Bankruptcy Watchdogs Seek Greater Scrutiny of Legal Fees

The appointment of a fee examiner to monitor legal bills in Detroit’s Chapter 9 case comes in the midst of a push by the Department of Justice to crack down on the perception of bankruptcy as a billing bonanza for attorneys.

Starting Nov. 1, attorneys representing large corporate debtors in Chapter 11 will be subject to additional disclosures and rules. Debtors will also face a bigger push to ensure that someone—namely, a fee examiner—is keeping an eye on the meter, which in large bankruptcy cases often runs into the tens of millions of dollars.

“It’s something in these larger cases that we think ought to be done with greater frequency,” Clifford J. White III, who leads the Justice Department unit responsible for monitoring bankruptcy cases and enforcing bankruptcy laws, said Tuesday.

On a call sponsored by the American Bankruptcy Institute, Mr. White explained the hallmarks of the new fee guidelines that his cadre of bankruptcy watchdogs, called U.S. trustees, will use to evaluate attorney fee requests in bankruptcy courts across the country. In Chapter 11, a debtor must secure court approval for its choice of lawyers, and their fees are also subject to court approval as well as public scrutiny.

While U.S. trustees can, and often do, object to legal fee applications, some of the biggest bankruptcy cases regularly involve dozens of law firms that submit extensive invoices throughout the case. In those cases, the court may appoint an independent fee examiner to make sure the fees are reasonable and to point out any red flags to the bankruptcy judge. There’s a fee examiner in the American Airlines Chapter 11 case, for instance, and one was just appointed in Detroit’s Chapter 9 bankruptcy case.

Having a fee examiner not only ensures that legal fees are reasonable but also serves as an important deterrent, Mr. White said.

“You’re going to receive fee reductions before the fee application has ever been filed,” Mr. White said, adding that such examiners can keep lawyers “on their toes.”

Driving the new guidelines is the desire to confront a perception that bankruptcy is a boon for lawyers who take advantage of their clients’ distress to charge high rates of $1,000 an hour (or more). Despite the hand-wringing as the new guidelines were being drafted, Mr. White said the U.S. Trustee Program’s aim is to restore public confidence in the bankruptcy process.

“All of us win if bankruptcy lawyers are paid through a transparent, market-driven system,” he said.

Write to Jacqueline Palank at [email protected]. Follow her on Twitter at @PalankJ.