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Category: Bankruptcy Fees / Expenses

Judge Remands Denial of $30M in Attorney Fees in Tribune Bankruptcy

December 11, 2018

A recent Law 360 story by Rose Krebs, “Denial of $30M Attorneys’ Fee Claim in Tribune Ch. 11 Tossed,” reports that a Delaware federal judge overturned a 2015 bankruptcy court order denying Wilmington Trust Co.’s $30 million unsecured claim for post-petition attorneys’ fees in the Tribune Media Co. Chapter 11 that was confirmed in 2012.  In a memorandum order, Judge Richard G. Andrews remanded the matter back to the Delaware bankruptcy court for further consideration, ruling that post-petition attorneys’ fees can be an allowable unsecured claim.

“I agree with the position adopted by every court of appeals faced with this question; [the bankruptcy code] does not limit the allowability of unsecured claims for contractual post-petition attorneys' fees,” Judge Andrews wrote.  Appeals courts have “have unanimously rejected [Tribune Media’s] position and have allowed unsecured claims for contractual attorneys' fees that accrued post-filing of the bankruptcy petition,” the decision said.

In November 2015, U.S. Bankruptcy Judge Kevin J. Carey allowed Tribune to reject Wilmington Trust’s claim, which Tribune had argued was unreasonable given how many of the activities were duplication of work other creditors performed.  The issue stemmed from an unsecured claim Wilmington Trust, as indenture trustee for a group of unsecured bondholders, lodged in the Tribune case seeking $30.3 million in post-petition attorneys' fees and litigation costs.

Wilmington Trust maintained that its fees should be paid because the indenture agreement provided for payment of reasonable fees and expense reimbursement.  “We think that the district court has made a decision that is consistent with the majority of courts that have addressed the issue,” Wilmington Trust’s attorney, James W. Stoll of Brown Rudnick LLP, told Law360.

In his order, Judge Andrews noted that there have been some cases in bankruptcy and district courts that have disallowed attorneys’ fees as unsecured claims, but that he had “nothing new to add to this debate.”  “I merely note that I cannot conclude that [the bankruptcy code] ‘expressly’ disallows the claims at issue here,” the order said.

Tribune — owner of its namesake newspaper in Chicago, as well as the Los Angeles Times and a host of other newspapers and television stations — filed for Chapter 11 protection in 2008 following a disastrous leveraged buyout a year earlier that saddled the media conglomerate with roughly $13 billion in debt.  Tribune's Chapter 11 plan was confirmed in July 2012 and the company exited bankruptcy in December of that year.

The appellate case is In re: Tribune Co. et al., case number 1:15-cv-01116, in the U.S. District Court for the District of Delaware.  The bankruptcy case is In re: Tribune Co. et al., case number 1:08-bk-13141, in the U.S  Bankruptcy Court for the District of Delaware.

U.S. Trustee Seeks More Attorney Fee Info in Sears Bankruptcy

December 7, 2018

A recent Law 360 story by Rick Archer, “US Trustee Faults Fee Info in Sears’ Request for IP Law Firm,” reports that the U.S. Trustee’s Office has asked a New York bankruptcy court to reject Sears Holding Corp.'s request to retain boutique law firm McAndrew Held & Malloy Ltd. to handle intellectual property matters unless it gets more information on what the firm will be paid.  In an objection, U.S. Trustee William Harrington said that, among other inadequacies, Sears’ request states McAndrews would receive a range of flat fees for a list of IP-related services but fails to assign specific payments to specific services.  “Accordingly, without more specific disclosure regarding the flat fee and the flat fee services, it is impossible to determine if the retention of McAndrews is reasonable,” he said.

Once one of the nation's largest retailers, Illinois-based Sears entered bankruptcy in October to reshape its physical footprint and reduce a debt load of more than $11 billion created by years of consecutive net revenue losses, store closings and unsuccessful efforts to adapt to a changing retail world.  After closing 142 of the 700 Sears and Kmart stores still in business, the company said it hopes to sell about 400 earnings-positive stores along with other potentially viable sites and assets including intellectual property while under Chapter 11 protection.

Two weeks ago, Sears applied to retain McAndrews, a Chicago-based IP firm, to handle trademark, copyright, patent and domain name issues.  The application said McAndrews has been Sears’ IP counsel for more than six years.  “By virtue of such prior engagement, McAndrews is intimately familiar with the facts and history of the company’s IP assets and coordinates the filing of IP applications in foreign jurisdictions.  The compensation proposed by McAndrews is at or below comparable rates in the IP market,” it said.

The application said Sears was proposing to pay a fixed fee of $43,750 a month, a flat fee of between $750 and $11,000 for a list of specific IP-related services, such as trademark and copyright registration, and an hourly rate for any other services.  The company also asked for permission to put $130,000 in retainers in trust to be paid to McAndrews in the event that it fails to pay any future invoices from the firm.

In his filing, Harrington said he was objecting on the grounds the application only gives the range of flat fees and does not give a specific fee for each of the specified services.  He also said the application “inexplicably” asks McAndrews be allowed to waive the requirement to file time records in six-minute increments for the fixed and flat fee services and that McAndrews had not shown why it should have a retainer in trust.

The case is In re: Sears Holding Corp, case number 7:18-bk-23538, in the U.S. Bankruptcy Court for the Southern District of New York.

$11.5M in Attorney Fees in Sears Bankruptcy…So Far

November 23, 2018

A recent American Lawyer story by Brian Baxter, “Wachtell, Weil Unveil Legal Bills, Hourly Rates for Bankrupt Sears,” reports that the two high-powered firms earned more than $11.5 million from the insolvent retail giant before its recent Chapter 11 case.  Two weeks after Sears Holdings Corp. stumbled into bankruptcy, the storied retail giant’s Chapter 11 case has revealed the cost of some of its many outside lawyers.  Weil Gotshal & Manges landed the lead role as Sears’ bankruptcy counsel once the company slipped into insolvency in the strategic locale of White Plains, New York, on Oct. 15.  In the 90 days before its Chapter 11 petition, Sears paid $10.15 million to Weil, according to a declaration filed with the bankruptcy court on Oct. 26 by Ray Schrock, co-chairman of Weil’s business finance and restructuring department.

Schrock, who joined Weil in 2014 from Kirkland & Ellis, is working with fellow New York-based bankruptcy partners Jacqueline Marcus, Garrett Fail and Sunny Singh in advising Sears.  Schrock helmed a Weil team that handled the 2015 bankruptcy of The Great Atlantic & Pacific Tea Co. Inc., a proceeding that eventually led to the demise of the grocer better known as A&P.

Earlier this year, Schrock and Weil picked up lead roles on the bankruptcies of fashion jewelry retailer Claire’s Stores Inc. and supermarket chains Tops Markets LLC and Southeastern Grocers LLC.  Singh, who made partner at Weil last year and is known for having worked day and night on a team advised on the bankruptcy of now-defunct Lehman Brothers Holdings Inc., is also involved in the Chapter 11 cases for Tops Markets and Southeastern Grocers.  Marcus, who made partner at Weil a decade ago, is another seasoned bankruptcy lawyer.

Schrock’s declaration states that Weil partners and counsel are billing Sears between $1,075 and $1,600 per hour for their services, while associates from the firm are working at hourly rates ranging from $560 to $995.  Prime Clerk LLC, a bankruptcy claims administrator started by former Weil bankruptcy partner Shar Waisman, is serving as a claims and noticing agent for Sears’ Chapter 11 case.

Wachtell Lipton Rose & Katz, which said in court papers that it has spent more than a decade serving as general corporate counsel to Sears on a variety of matters, is now seeking to serve as special bankruptcy counsel to the company.  Wachtell, whose billing practices remain a continuous subject of interest in Big Law, stated in court papers filed Monday that partners and of counsel at the firm are billing Sears between $950 to $1,400 per hour for their services, with associates working at hourly rates ranging from $500 to $925.

In the 90 days before its Chapter 11 petition, Sears paid nearly $1.4 million to Wachtell, according to a bankruptcy court filing by the firm seeking employment on behalf of the suburban Chicago-based company.  A declaration filed by Wachtell restructuring and finance of counsel Amy Wolf states that the firm has not done work for former Sears CEO Edward Lampert, who resigned from Sears earlier this month, his hedge fund ESL Investments Inc. or any of its affiliates on any matter since June 2015.

Haynes and Boone counseled Lampert’s ESL back in 2013 on the reduction of its stake in Sears, which has not turned a profit since 2010.  Former ESL general counsel William Harker, a former corporate associate at Wachtell who is now a co-founder and president of hedge fund Ashe Capital Management LP, also once worked in Sears’ office of the chairman and served on the board of directors of Sears Canada.  Wachtell advised Sears on its $11 billion merger in 2004 with Kmart Holding Corp.  The firm then helped Sears defeated a long-running class action suit stemming from that ill-fated retain industry combination.

Bankruptcy court filings show that James Bromley, a prominent bankruptcy partner at Cleary Gottlieb Steen & Hamilton in New York, is advising Lampert’s ESL in Sears’ bankruptcy case, along with fellow restructuring partner Sean O’Neal and litigation counsel Andrew Weaver.  Akin Gump financial restructuring partner Ira Dizengoff has been hired to advise an official committee of unsecured creditors in Sears’ Chapter 11 case.  DLA Piper, which Sears’ board has retained as real estate counsel, has not yet filed billing statements with the bankruptcy court.

Sears, whose general counsel is Stephen Sitley, earlier this month added former Skadden Arps corporate restructuring lawyer Alan Carr as an independent member of its board.  Carr is now a partner and CEO at Drivetrain LLC, a New York-based turnaround management firm.  Sears, which in bankruptcy has listed more than $10 billion in liabilities against $1 billion in assets, plans to close hundreds of stores in an effort to stay in business.

$105M in Attorney Fees Sought in Puerto Rico Restructuring

November 16, 2018

A recent Bloomberg Law story by Daniel Gill, “Proskauer Tops Firms Asking $105M in Puerto Rico Case,” reports that attorneys restructuring Puerto Rico‘s massive public debt have billed about $105.4 million, with Proskauer Rose and O’Melveny & Myers accounting for more than half the total.  Proskauer Rose LLP has asked for $35.1 million in fees for its work representing the Financial Oversight & Management Board appointed to act for Puerto Rico and others in the largest municipal debt reorganization in U.S. history, while O’Melveny & Myers LLP has billed $28.3 million.  O’Melveny represents the Puerto Rico Fiscal Agency and Financial Advisory Authority.

Other big firms that have billed Puerto Rico include Paul Hastings LLP ($24.9 million) for its work on behalf of unsecured creditors and Greenberg Traurig ($10.2 million) which represents the Puerto Rico Electric Power Authority.  Jenner & Block ($6.1 million), represents retired public employees, and Munger, Tolles & Olson is special counsel for the Oversight Board ($800,000).

These are interim fee requests and do not include local counsel they employed or requests for expense reimbursements, which could be substantial given the territory’s remote location.  “The amount of legal fees is not surprising given the unique procedural and substantive issues and level of complexity of the case, as well as the amount of money and number of parties involved,” said Howard Weg, a partner with Robins Kaplan LLP in Los Angeles specializing in bankruptcy and insolvency matters.

Although technically not a bankruptcy case—Puerto Rico filed for debt restructuring under a 2016 federal law known as PROMESA—it’s by far the largest municipal debt reorganization in U.S. history.  Puerto Rico filed in May 2017 with around $74 billion in debt, plus another $49 billion in unfunded pension liabilities.

For contrast, the previous largest municipal bankruptcy—Detroit’s 2014 case—involved about $18 billion in debt.  In that case, the attorneys and financial advisers earned about $178 million.  Jones Day, Detroit’s lawyers praised by the judge in the case, billed about $57.9 million.

Professionals hired in the Puerto Rico case must seek court approval of their fees, as is the case with municipal Chapter 9 bankruptcies.  Proskauer also represents the utility known as Prepa, the Highway and Transportation Authority, the Sales Tax Financing Corporation known as Cofina, and the Employees Retirement System.  Whatever money is ultimately available to pay the island’s creditors will be reduced by the professional fees allowed in the case.  So far that amount, including fees requested by financial advisers, is over $228 million.

Last week, a lawyer for the Oversight Board told the federal judge overseeing the cases that the Puerto Rico legislature was planning to tax the lawyers and financial advisers in the case.  The lawyers suggested that such a move may necessitate raising billing rates.

The case is In re the Financial Oversight and Management Board for Puerto Rico, D.P.R., 17-03283.

Bankruptcy Attorney Sanctioned for Improper Billing Practices

September 25, 2018

A recent BNA story by Daniel Gill, “Bankruptcy Attorney Sanctioned for Sloppy, Improper Billing,” reports that a consumer bankruptcy attorney has to return client payments in 17 Chapter 7 cases where he improperly billed for services and failed to provide appropriate required disclosures, an Oklahoma bankruptcy judge ruled.

Attorney J. Ken Gallon failed to properly disclose his compensation to the court or the source of such payments; he charged unreasonable fees; and he allowed legal fees to be paid before case filing fees were paid in full, Chief Judge Terrence L. Michael of the U.S. Bankruptcy Court for the Northern District of Oklahoma wrote in his Sept. 4 opinion.

At the center of the court’s problems with Gallon’s practices was his use of what the court called the “BK Billing Model.”  BK Billing is a Utah company that factors receivables for consumer bankruptcy attorneys.  It essentially buys the attorneys’ receivables for about 75 percent of their face value.  BK Billing was created to benefit debtors who lacked the resources to pay all their attorneys fees for filing a Chapter 7 prior to filing the case, the company’s president, Sean Mawhinney, previously told Bloomberg Law.

Many, including the American Bankruptcy Institute’s Commission on Consumer Bankruptcy, have highlighted the problem of access to Chapter 7 for consumers unable to pay fees up front, because an attorney can’t collect on a pre-petition debt after the case is filed.  Currently many of these debtors are compelled to file Chapter 13, which allows for paying attorneys fees over time, but which is also significantly more expensive, time consuming (up to five years for Chapter 13 compared to less than one for Chapter 7), and far less successful in discharging, or wiping out, debts.

BK Billing proposes a system where the debtor enters into two separate agreements with his bankruptcy attorney—one for services rendered prior to the filing and another for post-filing, or post-petition, services.  The first contract would be for no or little money, with the bulk of the attorneys’ fees loaded into the post-petition agreement.  As a post-petition debt, the Chapter 7 attorney wouldn’t be barred from collecting.

“If debtors had the money upfront to afford a bankruptcy attorney they would pay upfront,” Mawhinney said in a Sept. 5 email to Bloomberg Law.  "[B]ifurcation of services allows desperately-needed Chapter 7 cases to be filed quickly without debtors resorting to filing an unnecessary Chapter 13 case, or facing a continued wage garnishment, with no relief in sight,” he said.  But it remains unclear whether courts will ultimately approve of the bifurcating of a Chapter 7 case to pre- and post-petition services.

Gallon had sloppy record keeping, the court said. The required disclosures he filed were often inaccurate and failed to indicate when he was paid from advances by BK Billing, which would subsequently collect monthly payments from the client.  Worse, the court was “troubled by Gallon’s practice of charging a higher fee to his clients that use the BK Billing Model than to his conventional clients.”  BK Billing cautions lawyers not to charge clients a premium when they use the company’s services, Mawhinney said.

Attorneys’ fees must always be reasonable and properly disclosed, Mawhinney told Bloomberg Law.  He suggests that attorneys can avoid problems by filing a motion for approval of the fee agreement, or by stipulating with the U.S. Trustee’s office in advance or at the beginning of the case, he said.

While expressing reservations regarding the validity of bifurcating fees in Chapter 7, Judge Michael declined to make a ruling on the issue, instead finding that Gallon failed in his duties to properly disclose the details of his fee arrangement with his clients, as required by the Bankruptcy Code and applicable rules.  The court voided Gallon’s post-petition contracts and ordered him to return whatever the debtors wound up paying to BK Billing. He could keep the funds that were paid by the clients directly to him, it said.

The case is In re Wright, 2018 BL 318559, Bankr. N.D. Okla., 17-11936, 9/4/18.