Perverse Incentives: Law Firm Bills by the Hour — Court Cuts Its $1.8 Million Fee Down to $670,000 (Part 1 of 3)

On July 10, 2018 U.S. Bankruptcy Court for the Central District of Illinois Judge Mary Gorman issued a 54-page opinion explaining why she cut a law firm’s requested total hourly fee of $1.8 million down to an approved total hourly fee of $670,000.

Judge Gorman was responsible to approve or disapprove legal fees charged to the debtor by the debtor’s law firm because those fees are paid out of the bankruptcy estate’s assets.

The judge’s explanation of her drastic fee cut offers a case study in the perverse incentives of the billable hour.

Notes on format and content:

1. The text in this and the following two posts doesn’t refer to the law firm or its attorneys by name — but to the Law Firm, or to Attorney A, Attorney B, etc. This post’s purpose is to make a point about cost control and management of legal work — not to embarrass anyone.

The Law Firm ranks among the American Lawyer magazine’s “AmLaw200” — the 200 largest U.S. law firms by gross revenue and other key metrics.

2. While I don’t wish to embarrass anyone, I do need to substantiate what I say by reference to objective sources. Therefore the law firm and lawyers named in Judge Gorman’s 54-page opinion can be readily identified in it. Also, I consulted other court filings on the electronic docket (pay wall) for In re: Earl Gaudio & Son, Inc. at Case No. 13-90942.

3. Unlike this blog, Judge Gorman’s opinion did not address the wisdom of pricing lawyers’ services by reference to billable hours versus an alternative fee arrangement. To the contrary, when a lawyer seeks approval of legal fees from a federal court, the billable hour is the standard because that is the conventional model of the legal profession. (I followed this practice myself three years ago after winning a judgment for my client in a civil rights lawsuit — because I had to.)

4. My argument is not that use of the billable hour necessarily leads to excess costs and wasted effort — but that it creates incentives that make those bad outcomes more likely.

I begin with Judge Gorman’s summary offered at the end of her 54-page opinion — with underlined headings that I’ve provided:

 

Failure to “Focus on this Case as Required”

“[The Law Firm] is a well-respected, national law firm, and all of [its] attorneys who have appeared in the case are well-credentialed. But, for reasons that are not clear, they did not focus on this case as required and failed to efficiently resolve the many issues presented.

 

“Shuffling” of Attorneys Assigned to this Case

“[Attorney A] filed the case and then immediately turned it over to [Attorney B]. [Attorney B] completed the sale of the beer distributorship [debtor’s primary asset] —a challenging project that most likely was what interested [the Law Firm] in the case in the first place—and then left the firm.

Thereafter, the case was shuffled off to attorneys in a more distant office with no connection to or interest in Central Illinois [where Judge Gorman’s bankruptcy court was located, where the bankrupt business was headquartered, and where most assets were located]. Selling an empty warehouse, closing two modest UPS stores, and pursuing a handful of fraudulent conveyance actions was less interesting work and resulted in half-hearted efforts by the attorneys. Perhaps most telling was the insistence of [the Law Firm’s] attorneys on the use of their form sales documents, which included strict confidentiality requirements for the sale of the Tilton warehouse even though they were never able to identify even one detail about the warehouse sale that was confidential. It was easier to insist that they knew what they were doing and to run up huge fees preparing complicated, albeit recycled, documents than to figure out how things might best be done in Central Illinois.

 

“Lack of Attention to Detail”

“[The Law Firm’s] preparation of the [fee request to the court] … also evidences the lack of attention to detail paid to the case. Literally hundreds of thousands of dollars in compensation were requested in the applications either without any documentation whatsoever or based on documentation riddled with mathematical errors ….”

Part 2 — “General Mistakes and Carelessness”.

Part 3 Criticisms about the “reasonableness and necessity” of the Law Firm’s work.