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Bankruptcy Lawyers Charge Illegally?

May 12, 2009

Bankruptcy lawyers are billing their clients illegally by failing to get approval of the court before collecting fees, says a new report "Routine Illegality in Bankruptcy Court Fee Practices." The conclusion was based on a study of fee payments in 102 of the largest bankruptcies of U.S.-based public companies between 1998 and 2007, including WorldCom Inc., Kmart Corp., U.S. Airways Group Inc., and Delta Airlines Inc. The authors of the study were Joseph Doherty, director of the law-research group at the University of California at Los Angeles, and UCLA law professor Lynn LoPucki.

Attorneys are billing bankrupt companies for nearly 80 per cent of their fees without first submitting the charges to the court, as required under the U.S. Bankruptcy Code, the UCLA professors found. "Meaningful objections to fee requests are few, and judges are shirking the duty to review fees absent objection," the authors wrote. In practice, judges often review the monthly fee payments later, because it requires much more time in order to go through them every month, the report said. This kind of lack of oversight gives the bankruptcy attorneys and other professionals a good opportunity to increase their fees by more than 10 per cent, which is nearly double the rate of inflation since 1998, according to the experts.

The problem, the authors state, is that judges constantly allow illegal fee practices in bankruptcies of the public companies. For instance, it is a common thing for judges to allow debtors pay their professional representatives every month before the fee requests of the representatives are being reviewed, examined and their reasonableness is being established, per requirement of the federal Bankruptcy Code. Later in cases, bankruptcy judges do order that lawyers pay back any fees that are found to be excessive. Still, "payments are harder to reverse rather than to prevent," LoPucki and Doherty wrote.

Bankruptcy lawyers have a "cavalier attitude toward the laws that regulate them," LoPucki said in an interview. They do not seem to consider the illegality of their practices to be of such importance. The UCLA investigators are assailing a strategy that will enable law firms to get paid promptly at a certain time when delays in fee approvals might further strain firms suffering from declining business. At least 30 out of the 50 largest law firms in the United States fired lawyers and other staff members in the past 18 months due to the current state of financial crisis and recession, according to data compiled by Bloomberg.

Nancy Rapoport, a law professor at the University of Nevada, Las Vegas, said that, in her opinion, judges approve the fees to be paid beforehand, before reviewing them, because they are overwhelmed, especially in big cases. Still, the expert agrees with the study's premise that "the foxes are guarding the henhouse," because lawyers do not want to challenge other lawyers' fees, she said.

The highest bankruptcy rates are in New York and in Delaware, according to the UCLA study. By not challenging fees, U.S. Bankruptcy Court judges in Delaware have managed to lure 52 per cent of all large public company bankruptcy filings since 2005, while the U.S. Bankruptcy Court in Manhattan took 21 per cent, according to the report. "There is a sense of entitlement that a lot of lawyers talk themselves into because they are working 16 hours a day," said Rapoport.

Tags: Career & Money