Bankruptcy Lawyers' Fees Under Unconstitutional Fire

In recent months press reports have discussed the U.S. Department of Justice's attempt to rein in bankruptcy lawyers' fees. The U.S. trustee is proposing several new approaches to control the fees.

Though the lawyer applicant currently must disclose his hourly rate, the DOJ wants the attorney to disclose the lowest, highest and average hourly rates the law firm charges in all its matters.

In addition, the department wants the lawyer applicant to create and disclose to the court a budget for legal expenses. This budget would, necessarily, disclose to all involved — including the creditors who serve as adversaries to the bankrupt — the client's planned legal strategy.

Before going further, it should be noted that 1) any fee sought by an attorney must first be approved by the client going into bankruptcy; 2) the fee cannot be paid before a U.S. Bankruptcy Court judge approves the fee request; and 3) the legal fees most often are a pittance compared to the debts of the company and thus have little or no impact on either the creditors or the employees.

In fact, the current proposal is limited to companies whose assets and debts exceed $50 million — hardly your "normal" bankruptcy.

In the 1960s, the U.S. Supreme Court ruled that it was anti-competitive for bar associations to maintain a listing of suggested fees for different types of work. Such a listing particularly helped younger and newer lawyers set their fees at rates that were better in line with more senior lawyers.

Not having such a list would compel lawyers to set their own fees, the theory being that they would then be more competitive with one another to the consumers' benefit.

The trustee, by its first proposal, ignores that. The existing disclosure already provides information that tends to be anti-competitive. Law firms can see what others are charging and price their own services accordingly, causing rates to slowly increase in lockstep over the years.

Intruding into the fees charged for practice areas, such as general business matters, estate planning and tax, has no bearing on the special expertise of large-company bankruptcy lawyers. No area of law other than bankruptcy requires such disclosure for court approval. Fees are left to be negotiated between attorney and client. Other than precedent, there is no reason disclosure should be made here.

"Transparency" is a bogus issue. There is no backroom conspiracy on how bankruptcy fees are charged. All the proceedings are public and must be approved by the court before attorneys are paid anything.

Budgeting is a process between the client and the attorney. By requiring that bankruptcy budgets, which reveal legal strategy, be made public, the U.S. trustee is saying that bankrupt companies have no rights — to advocacy, to develop a strategy that might affect creditors' claims, even to confidentiality.

That is clearly contrary to the U.S. Constitution and our entire judicial system. While the bankrupts, and their inept management, may have proceeded down an economically unwise path, they still have rights to seek the best wind-up of affairs under law.