Audit Committee Suggests That Lawyers, Advisers Reduce Their Fees By Christopher Stern
Washington Post Staff Writer
Monday, November 10, 2003After more than a year in bankruptcy court, WorldCom Inc. won a federal judge’s approval for its plan of reorganization earlier this month. Now it’s time to fight over the bill.Ashburn-based WorldCom filed the biggest bankruptcy case on record in July 2002, and it has racked up legal and other professional fees ever since at the rate of $10 million a month.

In addition to paying its own bankruptcy lawyers at the law firm of Weil, Gotshal & Manges LLP as much as $3 million a month, WorldCom is also required to foot the bills for its creditors’ lawyers and financial advisers.

Included in the $150 million in fees it has paid during the past year is the cost of an exhaustive investigation commissioned by the board of directors into the company’s massive accounting fraud. That investigation alone cost in excess of $40 million, according to the company. WorldCom spokesman Brad Burns said the company has hired top firms to guide it through bankruptcy as quickly as possible.

“We hired the best firms and ultimately it paid off,” Burns said. “The bankruptcy process is typically lengthy and expensive; for us it was just expensive.”

With so much money at stake, U.S. Bankruptcy Judge Arthur J. Gonzalez, who is overseeing WorldCom’s bankruptcy, took the unusual step of appointing a fee audit committee to oversee the bills submitted to the court.

Last week the audit committee submitted its first of three scheduled reports on the fees, providing a glimpse into a world where lawyers charge more than $700 an hour and even charge their clients for the time spent preparing their bill.

According to the report, the audit committee recommended that several of the law firms and financial advisers reduce their bills by hundreds of thousands of dollars. Members of the audit committee, which include the Office of the U.S. Trustee, declined to comment. Legal Cost Control Inc., a New Jersey company that conducted the actual audit for the committee, also declined to comment.

In one example, Akin Gump Strauss Hauer & Feld LLP, the law firm for WorldCom’s official creditors committee, submitted a bill of $3,294,531.58, including fees and expenses, for a four-month period between July 29 and Nov. 30, 2002. The audit committee recommended a total reduction of $323,000, including a $293,000 reduction in fees and $29,000 in expenses. The recommendations were made to Gonzalez, who is to eventually rule on them.

In one instance, Akin Gump charged WorldCom $19,160 for time spent preparing its bill. The audit committee recommended cutting the bill preparation fee to $4,790.

In another example, the audit committee recommended that the court cut almost $30,000 from Akin Gump’s bill for work done by paralegals. The audit committee said the work could have been done by secretarial workers and clerks.

Akin Gump declined to comment, but the law firm disputed the fee auditor’s recommendations in a lengthy filing with the bankruptcy court.

In its court response, Akin Gump cited legal precedents that it argued allowed the firm to charge fees that reflect the time spent by lawyers in preparing a bill. It also disputed the claim that secretaries could have performed some of the work charged to paralegals. Much of that work involved creating binders for lawyers to be used during court hearings, Akin Gump said. While the auditor recommended a $29,540 reduction in expenses for clerical work, Akin Gump offered to reduce that portion of its bill by $571.50. Last week, Akin Gump reached a settlement with the fee audit committee in which it agreed to reduce its fees and expenses by a total of $95,000.

While fights over the lawyer bills and professional fees are common in bankruptcies — any money spent on a lawyer means that much less for creditors — the detailed review of the tens of millions of dollars in bills submitted in WorldCom’s bankruptcy is unusual, said Lynn M. LoPucki, a law professor at the University of California at Los Angeles. LoPucki said fee-audit committees are generally used in large cases where legal and professional fees are expected to attract attention. “The judge knows he is going to be attacked at the end of the case,” LoPucki said.

As large as the fees are in WorldCom’s case, they are dwarfed by those being racked up in Enron Corp.’s bankruptcy, in which lawyers and other professionals have already billed $500 million. Gonzalez, who is also presiding over Enron’s bankruptcy, appointed a fee auditing committee in that case as well. Bankruptcy fees soared upward after 1978, when Congress passed a law allowing bankruptcy lawyers to charge market rates for their services, LoPucki said. Previously, bankruptcy law required lawyers to offer their services at a discount, based on the theory that financially troubled companies could not afford to pay market rates.

During the past 20 years, while the number of business bankruptcies has declined, the number of bankruptcy lawyers has ballooned, along with the fees they charge, said John Toothman, president of the Devil’s Advocate, a fee-auditing firm based in Alexandria. Last year there were 38,450 business bankruptcy filings, according to the American Bankruptcy Institute.

The fees are particularly high in large bankruptcies such as WorldCom’s, in which companies have to rework billions of dollars in debt, Toothman said. WorldCom, which has $25 billion in revenue, filed for bankruptcy after it could not make payments on its $30 billion in bank debt.

Large companies are focused on emerging from bankruptcy quickly and are not likely to quibble over multimillion-dollar fees, Toothman said. “It is not going to spend a lot looking at the charges,” he said. “They are looking at much larger numbers.”

Marcia L. Goldstein, a partner at Weil Gotshal & Manges, was critical of fee-auditing firms, saying they often do not appreciate the work performed by bankruptcy attorneys in large cases. “They don’t know the level of intensity that is required,” said Goldstein, whose time is billed at $775 per hour.

Goldstein said the fee auditing committee recommended a 2.8 percent reduction in her firm’s bill for the four-month period ended November 2002. Although she did not agree with the recommendation, she said her firm, which charged WorldCom $3.2 million in fees and expenses in September 2003 alone, is not going to fight it.