As bankruptcy practitioners, we share a keen interest in the substance of fee awards and fee disputes involving others. Such matters are often professionally instructive, as they involve our livelihood. At other times, they merely concern details of others’ transgressions and are read with barely suppressed schadenfreude or the sort of voyeuristic interest usually reserved for readers of the National Enquirer.

But this article isn’t about that. It is about the procedure used to review the fees in the Enron cases. Why focus there? Because that procedure was unique and it worked. It worked to minimize fee disputes and associated court time, and it worked to provide recommendations generally thought to be fair by both the billing professionals and the creditors. While the substantive judgments made by the members of the Enron fee committee were, of course, critical, the procedure the committee implemented was also central to the results, and that procedure is easily employed by other courts in other cases.

When the Enron cases were filed, the inevitability of unprecedented professional fees quickly became apparent. One of the largest corporations in the world and its hundreds of affiliates were in chaos. Creditors could not and did not trust the debtors. Many of the most significant transactions and legal structures were intentionally labyrinth and would require detailed and sophisticated examination. Multi-billion dollar litigation was likely. To make matters worse, Enron’s large staff of in-house attorneys was quickly shrinking. More and more of the work they had done was being performed by high-hourly-rate private counsel. And even during normal times, Enron had reportedly been spending in excess of $200 million per year on attorneys’ fees. Careful review was required, but careful review by the court alone would have been an imposing burden.

Creation of the Fee Committee

Reacting to the problem, the court sua sponte appointed a fee committee, consisting of a court-appointed chair and representatives appointed by the creditors’ committee, the employees’ committee, Enron and the U.S. Trustee. In its order (April 26, 2002), the court determined that the services of a disinterested professional experienced in large chapter 11 cases were desirable as chair. It appointed Jerry Patchan (former bankruptcy judge, former director of the Executive Office for U.S. Trustees and practitioner) to the position. Because Mr. Patchan was not denominated as an examiner, he was appointed by the court, not the U.S. Trustee. The fee committee was instructed to file reports advising the court on fees and expenses, and was authorized to establish procedures and to hire professional staff. Eventually, the fee committee engaged four experienced bankruptcy lawyers and a forensic accountant.

The fee committee immediately focused on the needs of the estate and the participants in the case, and settled on two goals most likely to meet those needs: It would make recommendations based on adequate compensation of professionals, and it would employ a transparent procedure that would be fair to the professionals and would also assist the parties and the court in the event any party did not accept its recommendations. Meeting those goals would help to assure the integrity of the fee process and, at least to some degree, address the inevitable public concerns that the size of the fees in the case were likely to generate.

While these goals seem self-evident, they have not been uniformly sought in other bankruptcy cases. In many instances, the fee committee, the U.S. Trustee, the creditors’ committee or the debtor believed the role of fee review was simply to reduce fees as much as possible. One method for accomplishing this is an initial proposal for an extreme reduction, often based solely on technical deficiencies in the applications. The proposal usually forms the basis for negotiation, but that is not always the case. For example, in WorldCom, the fee committee is reported to have simply presented applicants and the court with extensive proposed reductions. Applicants could not meaningfully respond to the fee committee before it relayed its positions to the court; there was no procedure for changing its preliminary recommendations. Applicants had no recourse except to bring the disputes before the court. In other cases, the result of fee review was a negotiated settlement of interim fee requests without a detailed or public explanation of the result. In those circumstances, a party questioning a particular application would not know whether the problem it identified had been taken into account in the settlement.

The goal of reducing fees for the sake of reduction is, of course, the product of cynicism: “Everyone bills too much.” But that goal produces perverse results. Where reductions are made for the sake of reduction, applicants who bill properly are punished by receiving less than an adequate amount, while applicants who inflate their bills are rewarded for having gamed the system. People may simply bill more to make up for the inevitable arbitrary cut.

The Enron fee committee, in contrast, made recommendations for appropriate (as opposed to minimal) compensation, and made detailed reports on the basis for its recommendations. While the fee committee established a meaningful procedure for input from the professionals, it did not attempt to negotiate or even consider settlements. For example, in some cases an applicant would offer an explanation for a group of questioned time entries. and at the same time propose a compromise such as agreeing to half the proposed reduction. If the fee committee determined that the explanation was sufficient, it withdrew the recommended reduction entirely and did not accept the proposed compromise. The fee committee made its recommendations without any intent to stake out a negotiating position either in the preliminary advisory reports given the applicants or in proceedings before the court.

The Enron fee committee did have the advantage of being formed early in the case. Where there is no expectation of fee review in a case, fees of undisciplined counsel can mushroom. If fee review is then instituted late in the case, it may lead to significant reductions. The early establishment of a fee committee has a “cop on the side of the road” effect; professionals are more careful in their billing. Their bills also get feedback early in the case. As will be discussed, that is critical in setting expectations regarding the type of review. If review focuses solely on the form of the entries, applicants may not look beyond that when preparing their bills or, worse yet, staffing plans.

Use of Fee Review Company

For the first interim applications, the fee committee used a commercial fee review company. Many attorneys believe that computerized fee review is primarily based on a computer search for particular words or phrases or the use of some sort of specialized algorithm and that the computer then produces a report with little human involvement. That is not the case. A person actually reads the time entries and measures them against a set of standards, such as the U.S. Trustee Guidelines. Computers do make the job easier, but only in the same sense that word processors make writing easier; they help with the mechanical work.

Asking the Right Questions

Following the review of the first interim applications by the commercial fee review company, the fee committee decided the resulting recommendations were too broad and inflexible. The review tended to completely disallow any entry raising the slightest question, especially as to form. The fee committee then decided to have the interim applications examined by experienced bankruptcy attorneys and an accountant instead of the commercial fee reviewer, even to the extent of having those professionals read and code the underlying entries. That permitted an evaluation on three levels and a much better understanding of the basis for the application.

First, as was the case with the commercial fee reviewer, entries were evaluated for compliance with the U.S. Trustee Guidelines and local rules. Reasonably descriptive entries are fundamental to further review. The attorney review turned out to be significantly less rigid than the prior commercial review, as the attorneys were able to determine that many entries that were deficient on their face were adequate when read in context. Where entries were inadequate, the attorney reviewers were often able to articulate the problems caused by the inadequacy. It was unquestionably the case that the form of time entries for most firms became more clear and precise as the case went on.

Beyond that level, the review by an experienced bankruptcy professional gave a good sense of whether or not the billing firm was adequately policing its own billing. The Enron case required large cadres of attorneys working on specific projects. Was adequate billing discipline imposed on those attorneys? Were the entries reviewed by the supervising attorneys and was feedback given? Did instances of unacceptable billing practices occur more than rarely? In short, were the raw entries critically examined by the supervising attorneys, and was there adequate billing judgment?

Finally, the attorney or accountant reviewer could make an initial recommendation to the fee committee about the efficiency of the billed work. Did assignments appear to have been made on an organized and efficient basis? Did professionals perform tasks appropriate to their experience levels? Were there too many people assigned to a project? Did that result in duplicate work or excessive learning time? Was there proper supervision? The reviewer could also review filings on PACER or eLAW and could make a preliminary determination of whether substantial billings related to substantial issues. This is a critical step. If the fee reviewer is concerned with efficiency, the billing professional will also be concerned with that issue. It will consider the issue when work is assigned and will be prepared to explain its decisions. The reviews beyond the initial level were highly dependent on the skill and bankruptcy experience of the reviewer.

A hypothetical example helps illustrate the differences. Suppose an attorney has an entry, “prepare nonopposition to motion—5.0 hours.” The entry is not specific in that it fails to identify the motion involved. A commercial service would likely flag it for complete denial, and that would be the end of the analysis. However, a review of other entries by the same attorney might show that he had just reviewed a particular motion, discussed it with his supervising attorney and had been instructed to prepare the nonopposition. A thoughtful reader then would be able to identify the subject. In this particular case, the reviewer could examine the document on PACER. If it was a typical, short nonopposition, the question of excessive time is raised.

However, more important questions must be asked. At the second level, the reviewer would look more closely at the attorney’s other time entries to determine whether there are other indications of excessive billing. If there are none, then the seemingly excess item may be explainable, or the result of a clerical error (e.g., transposing “.5”) or an isolated excessive charge. But if there is a broader pattern of excess billing, issues about the timekeepers’ overall charges are raised. More importantly, there may be questions about the quality of the firm’s review of its own billings and its billing judgment. If the pattern extends to a work group or an office or the entire firm, the questions are increasingly serious and may deal with a billing culture rather than an isolated incident.

In the hypothetical example, a thoughtful reviewer would also try to get a sense of efficiency at a staffing level, a third level of review. Suppose, for example, the document were reviewed by two or three other attorneys, each at the same experience level as the original attorney, a possible indication that staffing decisions were undisciplined. As before, the reviewer would then try to determine if this were part of a broader pattern within the group, office or firm, perhaps indicating the firms’ approach to assignments and staffing.

Disclosure and Accountability

In Enron, the reviewer prepared an extensive preliminary report containing recommendations and the basis for each recommendation. The reviewer also prepared charts containing the time entries involved, permitting easy review by the professional firm and the fee committee. Where necessary, the preliminary report was reviewed by the entire fee committee before it was given to the applicant. Finally, a copy of the preliminary report and charts was provided to the applicant for comment. The preliminary reports were not filed with the court; they were sent only to the applicants for response.

The applicant could request an in-person or telephonic meeting with the fee committee. At the beginning of the case, most professionals wanted in-person meetings. As they became more familiar with the process, most opted for telephonic. The fee committee encouraged applicants to file written responses prior to the meetings, and almost all did. The written responses tended to be concise and factual and often, standing alone, resolved the issues.

Immediately after the conclusion of each meeting with an applicant, the fee committee would determine its recommendations. A report on the interim application was prepared for submission to the court. Unless subject to a confidentiality order, the report was public. Recommendations were detailed and addressed both proposed reductions and issues decided in favor of the applicant. The court and other interested parties had a clear understanding of which issues were considered by the fee committee, what recommendations were made, and the basis for those recommendations.

In the end, each interim fee application was reviewed by an experienced bankruptcy attorney or accountant, issues were presented to the billing professional in writing, the billing professional had the opportunity to respond both in writing and at a meeting with the fee committee, and a formal recommendation was made on every issue raised. One of the benefits of the procedure was that the hearings on interim compensation were almost invariably short. The applicants were sufficiently comfortable with the fee committee’s recommendations that objections were routinely deferred until the end of the case. Issues were brought before the court in only a handful of instances, and those matters could be and were dealt with quickly.

Outcomes

At the completion of the case, the fee committee provided recommendations for the final overall allowance for each professional, again allowing for input by each billing professional before making the recommendation. The final recommendation, in most cases, turned out to be the sum of the interim recommendations except that the fee committee revisited some of its “formula” based recommendations applicable to most applications, such as that regarding bill preparation charges. In some cases, however, the fee committee increased or reduced its final recommendation based on an overall review of the billings.

Only six of the 53 firms reviewed by the fee committee filed oppositions to its final recommendations. Three other applicants filed “me too” oppositions regarding issues of general application raised in the initial six oppositions. Most of the firms for whom the greatest reductions were recommended did not file oppositions and accepted the recommendations. The oppositions that were filed were limited and narrow, and the court had a full explanation for the fee committee’s position before it. No objections were filed by third parties regarding any of the fees reviewed by the fee committee.

Conclusion

The procedures that aided the fee committee in adopting its substantive positions were, in summary:

• invoice review by experienced bankruptcy professionals,
• detailed and reasoned reports,
• meaningful procedures for applicant input, and
• willingness to listen to the applicants.

This is not to say that the fee committee’s recommendations were invariably correct or without controversy. The court ruled for the applicants on some of the oppositions and adopted the fee committee’s recommendation on others. The lack of opposition by most applicants does not signify that each agreed with every position taken by the fee committee. But in the main, as the creditors’ committee noted, the fee committee got it right as to each applicant. In the main, its recommendations were accepted by the professionals, the creditors and the court. At the beginning of the case, fees were a high-decibel issue. By the end, the volume control had been turned down to near zero. n

 

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Footnotes

1 Mr. Ostrovsky acted as one of the fee reviewers in Enron.