But, applicants should include discounted or alternative fee arrangements. For instance, information regarding any fee arrangement for which the applicant tracks hours and revenue by hours worked should be included. Likewise, if the applicant's calculation includes any fee arrangements not billed by the hour, it should provide a concise explanation of the methodology used to calculate the blended hourly rate.

Second, applicants must provide the blended hourly rate for all timekeepers billing time to the bankruptcy case during the application period. The blended rate must also be provided for each category of professional billing time to the estate.

To substantiate these rates, applicants must submit electronic billing records to: 1) the court, the debtor (or trustee), any official committees, the U.S. Trustee, and any fee review committee, fee examiner, or fee auditor; and 2) any other party-in-interest, upon request. Obviously, providing such information without revealing client confidences or the applicant's case strategy presents challenges. But, such challenges are not novel to seasoned bankruptcy professionals (the previous guidelines required the submission of similar information). And, the U.S. Trustee's view is that, since practitioners should understand that their billing records will become publicly available, they should take pains when initially entering their time to avoid disclosing sensitive information. Although many practitioners lament that time spent complying with these requirements would be better spent solving pressing client problems; it is the price one must pay for the privilege of representing the estate.

Enhanced Disclosure Obligations

Relatedly, the new guidelines' enhanced disclosure obligations for both applicants and clients could unintentionally increase the administrative costs of bankruptcy proceedings and distract key personnel at a crucial moment in the life of their businesses. By way of example, the new guidelines require applicants to disclose: 1) whether their requested compensation varies from their customary billing practices; 2) whether any professionals altered their billing rate based on the geographic location of the case; and 3) the billing rates and material terms of any representation of the client during the 12 months immediately preceding the petition date and an explanation for any changes in such terms postpetition.

Similarly, clients must provide a detailed and individually tailored verification regarding: 1) the steps they took to ensure that the applicant's billing rates and material retention terms are comparable to its billings rates and terms for non-bankruptcy engagements and the billing rates of similarly skilled professionals; 2) the number of firms they interviewed; 3) the circumstances warranting the retention of the applicant, if its billing rates differ from “market” rates; and 4) the procedures they established to supervise the applicant's fees and expenses and manage costs. Although these requirements may help curtail rising bankruptcy fees, they could actually accelerate the trend and compound a client's problems by distracting key personnel.'

Detailed Budgets and Staffing Plans

Another controversial aspect of the new guidelines relates to provisions enabling U.S. Trustees to require applicants to create detailed budgets and staffing plans by which to evaluate their actual costs as the case proceeds. Given that bankruptcy cases rarely proceed in a perfectly linear fashion or as smoothly as perhaps initially anticipated, extreme care must be taken when crafting such budgets and plans. Indeed, any application seeking compensation for fees exceeding the budget by 10% or more, or for a greater number of professionals than originally proposed will be closely scrutinized. As such, applicants should clearly articulate the assumptions underpinning their budgets and staffing plans and explain how such estimates could change materially if particular assumptions prove inaccurate. As any experienced bankruptcy practitioner knows, myriad complicated issues can arise in even seemingly straightforward insolvency proceedings and litigious parties can pop up unexpectedly and cause litigation costs to balloon.'

Beyond potentially curtailing professional fees by providing benchmarks by which to evaluate the reasonableness of an applicant's fees and staffing choices, these budgets and staffing plans could have the salutary effect of encouraging firms to outsource “commoditized” or “routine” tasks to outside counsel. As long as lead counsel selects highly competent and economically priced co-counsel, this outsourcing can considerably conserve estate resources at a time when companies must be exceedingly parsimonious. Extreme care must be taken when delegating tasks to outside counsel, however, because failure to communicate effectively can result in issues “falling through the cracks” or outside counsel incurring unnecessary or duplicative fees.'

Conclusion

The new guidelines may help stem the tide in rising bankruptcy costs, but they are misguided in one significant respect. Specifically, their goal of removing any “premium rates” from bankruptcy-associated fees fails to adequately appreciate the unique risks posed by representing entities in financial distress. In short, the entities bankruptcy practitioners represent typically present a far greater credit risk than those their litigation and corporate colleagues represent. Axiomatically, absent appropriate compensation for assuming this increased risk, some practitioners may be deterred from assisting such clients in their time of greatest need.

Time will tell whether the new guidelines achieve their goals. And, should the new guidelines prove unduly disruptive, costly, or lead to inconsistent or arbitrary results, the U.S. Trustee will presumably integrate practitioners' concerns, as they have throughout this process.

Timothy Walsh is international head of the Restructuring & Insolvency practice at the law firm of McDermott Will & Emery LLP. Gregory Kopacz is an associate.

Compensation for attorneys specializing in navigating failed enterprises through the bankruptcy maze has skyrocketed in recent years. Not only have rates of some premier bankruptcy attorneys soared to over $1,000 per hour, but large cases often produce fees in amounts that resemble long distance telephone numbers.

In response to perceived excesses in the bankruptcy compensation process, the United States Trustee Program recently introduced new fee application guidelines for qualifying engagements. The new guidelines seek to: 1) subject bankruptcy attorneys to the same client-driven market forces and scrutiny facing non-bankruptcy attorneys; 2) increase disclosure, transparency and public confidence in bankruptcy compensation process; and 3) remove “premium rates” from bankruptcy-associated fees. Whether the new guidelines will achieve these goals remains to be seen. But, what is abundantly clear is that, as the fee application process continues to evolve, bankruptcy practitioners must remain nimble and adapt accordingly.

What to Expect

The new guidelines become effective Nov. 1, 2013 and apply to all attorneys retained under sections 327 or 1103 of the Bankruptcy Code in Chapter 11 cases with at least $50 million in aggregate assets and liabilities. Phrased differently, the new guidelines do not apply to single-asset real estate cases, non-attorney applicants, Chapter 7 liquidations and cases involving less than $50 million in total assets or liabilities.

Most notably, the new guidelines introduce a different standard for evaluating the “reasonableness” of an applicant's fees, require the submission of complete electronic billing records in searchable format, impose new disclosure obligations, and call for attorneys to provide detailed budgets and staffing plans.

Among the more controversial changes, fees will now be scrutinized using a “comparable services standard,” which compares the compensation requested to “market” prices, determined by analyzing the billing practices of the applicant firm and its peers for both bankruptcy and non-bankruptcy engagements. In particular, applicants must provide two blended hourly rates to demonstrate the “reasonableness” of their requested compensation compared with the “market rate” for such services.

First, applicants must provide the blended hourly rate, either billed or collected during the preceding year (on either a fiscal or 12-month rolling basis), for the aggregate of either: 1) all domestic timekeepers; or 2) all timekeepers in each domestic office that billed at least 10% of the hours to the bankruptcy case during the application period.

To calculate this rate, divide the sum of all fees billed/collected during the applicable time period by the number of hours billed during that period. Applicants must also provide the blended hourly rate for each category of professional billing time to the estate.

When calculating these rates, full-service firms should exclude hours billed: 1) on bankruptcy engagements; and 2) by bankruptcy professionals. Specialized bankruptcy firms should exclude hours spent on the case at hand. And, all applicants can exclude time billed to pro bono engagements and materially discounted work for employee-clients and charitable organizations.'

But, applicants should include discounted or alternative fee arrangements. For instance, information regarding any fee arrangement for which the applicant tracks hours and revenue by hours worked should be included. Likewise, if the applicant's calculation includes any fee arrangements not billed by the hour, it should provide a concise explanation of the methodology used to calculate the blended hourly rate.

Second, applicants must provide the blended hourly rate for all timekeepers billing time to the bankruptcy case during the application period. The blended rate must also be provided for each category of professional billing time to the estate.

To substantiate these rates, applicants must submit electronic billing records to: 1) the court, the debtor (or trustee), any official committees, the U.S. Trustee, and any fee review committee, fee examiner, or fee auditor; and 2) any other party-in-interest, upon request. Obviously, providing such information without revealing client confidences or the applicant's case strategy presents challenges. But, such challenges are not novel to seasoned bankruptcy professionals (the previous guidelines required the submission of similar information). And, the U.S. Trustee's view is that, since practitioners should understand that their billing records will become publicly available, they should take pains when initially entering their time to avoid disclosing sensitive information. Although many practitioners lament that time spent complying with these requirements would be better spent solving pressing client problems; it is the price one must pay for the privilege of representing the estate.

Enhanced Disclosure Obligations

Relatedly, the new guidelines' enhanced disclosure obligations for both applicants and clients could unintentionally increase the administrative costs of bankruptcy proceedings and distract key personnel at a crucial moment in the life of their businesses. By way of example, the new guidelines require applicants to disclose: 1) whether their requested compensation varies from their customary billing practices; 2) whether any professionals altered their billing rate based on the geographic location of the case; and 3) the billing rates and material terms of any representation of the client during the 12 months immediately preceding the petition date and an explanation for any changes in such terms postpetition.

Similarly, clients must provide a detailed and individually tailored verification regarding: 1) the steps they took to ensure that the applicant's billing rates and material retention terms are comparable to its billings rates and terms for non-bankruptcy engagements and the billing rates of similarly skilled professionals; 2) the number of firms they interviewed; 3) the circumstances warranting the retention of the applicant, if its billing rates differ from “market” rates; and 4) the procedures they established to supervise the applicant's fees and expenses and manage costs. Although these requirements may help curtail rising bankruptcy fees, they could actually accelerate the trend and compound a client's problems by distracting key personnel.'

Detailed Budgets and Staffing Plans

Another controversial aspect of the new guidelines relates to provisions enabling U.S. Trustees to require applicants to create detailed budgets and staffing plans by which to evaluate their actual costs as the case proceeds. Given that bankruptcy cases rarely proceed in a perfectly linear fashion or as smoothly as perhaps initially anticipated, extreme care must be taken when crafting such budgets and plans. Indeed, any application seeking compensation for fees exceeding the budget by 10% or more, or for a greater number of professionals than originally proposed will be closely scrutinized. As such, applicants should clearly articulate the assumptions underpinning their budgets and staffing plans and explain how such estimates could change materially if particular assumptions prove inaccurate. As any experienced bankruptcy practitioner knows, myriad complicated issues can arise in even seemingly straightforward insolvency proceedings and litigious parties can pop up unexpectedly and cause litigation costs to balloon.'

Beyond potentially curtailing professional fees by providing benchmarks by which to evaluate the reasonableness of an applicant's fees and staffing choices, these budgets and staffing plans could have the salutary effect of encouraging firms to outsource “commoditized” or “routine” tasks to outside counsel. As long as lead counsel selects highly competent and economically priced co-counsel, this outsourcing can considerably conserve estate resources at a time when companies must be exceedingly parsimonious. Extreme care must be taken when delegating tasks to outside counsel, however, because failure to communicate effectively can result in issues “falling through the cracks” or outside counsel incurring unnecessary or duplicative fees.'

Conclusion

The new guidelines may help stem the tide in rising bankruptcy costs, but they are misguided in one significant respect. Specifically, their goal of removing any “premium rates” from bankruptcy-associated fees fails to adequately appreciate the unique risks posed by representing entities in financial distress. In short, the entities bankruptcy practitioners represent typically present a far greater credit risk than those their litigation and corporate colleagues represent. Axiomatically, absent appropriate compensation for assuming this increased risk, some practitioners may be deterred from assisting such clients in their time of greatest need.

Time will tell whether the new guidelines achieve their goals. And, should the new guidelines prove unduly disruptive, costly, or lead to inconsistent or arbitrary results, the U.S. Trustee will presumably integrate practitioners' concerns, as they have throughout this process.

Timothy Walsh is international head of the Restructuring & Insolvency practice at the law firm of McDermott Will & Emery LLP. Gregory Kopacz is an associate.