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

This last of three posts about a 54-page opinion in which U.S. Bankruptcy Court for the Central District of Illinois Judge Mary Gorman explained her reduction of a nationally prominent law firm’s $1.8 million fee down to $670,000 offers a case study of the billable hour’s perverse incentives.

Today I address a case-study-within-a-case-study — a bill for $270,000 within the $1.8 million total sought by the law firm. Judge Gorman considered the wisdom of a law firm’s decision to pursue multiple litigations that — she believed — offered better odds to the lawyers of getting their hours paid than it offered to the client of getting recovery that would exceed those lawyers’ fees.

Judge Gorman’s case-study-within-a-case-study illustrates a critical drawback to use of the billable hour to price attorneys’ work:

Even when the client loses, the lawyers win. 

Except in the unlikely event that the hourly bill is submitted for approval by someone with the legal sophistication — and firmness — of a reviewer like Judge Gorman, who cuts that $270,000 bill down to $80,748. But I’m getting ahead of the story.

A couple of points among several that Judge Gorman made:

1. The Judge called out the Law Firm for litigating multiple lawsuits for which it sought $270,360 in hourly fees — but for which the bankruptcy estate recovered only $150,000 (along with some waivers of claims): “[the Law Firm] did not think through” whether the defendants they sued were solvent enough to pay any judgments they might get in court.  

” … That is not to say that professionals cannot collect fees for pursuing [litigation against third parties to recoup assets rightfully owed to the bankruptcy estate] that turns out to be unsuccessful or in which the amounts collected do not cover the fees and costs incurred. But … once it becomes reasonably obvious that further litigation would cost more than it [is] likely to bring into the [bankruptcy] estate, an obligation to abandon the litigation arises.

Here, the Court cannot say exactly when it became ‘reasonably obvious’ that the costs of litigating [these lawsuits] outweighed the potential benefit to the estate. But it certainly came before incurring more than $270,000 in fees and realizing that the default judgment against the seemingly defunct corporate defendants was uncollectible …. It is quite apparent that [the Law Firm] did not think through these issues at the time it filed the [multiple lawsuits]. Regardless of the merit of these suits, there was clearly a question of whether it would cost the estate more to collect on any judgment than it hoped to gain from doing so. A review of [the Law Firm’s] billing invoices shows that this was a question that was not pondered beforehand ….”

 

2. Of total fees that the Law Firm sought for the multiple litigations described above, the judge ruled that only 30% of that bill was reasonable and necessary — disallowing $189,252 of the total $270,000 hourly fees billed.

“In short, there was a lot of work done with little self-monitoring or antecedent adjustment of the litigation strategy.

“Of course, hindsight is 20/20. But the fact that [the Law Firm] was employed on an hourly basis, rather than on a contingency-fee basis, does not justify the fees requested as necessary and reasonable. At some point early on, it should have been apparent to [the Law Firm] that, while it may have had a meritorious case, the cost of prosecution and collection on the judgment would greatly outweigh the potential recovery to what would become an insolvent estate.

“Had [the Law Firm] exercised the discretion required, it may have saved itself a lot of time and the estate a lot of money. Assuming [the Law Firm] would have incurred some fees before it realized there would be a net loss to the estate, 30% of the fees requested for [these multiple] lawsuits will be allowed. Accordingly, $189,252 will be disallowed.

Use of an hourly bill to price lawyers’ services creates an incentive to bad performance on the lawyers’ part.

But most hourly bills from lawyers don’t face expert scrutiny from the likes of Judge Gorman acting on the client’s behalf, or the authority and resolve of someone willing — and capable — of pushing back on such unreasonable and unnecessary conduct.

Part 1

Part 2