Backlash Against Bankruptcy Fees

You know where this is going when the reporters start with sarcasm:

MORE than $263,000 for photocopies in four months. Over $2,100 in limousine rides by one partner in one month. And $48 just to leave a message. Explanations for these charges? Priceless.

We’re the first to admit that legal fees are getting out of control, but this Times article about the Lehman bankruptcy fees is a perfect example of conflating the issues.

The lawyers, accountants and restructuring experts overseeing the remains of Lehman Brothers have already racked up more than $730 million in fees and expenses, with no end in sight. Anyone wondering why total fees doled out in the Lehman bankruptcy alone could easily touch the $1 billion mark merely has to look at the bills buried among the blizzard of court documents filed in the case.

A billion dollars in fees is certainly notable and newsworthy, no question.

After the jump, we take exception with the categorization.





The problem we have with this article, and articles like this, is that it starts with the absurdities, like:

• $364.14 in dry cleaning
• more than a week at the Sherry-Netherland hotel in Manhattan last summer, where one lawyer’s room cost $685 a night
• $2.54 for “gum in airport”
• $18 fitness-club charge at a hotel

and, of course, the big bugaboo

• first- and second-year associates charging more than $500 an hour in some of these bankruptcy cases

Times image

That’s not how you get to $1 billion in fees (or $730 million, which is the current total). That’s just a spin on reductio ad absurdum. Point out trivialities and extrapolate those out to show that the whole fee must comprise these sorts of charges.

Harvey Miller gets us back on track:

“The legal skill we used to sell Lehman’s North American capital markets business to Barclays saved 10,000 jobs and preserved the business itself, capturing value that otherwise would have been lost,” said Harvey Miller, 77, a Weil partner who is considered the dean of the bankruptcy bar.

I haven’t heard anyone complaining about paying his rate (which is just under the $1,000 per hour highwater mark the article also cites).

Even a law professor agrees the fees may be justified!

Many people in the industry agree that Lehman, in particular, is a huge case that tests even the most experienced lawyers. “Lehman is a sufficiently complicated company that it would be safe to assume that if it weren’t for equally sophisticated professionals running the Chapter 11 case, that the creditors would essentially receive nothing,” says Stephen J. Lubben, a professor at the Seton Hall University School of Law. “In those situations, it makes sense for sophisticated professionals to handle the case.”

And that’s the problem we’ve been talking about for so long, and which isn’t distinguished in this article:

At the top of the law firm pyramid, there are people like Miller whose value is unquestioned.

Wouldn’t you pay $1 billion to increase the recovery by $4-5 billion?

“The size of this case justifies the size of the fees,” says Mr. Marsal, shrugging as he sits in a conference room at Lehman’s headquarters in Midtown Manhattan. Mr. Marsal and Mr. Suckow estimate that they have increased the potential recovery value for Lehman creditors by $4 billion to $5 billion in the last year.

At the bottom are the junior associates, whose value proposition is clearly under fire. In our view, they’ve become a loss leader when having Miller on your deal is imperative.

Ken Feinberg, who knows a little about complex cases, points to that as the problem, too.

“Unemployment is over 9 percent, and to be paying first-year associates $500 an hour angers the public,” he observes. “People read about all of this and say that lawyers and the legal system are one more example of Wall Street out of control.”

That’s a lame duck argument, though. If you’re angry about high wages because you’re unemployed, then you’ll be twice as angry about the higher wages Miller and the partners are making.

Forgive us for reading between the lines, but we agree with what we think he’s implying: there’s a disconnect between the value a newly hired lawyer offers and the amount he’s paid.

Miller, of course, is capable of defending himself:

“Mr. Feinberg doesn’t know what he’s talking about,” says Mr. Miller. “We don’t generally give discounts. Just because bankruptcy has been the hot legal area for the last 19 months doesn’t demand you cut fees.”

Then there’s the third category, which is those nonsense incidental charges. Frankly, the person who charged back the pack of gum is just a douchebag. Whatever the policies are, that person has no class and is always going to be doing stupid things like that and making the industry look bad. We also lump in with them the dolts who don’t read the hotel bill and who otherwise wait for clients to find errors to correct bills.

The people in the third class aren’t a problem with the business model, they’re a problem with people.

Nor will solving the photocopying and hotel charges solve anything, but it makes it look like Feinberg got concessions.

Among the new fee rules being enforced are these: Air travel must be in coach class only. Ground transportation is limited to $100 a day, and only after 8 p.m. Hotel rooms are capped at $500 a night. Photocopy charges are limited to 10 cents a page. Late meals can’t be more than $20 each.

At least he’s serious about it.

Actually, we hope he’s using the additional money he’s getting (his budget for overseeing the bills is being increased to $250,000 per month from $75,000) on the bigger items, even as the smaller make for more catch pronouncements

Already, he’s called out Jones, Day, saying it charged $70,800 extra for photocopying and spent $2,856 too much on taxi rides last summer. According to court filings, a Jones, Day partner, William Hine, claimed more than $2,100 for late-night rides home in one month. Milbank, according to court filings, charged $148,426 just to compile its bills and time records — a move akin to a doctor charging a patient to prepare a bill after expensive, complex surgery.

To put it in context, that $70,800 constitutes less than one-one hundredth of one percent of the total fees to date (0.00969863%). (There’s another whole piece in whether bankruptcy practice plays fast and loose with staffing and billing, but that’s not the main point here)

And for what it’s worth, Miller and his partners are going to make up the shortfall out of their own pockets to ensure their people are at least made whole and practicing in reasonable comfort.

But don’t get him started on discounts!  He’s still feuding with Brady Williamson, the examiner in the GM case.

“If you had cancer and you were going into an operation, while you were lying on the table, would you look at the surgeon and say, ‘I’d like a 10 percent discount,’ ” he explains. “This is not a public, charitable event.”

And there we are again, right where we started at the beginning.  Conflating the issue of high fees and no discounts for the senior lawyers doing the real, difficult work, and the ticky tack expenses for photocopying and late meals.

Tagged as: bankruptcy, gm, jones day, kaye scholer, lehman, milbank tweed, weil gotshal