A Good Time to Be a Bankruptcy Lawyer:

This will come as no surprise, but it is a good time to be a bankruptcy lawyer. The front page of the WSJ reported yesterday (may be subscriber only) that Weil, Gotshal & Manges is requesting $55.1 million in quarterly fees and expenses for its work in the Lehman Brothers case. "The firm says it worked more than 100,000 billable hours during that period. Lead lawyer Harvey Miller is asking to be paid $950 for each of the nearly 795 hours he worked during the period."

And a few months back was the first reported sighting of a $1000 an hour bankruptcy lawyer, an English chap at Kirkland who cracked the $1000 barrier after converting dollars into pounds. The rate for Kirkland's domestic bankruptcy partners topped out at $965 an hour. Skadden's lawyers requested $1050 an hour for its work in the Circuit City bankruptcy case.

There are several structural peculiarities in bankruptcy that tends to push fees in an upward direction.

First, as Lynn LoPucki stresses in his book Courting Failure, forum-shopping in bankruptcy is easy and prevalent. And one of the margins on which a debtor can forum-shop is the receptiveness of bankruptcy judges in a given district to generous awards of attorneys' fees. So a judge that takes a hard-line on fees, such as capping fees at a local prevailing rate or scrutinizing the necessity of expenses closely, will soon discover that no big cases are filed in his court. Firms like Weil or Kirkland won't accept a case unless they get these rates. So a debtor given a choice between a venue that pays full fees versus one that limits fees will choose the one that pays full fees because otherwise it won't get the lawyers of its choice.

Second, fees are paid from "the estate" rather than a typical client. There is no inherent incentive for the debtor-in-possession acting on behalf of the estate to seek to minimize fees. Creditors can object to excess fees, but the lawyers for the creditors committee are also paid from the estate. As a result, if the creditors' lawyers object to the fees of debtor's counsel, debtor's counsel later may object to the fee requests of the creditors committee's lawyers. Thus, they are repeat-players and tend to adopt a "go along to get along" attitude toward each others fees, rather than vigorously challenging excessive fees.

Third, unlike a traditional client, bankruptcy lawyers don't really negotiate their fees with the debtor in the case. Because the fees are paid from the estate, the debtor has no incentive to try to cut down hourly rates or to demand volume discounts or the sort of thing that occurs in regular legal practice.

All of these factors tend to exert an upward hydraulic pressure on fees in bankruptcy. Thus, while one might expect that the overriding principle of fees and expenses in bankruptcy cases would be one of "economy" (which was the principle until 1978), today bankruptcy lawyers tend to push the upper-end of fees and expenses for lawyers.

This points out an issue for Congress to think about. There have been much chatter about whether federal judges are underpaid. I take no position on the general point. These massive fees in bankruptcy cases, however, does raise the question about the adequacy of salaries for bankruptcy judges. The opportunity cost for bankruptcy judges in this economy seems extremely high. And while there are many good things about being a bankruptcy judge, they are paid less than Article III judges (92% of a district court judge salary) and lack the prestige and life tenure of Article III judges. As a result, their salaries also are tied to those of district court judges.

Thus, one possible concern to keep an eye on in the near future is the potential that smart and able bankruptcy judges may be tempted to leave the bench in the near future to take advantage of what is starting to look like a once-in-a-lifetime opportunity in private practice. I've not heard of bankruptcy judges stepping down for this reason, but I'm sure there must be some and there will be more.

While on my soapbox, and regardless of what one thinks of raising bankruptcy judges' salaries, one area of bankruptcy practice that needs to be addressed is the ridiculously low rate paid to Chapter 7 trustees in no-asset cases. Chapter 7 trustees are paid $60 for a no asset case, a sum that has not been raised in years. I was talking to a chapter 7 trustee the other day and he noted that today's no-asset 7's are not at all like those in the past. He had a case where a debtor owned 10 properties, all encumbered by various liens, mortgages, and junior mortgages. So technically it was a case with no assets to be distributed to unsecured creditors. Yet he had a fiduciary duty to figure out what was happening with all those properties. That seems absurd. It seems especially absurd in light of the fact that the unwinding of the real estate bubble is going to expose more than usual levels of fraud for which chapter 7 trustees are going to be essential to uncover.