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US bankruptcy regulator updates proposal for lawyer fee overhaul

* U.S. Trustee offers three-weeks to comment on proposals

* Overhaul aimed at reining in high legal fees in bankruptcy

* Features include budgets, disclosures on billing practices

NEW YORK, Nov 2 (Reuters) - Despite their strong opposition, law firms would be still have to disclose extensive details about billing practices under the latest proposals to overhaul how lawyers are compensated when they handle bankruptcies.

The latest draft, issued on Friday, keeps proposals that would force law firms to compare their bankruptcy rates to those used in other legal work and to calculate the added cost of any increase imposed in the middle of a case.

The guidelines are being drawn up by the U.S. Trustee Program, the Justice Department arm that oversees how companies spend money in court-supervised restructurings. They are aimed at reining in legal fees seen as inconsistent with the broader market.

Bankruptcy fees, which in large cases routinely reach hundreds of millions of dollars, have long been under scrutiny by regulators such as the trustee's office. That is because the money is paid out of the bankrupt firm's estate, so the more money paid to lawyers, the less is available for creditors.

In the liquidation of Lehman Brothers Holdings - the largest Chapter 11 case ever - fees paid to lawyers, accountants, financial advisers and other professionals have topped $1.6 billion.

Bankruptcy courts, which must approve all professional fees, are the final arbiters when it comes to compensation for lawyers. But the trustee's office, charged with overseeing compliance with bankruptcy laws, can object and argue that fees are unreasonable.

The trustee's fee overhaul was first proposed last November and Friday's draft followed a feedback period in which law firms and other industry professionals offered criticism.

While the guidelines are far-reaching, a particular point of contention had been disclosures that show legal fees are in line with market rates. Law firms argued the requirements constituted unfair micromanagement.

Unchanged from the earlier draft, firms would have to disclose and calculate the cost of rate increases and offer data comparing them to fees charged in non-bankruptcy legal work.

The new draft is not a carbon-copy of the old, however. Instead of having to disclose their highest, lowest and average rates, law firms would be required only to disclose a blended average of their rates to account for the widespread use of alternative, non-hourly billing measures.

Another controversial aspect of the guidelines was the proposed imposition of non-binding budgets, which firms feared would make details of their billing agreements public.

The trustee's office stands by its budget proposal in the new draft, but makes clear that budget details would be redacted to protect privileged information.

The latest version carries a comment period through Nov. 23, after which the trustee's office will issue final guidelines. Courts will not be required to enforce them, but the trustee's office hopes they will serve as a compass in assessing fees, Cliff White, director of the trustee's office, told Reuters.

``We'll be quite conscientious and vigorous in seeking to uphold these guidelines,'' White said on Friday. ``They are a statement of how we think (bankruptcy) statutes should be complied with.''

The latest draft would raise the threshold to apply the guidelines from cases in which debtors had combined assets and liabilities of $50 million, to cases in which debtors had at least $50 million in both assets and liabilities.

The trustee's office is also now calling for large law firms to delegate certain tasks to co-counsel if they can be done more cheaply by a smaller firm, a directive left out of the prior draft.

The change was a response to a handful of comments, including from bankruptcy lawyer Albert Togut, who argued that greater use of co-counsel could be a huge cost-saver in big cases.

``It's not anybody pointing a finger at the big firms saying you did something wrong,'' Togut told Reuters on Friday. ``But as long as you've got a co-counsel in the case, that co-counsel should be utilized.''

Law firms will have some time to familiarize themselves with the new proposal. According to Friday's draft, the final guidelines, once issued, will become effective on July 1.