The lawyer needed a dress shirt for an out-of-town bankruptcy proceeding, so he spent about $120 on his way into town. His real mistake was trying to get the bill past Nancy Rapoport.
The expense stood out when she was in charge of policing fees for the estate of Mirant Corp., now GenOn Energy Holdings Inc., during the power company’s Chapter 11 case several years ago. Big Law attorneys and high-priced consultants can spend their own money on clothing, minibar expenses and cocktails at dinner so far as she’s concerned.
“That one wasn’t going to be compensable under any circumstances,” she said. When the bill is being footed by a bankrupt corporation and its creditors, she said, people can easily argue that hired professionals “are taking advantage of the system.”
Bankruptcy can be big business as investors and other stakeholders pay top dollar attempting to quickly rehabilitate distressed companies and negotiate compromises.
Rapoport is one of a dozen or so practitioners around the country appointed to monitor fee applications by the attorneys, investment bankers and other specialists retained in the biggest bankruptcy cases.
Where competition for work on a mega bankruptcy can be fierce and involve several dozen firms, the jobs of monitoring the cash spigot for high-paid restructuring advisers go to just a few willing to double-check and second-guess the fees and expenses of their peers. The work is steady enough for some to build a practice around, while others, like Rapoport, take examiner assignments on top of teaching jobs or a bankruptcy law practice.
“It is not easy to recruit fee examiners because some qualified practitioners have expressed concern about the need to maintain relationships in the chapter 11 community,” said Clifford J. White III, director of the U.S. Trustee Program, the Justice Department’s bankruptcy watchdog.
Keeping them honest
The fee examiner’s job is to make sure “professional fees and expenses paid by the estate are reasonable, actual, and necessary,” according to guidelines set by the U.S. Trustee Program. The objective is to promote compliance with bankruptcy rules and “to ensure greater public confidence in the fee process,” White said.
Examiners are retained when the task of reviewing legal bills and invoices for estate-paid consultants is overly burdensome for the court and parties involved. Fees in the biggest Chapter 11 cases can balloon quickly and lessen the amounts available for creditors, since the estate not only pays firms retained by the bankrupt company, but also those hired to advise creditor committees or any other officially appointed groups of stakeholders.
PG&E and its board, for example, have already retained lawyers at Weil, Gotshal & Manges LLP; Cravath, Swaine & Moore LLP; Munger Tolles & Olson LLP; Keller & Benvenutti LLP; and Simpson Thacher & Bartlett LLP. Meanwhile, two separate official committees representing general unsecured creditors and tort claimants have hired Milbank LLP and Baker & Hostetler LLP, respectively.
Rates for the most senior partners on each of those legal teams can be as high as $1,600 an hour. Bruce Markell, a former bankruptcy judge selected to review fees in the PG&E case, bills at $900 an hour. He declined to be interviewed for this story, saying in an email that he is just getting started with the case.
“It’s a hectic time,” he wrote.
The process is typically cordial, says Rapoport, who begins with an assumption that almost all expenses and billings can be justified. But she can get under the skins of law firm partners or others spearheading a case by questioning, for example, if work could have been performed by more junior employees or if certain expenses should be absorbed by the estate.
“You can tell that they probably are pretty offended that I’m asking about these things,” she said.
What it takes
While most of their work is done behind the scenes before applications are submitted to the court, fee examiners sometimes publicly call out overbilling or excessive spending.
Shortly into his tenure as examiner in Puerto Rico’s bankruptcy-like cases, attorney Brady Williamson issued a report stating that lawyers were sending more staff than seemed necessary for court hearings and mediation sessions, billing at dramatically disparate rates, and seeking six-figure expense reimbursements “which seem challenging to justify.”
He also reminded attorneys and consultants working on the dime of taxpayers in Puerto Rico that first-class airfare and alcohol are never reimbursable.
Attorney Robert Fishman of Fox Rothschild LLP likens the job to a police officer who sets a speed trap in the same place every day. “Eventually the deterrent does the job for you,” he said.
Ninety-nine percent of the time when examiners question an expense, professionals agree to a recommended reduction, which is often only around 5 percent off the original request, said attorney Bob Keach. He served as fee examiner in the Chapter 11 cases for American Airlines parent AMR Corp. and film studio Relativity Media.
Still, Keach has challenged a $2 million commission sought by Guggenheim Securities LLC when it served as investment banker for the unsecured creditors of battery maker Exide Technologies. And in the AMR case, he listed things like “vague time entries,” “possible ‘top-heavy’ staffing and overstaffing,” “first-class airfare,” “meal expenses,” “duplicative tasks,” and “multiple attendees.”
Getting the job
Only a tiny minority of Chapter 11 cases each year are complex enough to warrant paying another set of eyes to track professional fees. Still, competition for the work is still not fierce, according to Justin Rucki, who earlier this year launched an examiner practice in Delaware, home to one of the busiest bankruptcy courts.
“For the most part, people come to you,” said Rucki, who relies on his 10 years as a Delaware bankruptcy lawyer and experience as a bankruptcy court clerk to sell his services.
Fishman’s track record in restructuring cases and presence in the community of bankruptcy professionals factored in considerably when former Judge Steven Rhodes picked him to examine fees in the city of Detroit’s Chapter 9 bankruptcy in 2013.
“I wanted an experienced reorganization lawyer who would have good standing and reputation with the lawyers in the case,” Rhodes said, recalling that he needed someone to help him “land that case as soft as possible.”
And since those having their fees monitored often get a say in who should do the job, they often opt for someone who knows from experience what goes into reorganizing a bankrupt company.
“It’s important for parties whose fees are getting examined to know they are getting a fair shake,” Rucki said. “They need to know you’re not the type of person who’s going to hold a grudge.”
Maintaining civility with advisers being scrutinized is also the best way to help a case run smoothly, according to Rapoport, a law professor at the University of Nevada, Las Vegas. As a fee examiner in the bankruptcy for Toys R Us, she reported that firms like Kirkland & Ellis LLP and Alvarez & Marsal North America LLC voluntarily shaved off what amounted to millions from their final fee applications after questions were addressed.
“If the answers don’t make sense to me then we try to negotiate a reduction,” she said. “What’s beautiful about bankruptcy is people understand the value of reasonable compromise.”