New Study Accuses Bankruptcy Judges Of “Routine Illegality”

[WSJ_law_blog]

Bankruptcy lawyers are fat and happy these days; that much we have documented. (Click here and here.)

But are judges to blame for the fact that bankruptcy lawyers are earning such big bucks? Yes, according to a study out today from UCLA Law professors Lynn LoPucki (pictured) and Joseph Doherty.

“Meaningful objections to fee requests are few, and judges are shirking the duty to review fees absent objection,” the authors write. From 1998 to 2007, according to the study, bankruptcy professional fees increased more than 10% annually; more than twice the rate of inflation.

The problem, according to the study, is that judges routinely allow illegal fee practices in public-company bankruptcies. For example, it is common for judges to allow debtors to pay their professionals monthly before the judges have reviewed the professionals’ fee requests and determined their reasonableness — as the federal bankruptcy code requires.

Later in cases, bankruptcy judges do require professionals to submit formal fee applications, and courts can require lawyers to pay back any fees that are deemed excessive. Still, “payments are harder to reverse than to prevent,” LoPucki and Doherty write.

Here’s a Bloomberg story from today, which analyzes the study and notes that the Chrysler bankruptcy is adopting this purportedly illegal practice of paying professionals first and then asking questions later. (The debtor counsel in Chrysler, Jones Day, declined comment to Bloomberg.) Bankruptcy lawyers have a “cavalier attitude toward the laws that regulate them,” LoPucki told Bloomberg. The UCLA prof has been a longtime critic of runaway fees in big Chapter 11’s.

Nancy Rapoport, a bankruptcy specialist at UNLV’s law school, believes it is acceptable in many cases, in the interest of administrative convenience, to allow professionals to be paid before their fee requests are formally reviewed. “There is a presumption that if we don’t like what [the lawyers] did, they are good for it,” and the courts can claw back any excessive fees, Rapoport told the Law Blog. Still, she agrees with the study’s premise that “the foxes are guarding the henhouses, because lawyers don’t like to reduce others lawyers’ fees.”

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Marc Dreier, the hobnobbing, high-flying attorney-turned-imposter-and swindler is slated to plead guilty at 5 p.m. today to every count lodged against him in the indictment. The main allegations in connection to his sale of fictitious notes to a variety of folks between 2004 and 2008: money laundering, securities fraud, wire fraud and conspiracy to commit both securities and wire fraud. Click here for the story from the New York Law Journal; here, here and here for earlier LB posts about Dreier.

Dreier, 58, faces a sentence of 20 years in prison on each of the most serious charges against him, but his lawyer, Gerald Shargel, hopes that his sentence leaves open the possibility that he will get out of prison before the end of his life.

For now, it's unclear whether Dreier will be allowed to return home before the start of his prison term. “We're going to have an issue about bail pending sentencing because the government is seeking to have him remanded and I'm trying to keep him out,” Shargel told the NYLJ.

So, alas, the Marc Dreier situation is nearing a conclusion. For our money, three pieces in regard to the situation really stand out: Nathan Koppel, Justin Scheck and Steve Stecklow's piece in the WSJ from December; Robert Kolker's piece in New York magazine and Alison Frankel's piece in the American Lawyer.
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