A recent Law.com story by Dan Roe, “Nickel and Dimed: Fee Examiners More Common Amid Rise in Contentious”, reports that, within weeks of being ordered by the U.S. Court of Appeals for the Third Circuit to appoint an independent examiner to the bankruptcy of fraudulent cryptocurrency exchange FTX, U.S. Bankruptcy Judge John Dorsey of the District of Delaware issued a related order of his own.  Starting in early February, Dorsey ordered the appointment of fee examiners in all Chapter 11 cases before him where assets and/or liabilities exceeded $50 million—the threshold for “larger Chapter 11 cases,” according to the Office of the U.S. Trustee.

While the U.S. Trustee Program provides for the use of fee examiners in such cases, examiners aren’t required and frequently aren’t appointed in pre-packaged bankruptcies and cases that aren’t particularly contentious.  However, a rise in bankruptcies involving fraud and mass tort litigation is causing more bankruptcy lawyers to face scrutiny over their billing practices.  “Fee examiners have become more prevalent recently because of very significant bankruptcy cases seeking recompense for alleged abuses,” said J. Scott Bovitz, a Los Angeles attorney who represents fee examiner Nancy Rapoport in bankruptcy court.

For instance, fee examiners have lopped six- and seven-figure amounts off of recent cryptocurrency bankruptcies such as Celsius, Voyager and BlockFi as well as recent bankruptcies involving tort claims such as Boy Scouts of America, fire protection company Kidde-Fenwal and LTL Management, a company formed to divert Johnson & Johnson’s tort liability over cancer attributed to the company’s talcum powder.  In their assessments of Big Law bills, fee examiners look for duplicate and redundant tasks, block or “lumped” billing, vague time entries, staffing inefficiencies, excessive expenses and more.

“I always tell professionals that my goal is not to reduce anyone’s fees because everyone did everything perfectly,” said Robert Keach, a fee examiner and the co-chair of the bankruptcy practice at Maine law firm Bernstein Shur.  “I haven’t found that case yet.”  According to Keach, most fee examinations end up taking 5% to 7% off of a legal bill, although some recent cases have been higher. In July, Dorsey cut roughly $1 million in fees off Pillsbury Winthrop Shaw Pittman’s $6 million tab for its work restructuring a California luxury hotel owner.  “It is not the Court’s job to piece together entries and try to make sense of them.  Each entry must be capable of evaluation on its own.  Many of Pillsbury’s entries are not,” Dorsey wrote.

Fee examiners also come at a cost to the estate, although Keach noted that the costs of examining fees are almost always offset by the reduction of professional fees resulting from examiners’ work.  In a December fee application for the BlockFi bankruptcy, examiner Elise Frejka, a New York-based solo practitioner, requested a total of $168,500 for 269 hours of work billed at an hourly rate of $675.

The biggest reductions in recent fee examinations sometimes came from firms that billed smaller amounts than those of debtor’s counsel. Representing debtor Kidde-Fenwal, Sullivan & Cromwell agreed to roughly $100,000 in fee reductions for vague and repetitive time entries and potentially unnecessary attendance levels at board meetings and on calls.

However, while Sullivan & Cromwell billed roughly $9 million in the bankruptcy, Brown Rudnick lost even more money to the fee examiner despite billing less than $6 million representing the creditors committee.  The firm was docked for vague time entries, “certain junior associate time,” potential duplication and overlap of tasks, unnecessary attendance levels and other miscellaneous issues with time entries.

Rapoport, a fee examiner and a professor at the William S. Boyd School of Law at the University of Nevada, Las Vegas, said she doesn’t believe law firms are intentionally inflating their fees so much as not exercising adequate billing judgment.  “What I do see is a combination of two problems: bad billing hygiene, such as block-billing, vague entries, and rounded hours, which is often improved after a few conversations with a fee examiner, and the use of more senior billers to do more junior work than they should be doing,” Rapoport said.  “I also find that the weekly ‘all hands on deck’ meetings need to be able to justify why each professional is in the room.”

In other recent bankruptcies, law firms escaped with 100% of their fees intact, although such firms had already offered discounts for time spent preparing fee applications and “transitory” timekeepers who billed less than five hours in a given month.  In the BlockFi bankruptcy, Kirkland & Ellis made out with 99.9% of its fees intact, while the examiner granted the full requested amounts to Cole Schotz and Haynes and Boone.

A recent Law.com story by Amanda O’Brien, “’Seriously Inflated’ Duane Morris Bill Highlights Risk When Big Law and Public Clients Lack Alignment”, reports that, as Duane Morris faces scrutiny over publicly obtained emails alleging that the firm delivered “seriously inflated” bills to a suburban Philadelphia school district following its investigation into allegations of rampant bullying against LGBTQ+ students, the dustup underlines how law firms’ work on behalf of public-sector clients demands a heightened level of communication.

The firm landed in the spotlight in the aftermath of a 151-page internal investigation report for the Central Bucks School District put together in April 2023 by a team led by partners Bill McSwain, the former U.S. attorney for the Eastern District of Pennsylvania, and Michael Rinaldi.  The report ultimately refuted allegations made by the American Civil Liberties Union in 2022 claiming that the school district created a hostile environment for queer students.

The investigation leading to the report took approximately six months, with the district bringing on McSwain and the firm in November 2022.  The bills referenced in the memo span from November 2022 to the end of October 2023, and outside reporting by The Philadelphia Inquirer indicates the bills, totaling around $1.1 million, were paid in December 2023. 

“One could spend countless hours picking apart this bill,” the email, authored by Edward Diasio, a partner at Montgomery County-based Wisler Pearlstine, said.  “The bottom line, from my standpoint, is that it is seriously inflated, and should be reduced considerably.”

Among the issues highlighted in the email were complaints of inefficient time management, vague time entries for hundreds of thousands of dollars of work, and an excessive number of attorneys engaged in repetitive tasks.   “The issue is that the Engagement Letter indicated two attorneys would lead the matter, and rely on help (where appropriate) at lower hourly rates,” the email raids.  “This was a good strategy in theory, but it was poorly implemented by Duane Morris.  The District should have benefitted from the efficiencies such a structure should have generated…”

“What happened, though, was that an army of attorneys was brought in and any efficiencies that could have been achieved were dramatically outweighed by the inefficiencies associated with managing such a large team and all of the internal communication and coordination that come along with that,” the memo’s introduction concludes.

Keeping the Client in Mind

According to several consultants, establishing client expectations around billing practices is a weak point, even a “lost opportunity,” for law firms. At the center of the issue, consultants said, is keeping in mind the client’s expertise when it comes to litigation or other legal matters.

“With corporate clients, often the client is an in-house lawyer. With public sector clients, you’re frequently dealing with people who aren’t lawyers,” Mantra Partner founder and CEO Marci Taylor explained.  “It’s more of an incentive to be as descriptive as possible about the nature and complexity of the task.  You’re writing knowing that there’s a high likelihood that your invoices will be made public.”

Law firm consultant Tim Corcoran also acknowledged that billing isn’t a one-size-fits all practice.  “There is quite a bit of forethought that goes into billing strategies because different circumstances call for different approaches,” Corcoran observed, contrasting in-house lawyer clients to government and public sector clients, and these also to third-party bill reviewers used by many corporate clients. 

Corcoran and consultant Stephen Ruben indicated that billing strategies and professional responsibilities change slightly according to the type of client.   “Normally if you’re dealing with a large corporation or corporations that have a lot of legal matters, they’re [used to] dealing with legal matters over time and have a greater ability to manage the relationship … they know what to ask for, they know what to expect,” Ruben explained.  “The firm has a different obligation when a law firm is dealing with people who are less experienced and sophisticated in dealing with lawyers and litigation.  Litigation is messy by nature.  One would think that when you are dealing with people who are not as experienced in litigation, you have a greater obligation to take them through the process step by step.”

And as for third-party billing reviewers, Corcoran noted that some firms take into account that reviewers might shave off some of the bill.  “It’s like the shopping trick.  Some firms will bill accordingly knowing that clients who put them through this review process will shave off some eventually,” Corcoran said.  “They may also take the exact opposite approach by only billing for the specific things enumerated … in the outside counsel guidelines, because they don’t want to risk the relationship knowing anything outside of that scope will have to be justified or defended.”

Setting Expectations Early

Law firms often fail to set client expectations on billing, Corcoran noted.  As a result, Corcoran said, it is often on clients to take the initiative and set expectations on billing for law firms.  And while some corporate clients may have the sophistication and resources to take charge here, public sector clients—with a shorter history in turning to Big Law for complex engagements—don’t have the same knowhow.  That can be a recipe for frustrations, as the Central Bucks School District’s review demonstrates.

“Failure to set or manage client expectations … is probably the greatest missed opportunity [at law firms],” said Corcoran.  “What lawyers believe is that because they cannot predict with absolute certainty how long something will take, the outcome, and what it will cost, they view it as binary, so few will provide a budget or cashflow guidance to help a client squirrel away funds.”

“It’s up to the client then to impose restrictions or guidelines or checkpoints to say ‘you need to let us know what your work in progress is, we need to be ahead of the pace of your billing,’” Corcoran continued.  “As a former CEO myself who’s managed the law department, I cared about the total amount we’ve got to budget for this … [I’d ask to] get me in the ballpark [of how much something would cost], even on a quarterly basis.”

“Few law firms do that because clients don’t ask for it,” Corcoran added.  The risk, of course, of avoiding early billing discussions is an unhappy client when the bill comes due.  “Not giving a heads-up is zero risk unless the client is unhappy … [then] the risk is that [clients] will subject the invoices to deeper scrutiny,” Corcoran said.  “The risk is you will expect one income stream and get something less than that … [and that] repeated behaviors like that can cause clients to go elsewhere.”

“Client defections are based on dissatisfaction not with the legal work but how the client is treated by the firm almost as an afterthought,” Corcoran continued. “They’re missing out on the ability to retain the client.”  Ruben suggested that firms address billing expectations early on in the relationship with a client, noting that “in generally, a good law firm will state expectations.  That’s what the retainer agreement is about.”

“It should include terms about how [the client] is going to be billed, and there should be conversations about that,” Ruben said.  “You’re dealing with people and when people are involved in a transaction, there’s often going to be a miscalculation of expectations on either side … when you have a monthly bill, issues that need to be managed more quickly come to the attention of both parties.”

A recent Law 360 story by Beverly Bank, “’Vague’ Billing Justifies 10% Cut in Atty Fees, Judge Says”, reports that a federal magistrate judge recommended slashing an Iron Workers' benefits funds' request for attorney fees in a case over an employer's unpaid contributions, saying there are "vague" billing entries from the plaintiffs' counsel as part of a $2.2 million judgment.

U.S. Magistrate Judge Kimberly G. Altman issued a report and recommendation, suggesting the district court cut a nearly $111,000 attorney fee request from Iron Workers Local No. 25's benefit funds by 10%.  The attorney fees dispute is connected with U.S. District Judge Nancy G. Edmunds' order, requiring Next Century Rebar LLC to pay more than $2.2 million in unpaid contributions with interest and liquidated damages.  The company filed a notice of appeal to the Sixth Circuit.

"Portions of the trustees' itemized hourly work are described insufficiently to prove that the work 'was performed with reasonable diligence and efficiency,'" Judge Altman said.  The judge said many of the funds' billing entries linked to an audit are "vague," necessitating a drop in proposed attorney fees from around $110,900 to roughly $99,800.  Judge Altman did not disturb the funds' request for more than $18,200 in costs.

The judge pointed to billing entries connected with an audit, saying some entries about the correspondence and emails with the auditor "provide the court with little information as to the necessity of the work."  The benefit funds requested around $110,900 in October, saying the plaintiffs' counsel spent 388.8 attorney hours in pursuing the case.

Next Century Rebar called billing entries linked to the attorney fees request "excessive, duplicative, and vague" as part of the company's Oct. 30 response. The company challenged the funds' bid for fees over review of the audit.  "Excessive review of the audit is ongoing throughout the time entries of multiple persons without any detail or reason for the excessive amount of time spent reviewing, re-reviewing, and again revisiting the audit report," Next Century Rebar said.

The company said the funds were seeking fees for clerical work that could have been undertaken by a legal clerk or assistant to the plaintiffs' attorneys.  Judge Altman found that some of Next Century Rebar's complaints about the clerical work entries were valid and warranted lower attorney fees.  "Next Century has highlighted instances where parts or all of the described work was clerical in nature and could have been handled by paralegals or other staff at much lower rates," the judge said.

The judge took on arguments from Next Century that the request related to audit costs of about $13,000 was "outrageous," saying the company didn't raise evidence to back up this claim.  Judge Altman said an affidavit "from an attorney that worked closely on this case and on the review of the audit" corroborated the cost of the audit.

A recent Law 360 story by Chart Riggall, “Colo. Judge Calls Out Enviro Attys For ‘Egregious’ Billing”, reports that a Colorado federal judge chided a group of environmental attorneys who successfully sued a gold-mining company for polluting the South Platte River over their "egregious" billing practices, slashing their request for fees by nearly two-thirds.  U.S. District Judge William J. Martinez of the District of Colorado — who in a 2022 bench trial ordered the Wyoming-based High Mountain Mining Co. LLC to pay $500,000 in penalties for violations of the federal Clean Water Act — said spotty record-keeping produced a fee request the court "cannot condone."

"These issues make the court seriously doubt counsel's billing judgment," Judge Martinez wrote in an order.  The judge ultimately awarded over $295,000 in fees and $77,000 to the attorneys representing Park County residents Pamela Stone, Twyla Rusan and M. Jamie Morrow, along with a pair of nonprofit groups, the South Park Coalition Inc. and Be the Change USA.  The groups also sued James R. Murray, a managing member and part owner of High Mountain.

That fell far short of the plaintiffs' request of nearly $1 million, which Judge Martinez pinned not only on their billing records but also on their "unprecedented" request for attorney fees in two separate, earlier lawsuits that were dismissed.

Stone and the other plaintiffs had argued that those two earlier cases yielded information directly bearing on the ultimately victorious lawsuit, but Judge Martinez disagreed, saying they pointed to "no case law supporting the proposition that a court may award fees for work done in earlier, failed actions at the conclusion of a later, successful action."

Filed in 2019, the residents' lawsuit took aim at a High Mountain mine near Alma, Colorado — mere steps from a fork of the South Platte River — that was allegedly leaking pollutants into the waterway.  The source of the contamination, according to the lawsuit and expert witnesses, was a series of unlined settling ponds containing mine waste that allowed chemicals to leach into the groundwater and then the river.

Judge Martinez used the factors laid out in the U.S. Supreme Court's 2020 decision in County of Maui v. Hawaii Wildlife Fund to determine whether the company was required to obtain a permit for its discharges, which plaintiffs' attorneys said was one of the first applications of the Maui precedent.  The judge relied primarily on two factors: the distance the pollution has to travel to get to the river and the time it takes to get there.

The final $500,000 judgment was based on Judge Martinez's calculations of how much the company had saved by failing to line the ponds, as he declined to award an additional $500,000 sought by the plaintiffs absent evidence of serious environmental damage.

Because the plaintiffs didn't succeed on all their claims, High Mountain argued that the case was, in effect, only 25% successful and that the fee award should be slashed accordingly.  But Judge Martinez said he wanted to avoid having to disentangle the fee requests from the prior actions and elected to split the baby by cutting the fee request by 50%.

More problematic, he continued, were a number of billing line items where the work reportedly done wasn't fully documented, or the plaintiffs' attorneys had put apparently frivolous tasks down for billing.  In one such case, an attorney billed 0.02 hours for reading court transcripts, "rather than writing off 72 seconds of work during which he could not have possibly accomplished anything for his client," Judge Martinez said. 

High Mountain had also tried to argue that opposing counsel had charged exorbitantly high rates for their work, but that argument ultimately fell short.  "The court concludes that plaintiffs' requested hourly billing rates are very much on the high end, but ultimately accepts them as reasonable for environmental law attorneys of comparable skill and experience in the Denver area," Judge Martinez said.

A recent Law 360 story by Lynn LaRowe, “Southwest Slams ‘Excessive’ Fee Bid in Religious Bias Case”, reports that Southwest Airlines has called on a Texas federal court to reduce the nearly $180,000 in fees sought by a flight attendant in connection with contempt proceedings that followed her victory in a religious bias suit against the airline, saying the requested amount is "excessive rather than reasonable."  In a brief, the airline said that while it "previously agreed to pay plaintiff's reasonable attorney's fees in connection with her contempt motion," the amount requested should be cut to about $83,000.  "However, Southwest respectfully submits that [Carter's] fee request is, in substantial part, excessive rather than reasonable," the airline said.

U.S. District Judge Brantley Starr sanctioned Southwest and in-house lawyers Kerrie Forbes, Kevin Minchey and Chris Maberry in August, saying they "didn't come close to complying with the court's order" in posting a notice of non-discrimination over religious beliefs, and that the three attorneys "were at the root of the problem."  The judge ordered them to attend training given by Alliance Defending Freedom, which advocates against abortion, and LGBTQ and similar causes.

Last month, plaintiff Charlene Carter urged the court to order Southwest to pay roughly $176,000 in attorney fees, $3,000 in expenses and $600 in other costs to the National Right to Work Legal Defense Foundation Inc., which represents her.  The airline pointed out in its brief that the court held "approximately 9 hours of hearing (approximately 3 hours of which occurred ex parte without plaintiff's participation) during which [Bobby G. Pryor] examined four members of Southwest's legal team, [Matthew B. Gilliam] made a closing argument, and [Matthew D. Hill] displayed exhibits," referring to members of Carter's legal team.

Southwest is asking Judge Starr to cut Carter's lawyers' request to be paid for "nearly 500 hours of attorney time" and reduce the total award to just over $83,000.  The airline argues that Carter's team used "block billing" for a large portion of their attorney fees, "making it impossible to assess how much time counsel spent on each specified task, and whether that time was reasonable."  Southwest also noted that the court had reduced a previous fee award request from Carter's team by 30% that included block billing.

The airline further argued that each of the three lawyers who attended the contempt hearing had more than a decade of experience, and each could have handled the matter solo.  "Mr. Pryor handled all of the witness examinations," the airline said.  "In contrast, Mr. Hill's role was limited to displaying exhibits from his computer, a task that a non-lawyer could have handled; and Mr. Gilliam's role was to make a brief closing argument at the conclusion of the contempt hearing."

Southwest also said Carter's lawyers spent a lot of time filing pretrial motions related to the contempt proceeding, which were "unnecessary and minimally successful," and that Carter's attorneys have shown "a failure to exercise billing judgment."  The brief includes a detailed chart outlining the reasons for the more than $90,000 in reductions sought by the airline to Carter's fee bid.

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