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May 6, 2009 5:56 PM

Do Bankruptcy Lawyers Bill Illegally?

Posted by Zach Lowe

In the past few weeks, we've all marveled at the huge amounts Jones Day, Schulte Roth & Zabel, and Weil, Gotshal & Manges have billed in the country's two most-watched Chapter 11 cases (Chrysler for Jones and Schulte, Lehman Brothers for Weil). But we have to admit we haven't stopped to ponder: Are those fees illegal?

According to a new study co-authored by UCLA bankruptcy law professor Lynn LoPucki (hat tip: the Wall Street Journal's Law Blog), the answer might be yes. LoPucki and his co-author, fellow UCLA prof Joseph Doherty, essentially argue that bankruptcy judges allow lawyers to bill their debtor clients for months at a time before submitting those billing statements to the judge for approval, according to Bloomberg. That goes against the federal bankruptcy code, the study argues, and it has allowed legal fees to increase faster than inflation rates. Judges in theory have the option of objecting to those bills and demanding law firms pay back some of the money, but "payments are harder to reverse than to prevent," the study says. 

Nancy Rapoport, a law prof at UNLV, told Bloomberg judges approve the fees without thorough scrutiny "because they are overwhelmed, especially in the big cases." She told Bloomberg she agrees with LoPucki "that the foxes are guarding the henhouse, because lawyers don't want to challenge other lawyers' fees."

One of the titans of the bankruptcy bar did not let the study stand unchallenged. Martin Bienenstock of Dewey & LeBoeuf told Bloomberg that LoPucki "is wrong conceptually and legally," and that "the legislative intent of the Bankruptcy Code's fee provisions is that bankruptcy lawyers should be compensated" promptly. He explained that in many bankruptcy courts, lawyers submit monthly invoices to the debtor, which then pays the invoice amount as long as the U.S. trustee does not object to it, according to Bloomberg. The judges review the payments every three or four months, Bienenstock says. The system is set up to "avoid judges spending time on fee hearings every month."

READERS:  Who's right?  LoPucki or Bienenstock? 

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If stockholders and creditors actually know how some (if not most) of those lawyers and other advisers charged their fees (which include, without the judges and outsiders knowing, hefty fees charged to purchasers of the assets who then reduce the amounts otherwise payable to the company), the sensible conclusion should be that stockholders and creditors are far better off having the company continue to trade, instead of being put into Ch 11, as that only moves most of the funds into the pockets of the advisers and other interested parties who would (in most cases) only generate negative value at the end of the process.

LoPucki is stuck in an academic ivory tower, blissfully ignorant of what goes on in the real world and how business works.

One of the primary functions of the U.S. Trustee's office is supposed to be reviewing and, where appropriate, objecting to fee petitions submitted in bankruptcy cases. If Prof. LoPucki has found a problem with the fees, then he has identified a major failing on the part of the U.S. Trustee's office.

You can't get sophisticated professionals to work on a complex case without paying them market rate. That's what the law says.

LoPucki is 100% correct. He's got a spine, integrity, and not afraid to call this what it is: LEGAL THEFT!

The whole bankruptcy system has been corrupted by a "Good 'Ole Boys" network of bankruptcy lawyers, firms, and Oh, My "Consultants!" who are like camp-followers. Buy LoPucki's book, read it and weep.

$1,100.00 per hour these days. NOT BAD! Maybe I'll come out of retirement to work 1 hour a month!

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