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Bankruptcy judges deal with huge legal fees

Published Oct. 18, 2005

When a big Minneapolis law firm sought payment in one Tampa bankruptcy case, it submitted a bill more than 50 pages long, single-spaced. But that wasn't enough for Chief Bankruptcy Judge Alexander Paskay. "The court cannot determine from the application whether (travel) expenses were incurred for air travel, hotels or car rental," the judge complained. "A fee application should include a detailed list of expenses."

And to make sure the law firm got the point, Paskay cut its total request for fees and costs by $275,000 _ almost a third of the total.

Each year, thousands of troubled businesses _ 19,591 this year alone _ troop into bankruptcy courts nationwide hoping to reorganize under the protection of Chapter 11. They're usually followed by a parade of lawyers, accountants, investment bankers and other professionals, all with roles to play and fees to be paid.

Now, with the fees in some cases approaching "the budget of a small country," as Paskay recently put it, there's always the threat that nothing will be left for the business or its creditors. As a result, many judges are giving greater scrutiny to the torrent of payment applications engulfing their desks.

"I review every single one," says Tampa bankruptcy Judge Thomas Baynes, who devotes two weekends a month to the chore. "Attorneys don't like it and I don't like it but you've got to do it. That's what they pay you for."

Lawyers who practice in bankruptcy court acknowledge that fees can be excessive _ especially those charged by lawyers for the other side. When it comes to their own fee applications, though, many feel that they are at the whim of judges, who don't even agree among themselves on whether such things as travel time and Federal Express costs should be reimbursed.

"Judges go all over the place _ there is no consistency," says lawyer Robert Soriano, a member of a Tampa Bay Bankruptcy Bar Association committee that's exploring the fee issue.

"It's very difficult to operate a business when you don't know whether or when you're going to get paid," says John Olson, a Tampa lawyer who represents Bradenton-based Murray Industries, the former builder of Chris-Craft boats. Olson said he went almost a year without payment after Murray entered Chapter 11 _ and then a judge chopped the request by $250,000.

"It made life a little tough," says Olson. "It was tough explaining to some of my managing-partner types who are used to getting paid by return mail why you haven't been paid for work you did six or nine months before."

The issue has become so heated that the non-profit American Bankruptcy Institute, which advises Congress on bankruptcy matters, is about to begin its first nationwide survey on professional compensation. Researchers from Northwestern University plan to interview 800 judges, lawyers, accountants and panel trustees, the government-appointed officials who monitor Chapter 7 liquidation bankruptcies.

"Silently, very quietly, firms are steering away from (bankruptcy) cases because of the risk of not being fully compensated," says Keith J. Shapiro, a Chicago lawyer who's on the institute's compensation committee. "It's happening in many cities around the country, based on the feedback we're getting."

Unlike most other forms of law, almost no one gets paid in bankruptcy court without the judge's okay. The idea is to keep lawyers and other professionals from gorging themselves at the expense of a debtor that's already in acute financial distress.

Before 1978, "the most important factor in determining proper fees for attorneys were the results achieved," Paskay says. "No premium was placed on the time spent, under the notion that lawyers are not supposed to be paid as plumbers."

Although bankruptcy fees may seem staggering to a lay person, professionals note that Chapter 11 reorganizations can be enormously complicated, time-consuming affairs.

But Congress, under intense lobbying pressure, became convinced that debtors were being denied top-flight legal representation because compensation was too low to attract top-flight lawyers. When it overhauled the bankruptcy code in 1978, Congress came up with a new principle _ that professionals were entitled to "reasonable" compensation based on actual services rendered, time spent and the cost of comparable services outside of bankruptcy court.

"Shortly thereafter, lawyers wised up to the "costs of comparable service' and figured that if they can charge $500 an hour to GM or IBM or other Fortune 500 companies, that should be the measure of payment charged to insolvent Chapter 11 debtors whose economic life is on the brink of disaster," Paskay says.

The inevitable result has been bills the size of telephone directories, seeking reimbursement for every split second of time spent on a case _ from pulling a file off the shelf to ordering Chinese take-out food when the boss works late. A few examples:

Revco D.S., Inc., an Ohio-based drug store chain in Chapter 11, is being hit with monthly professional fees totaling $872,000, according to an estimate by the magazine Turnarounds & Workouts. Among those seeking payment are the general bankruptcy counsel, the co-counsel, the general outside counsel and the counsel to the trade creditors committee.

Two weeks ago, lawyers and accountants requested almost $3.5-million for their first four months' work in General Development Corp.'s Chapter 11 case in Miami. "We were 10 minutes into the review (of one law firm's) bill when we were so offended that we stopped," said Robert A. Mark, an attorney for a GDC creditor. "We counted 138 people who were billing hours on the case."

In a study of 30 Chapter 11 cases in Texas, the Houston Chronicle found that bankruptcy trustees overseeing the cases paid themselves and other professionals almost $18.8-million _ more than four times as much as secured creditors received. "They are supposed to be protecting the creditors but instead they are systemically looting the estate for their own good," said debtor David Legg.

And in Tampa, Paskay slashed $2-million from the $5-million-plus bill presented by lawyers and accountants handling the bankruptcies of Hillsborough Holdings and numerous subsidiaries. Paskay called the request for payment "a Christmas feast in July" and chided the professionals for "attempting to get while the getting's good."

Professionals used to get paid only after a reorganization plan was confirmed, a process that can drag on for years. Under the new bankruptcy code, they can apply for interim fees every 120 days. The court usually grants the requests, but not always. In the cases of Manville Corp. and A.H. Robins, judges froze payments because so much money was being eaten up in legal fees there was hardly anything left for the victims of defective products.

Although bankruptcy fees may seem staggering to a lay person, professionals note that Chapter 11 reorganizations can be enormously complicated, time-consuming affairs.

"It's no easier to sell a business in a bankruptcy than to do a merger and acquisition work outside a bankruptcy," says Olson, the lawyer representing Murray Industries. "It's no easier to litigate in bankruptcy court than outside. When determining, in my view at least, how people ought to be paid, you need to compare how people are paid in the non-bankruptcy world."

Soriano, of the bankruptcy bar association, suggests that Tampa's court is in "a state of flux" over fees because of the huge increase in the number of Chapter 11 cases (343 were filed in the first nine months of this year, a 24 percent jump). Many of them involve large companies that bring in high-priced legal talent from New York and other major cities.

"In New York, judges are used to big cases and big fees," Soriano says. "What's happening is that we're seeing these kinds of major cases in Tampa for pretty much the first time and I think the judges are not used to seeing these types of fees." Soriano charges $190 an hour. A Washington, D.C. lawyer with whom he's working on a reorganization charges more than $300.

Tampa's two judges deny they're behind the times. They also say there's no reason why "these big operators from up North," as Paskay calls them, should expect to be paid the same in Tampa as they would somewhere else.

"The New York guys want to get paid for secretaries going home in cabs," says Paskay.

Despite perceptions to the contrary, both local judges often grant fee applications without reducing the amount requested, court records show. Fees are usually cut because the bill is vague about the work that's been performed.

A New York law firm representing Bicoastal Corp., formerly Singer Co., submitted a 55-page bill listing such things as $1,896 for "U.S. travel" and $8,744 for "duplicating." Paskay disapproved all $43,306 in expenses, saying "it is unclear from the brief description of services what benefits, if any, the debtor received from these expenses."

In the case of the Florida Group, Inc., a St. Petersburg mortgage banker, Baynes slashed almost $30,000 from the fees requested by a Tampa law firm. Among other things, "It would appear it took the applicants 7.7 hours to file a single application," Baynes wrote in his order.

Judges sometimes reduce interim fees without prejudice, meaning the lawyers can come in at the end of a case and argue for more money. Or the lawyers can appeal the judge's final order to the district court.

Both Tampa judges tend to be conservative about travel, where costs have soared as lawyers wing around the country representing debtors with far-flung operations. One Minnesota law firm in the Bicoastal case billed $4,509 for four lawyers to fly to Tampa for a single day _ and an extra $7.50 for Airborne Express to send something they apparently couldn't carry with them.

"The basic problem is that the debtor has an absolute right to select a lawyer, but technically he could hire a lawyer from Hong Kong who comes over three times a week," Paskay says. "It makes no sense." He and Baynes permit compensation for the cost of a plane ticket but rarely for the time a lawyer may spend snoozing in his seat after a couple of martinis.

"The problem," Paskay notes, "is they always say, "I was reading briefs on the plane.'


While it is more common to reduce fees, judges occasionally give bonuses for a job well done. Such was the case with Gardinier, a fertilizer manufacturer that was sold to a Minnesota company less than a year after entering Chapter 11. Paskay gave a bonus to the Tampa law firm that helped find a buyer and saved hundreds of people from losing their jobs.

"It was sheer luck of genius that at the last minute they got people up north and were able to salvage the whole of Gardinier from collapse," Paskay says. "They didn't get paid mega-bucks because of the time spent but because of the results achieved."

Not everyone came out the case totally thrilled, though. Judge Baynes, at the time a Polk County bankruptcy lawyer, understands how professionals feel when the court doesn't view their efforts as favorably as they do.

"I still tease Judge Paskay about the Gardinier case," Baynes says. "I had probably the lowest fees of 54 attorneys and he cut me."