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Category: Challenging Fees

Nortel Creditors Challenge $4M in Fees in Chapter 11 Case

March 20, 2017

A recent Law 360 story by Matt Chiappardi, “Nortel Creditors Seek $4M Cut to Indenture Trustee Fee Bid,” reports that two hedge funds that held senior notes issued by a Nortel Networks Inc. unit pushed the Delaware bankruptcy court to cut their indenture trustee’s roughly $8 million attorney fee request in half, arguing that Delaware Trust Co. didn’t properly discharge its duties.

During a daylong hearing in Wilmington, PointState Capital LP and Solus Alternative Asset Management LP argued that roughly $4 million of Delaware Trust’s fee request comes from work connected to the defunct telecom’s official committee of unsecured creditors, the massive allocation dispute to decide how to divide $7 billion in sale proceeds among Nortel’s global units, fighting to protect its legal fees, or other duplicative efforts, none of which benefited the noteholders directly.

The hedge funds argued that as an indenture trustee, Delaware Trust has a duty of undivided loyalty to its constituency, but didn’t manage its professionals in such a way that limited the scope of their work to tasks directly benefiting the noteholders, and is looking for an outsized fee that doesn’t comport with its role in the case.

Arguing for the hedge funds, attorney James C. Tecce of Quinn Emanuel Urquhart & Sullivan LLP stressed that the dispute was not about the “qualifications, caliber or integrity” of the counsel Delaware Trust retained, but how the trustee chose to utilize them and whether the fee request, some of which could be taken out of their recoveries, now pending is reasonable.

“This is not an objection we took lightly,” Tecce told U.S. Bankruptcy Judge Kevin Gross.  “The duty was not properly discharged … [professionals] were not managed in a way to avoid duplicating expenses.”  Delaware Trust countered that its fee bid was indeed reasonable, calling the Nortel case “unprecedented, complex and massive,” and arguing that it, and its predecessor Law Debenture Trust Co. of New York, “carried the torch” for the noteholders throughout the eight-year-long case.

Decisions about where to focus efforts were prudently made on a day-to-day basis throughout the case, and that work ultimately led to the noteholders receiving a full recovery on their roughly $300 million in claims, Delaware Trust attorney Daniel A. Lowenthal of Patterson Belknap Webb & Tyler LLP said in court.  “The irony is that now that they are receiving a 100 percent recovery, they now object to the amount of the work done,” Lowenthal said.  “These are the same holders who demanded we not sit on the sidelines.”

The issue stems from an objection the hedge funds lodged against Nortel’s Chapter 11 plan, which Judge Gross confirmed in January, not to the strategy itself, but to the fees, and how it plays out could have wide-reaching implications for indenture trustee fees in bankruptcy cases.

Indenture trustee attorney fees that are not covered by a debtor’s estate are typically paid by the noteholders or charged against their recoveries, but the hedge funds argue that the full amount of such costs are not reasonable when the indenture trustee is also working as a member of a statutory committee with different or overlapping constituents.

The hedge funds additionally argue that the indenture trustee is mischaracterizing its arguments, claiming that they object to its decision to sit on the unsecured creditors committee when they only take issue with charging fees for work there.  They also contend that the indenture trustee hadn’t kept the hedge fund in the loop about the expenses, only springing them at the end of an eight-year case.

Delaware Trust took issue with that argument, asserting that the noteholders were informed about the expenses at periodic intervals during the case.  Judge Gross did not rule, but did question whether the hedge funds were engaging in a “hindsight exercise.”  He said he would issue a decision in writing shortly.

The fee dispute is only one of several vestiges left hanging after Nortel came to a major peace deal that allowed for confirmation of a Chapter 11 plan earlier this year for a case that has been pending since 2009.  The major sticking point was how to divide more than $7 billion raised in asset sales, a good potion of it intellectual property transactions, among the various Nortel units around the globe, a dispute that was adjudicated through an unprecedented simultaneous cross-border trial in Delaware and Toronto in 2014.

Professional fees throughout the case have been estimated to exceed $2 billion, making it one of the most expensive Chapter 11 cases in history.  The case is In re: Nortel Networks Inc. et al., case number 1:09-bk-10138, in the U.S. Bankruptcy Court for the District of Delaware.

NALFA: Some Class Counsel Turn to Fee Experts When Seeking Fees

February 27, 2017

Attorney fees are often a bone of contention in class actions.  In fact, upon settlement, the only disputes usually to surface center around the attorney fees.  Upon settlement approval, class counsel file somewhat self-interested fee requests with the court.  Here, even when prepared with the proper standard of care, these fee requests appear bias and self-serving.  Indeed, these self-seeking requests for fees are a source of frustration for the courts and often contested by professional fee objectors.  These internal dynamics can drag class action litigation on for years.  Recently, some class counsel have even grudgingly low-balled their fee requests to avoid this confrontation and delay in payment (see Race to the Bottom: Class Action Lawyers are Low-Balling Fee Requests).  This self-reduction in fees is short-sighted and sets a bad precedent for future class action cases.

In order to break this stalemate, some class counsel are turning to attorney fee experts.  Attorney fee experts are fully qualified expert witnesses who provide expert declarations on the reasonableness of attorney fees and expenses in underlying actions.  They are skilled litigators with subject matter expertise and are highly qualified on a range of fee and billing issues like hourly rates, billing practices, fee award factors, litigation management, and lawyering just to name a few.  A qualified, outside fee expert provides a fee-seeking attorney with an independent, unbiased, and objective analysis of the attorney fees and expenses in the underlying class action.  Fee experts can manage the entire fee application process, provide an expert report/opinion, or advise and consult on fee matters.  Some fee experts include law professors and former judges.

Hiring a qualified fee expert during the settlement phase shows the court and would-be professional fee objectors that you are taking the setting of attorney fees in a constructive and impartial manner.  Retaining a fee expert shifts the focus from an internal and rather self-assured fee analysis to an outside, objective, and peer review-driven fee analysis.  By relying on a qualified fee expert, class counsel can defuse the existing tensions within the class action and speed up the recovery of attorney fees.  What is more, courts are more likely to rule in favor of a fee analysis provided by a qualified and disinterested expert, rather than someone with a financial stake in the outcome.

NFL Concussion Settlement Kicks Off $112.5M Fee Dispute

February 23, 2017

A recent Delaware Law Weekly story, by P.J. D’Annunzio, “Stage Set for $112.5M Fee Fight in NFL Concussion Case,” reports that, although the NFL concussion litigation has ended in a $1 billion settlement, a new dispute has kicked off as the players' attorneys rush to score a piece of the $112.5 million pot of legal fees.

Earlier this month, Christopher Seeger and Sol Weiss, the lead attorneys for the players, filed a request in federal court to award them the multimillion attorney fee amount along with giving Seeger the authority to pay the other lawyers involved in the case.  This prompted objections from a faction of lawyers representing roughly 30 players who asked the court to effectively stop a mad dash to the "$112.5 million table."

In a motion for a case management order filed this week, the objectors' lawyers said Seeger and Weiss were not the first to the courthouse seeking fees, but the two argued their request should go first.  "And, no wonder," the objectors motion said.  "Co-class counsel has just recently submitted an application seeking the full amount of $112.5 million."

The motion added that the objectors' lawyers had no notice that the lead attorneys would file their request for the full $112.5 million.  "If co-class counsel has unilaterally decided which attorneys are 'entitled' to an award of fees, the decision has not been communicated to this court or to the counsel involved," the motion said.

Lance Lubel, the attorney who filed the objectors' motion, said in an email that the attorney fee situation was similar in the case of the 2010 BP Horizon oil spill in that it had a clear sailing provision, but those lawyers waited four to five years until claims were paid out before asking for attorney fees.  "I don't think it will take five years for this settlement's value to the retired players to be better understood but 60 days seems a bit too fast," Lubel said.

While not directly addressing the objection relating to Seeger having autonomy over the attorney compensation process, Seeger said in a statement, "The ultimate amount the NFL parties must pay in attorneys' fees will have no impact on the monetary awards paid or baseline assessment examinations given because the NFL parties have already guaranteed these benefits, in full, to eligible claimants."

The settlement was approved by the presiding judge and upheld by an appeals court last year.  With the U.S. Supreme Court taking a pass on review of the case, the settlement was cemented.  The agreement provides payment for retired players diagnosed with amyotrophic lateral sclerosis; chronic traumatic encephalopathy (CTE), which can only be diagnosed by an autopsy; Alzheimer's disease; Parkinson's disease; and dementia.  In addition to monetary compensation, the NFL agreed to provide brain injury testing to players and provide payments to fund the education of concussion and sports-related brain injuries.

Attorneys Challenge Low Fee Award Before Ninth Circuit

February 21, 2017

A recent Law 360 story by Dorothy Atkins, “Kraft Buyers’ ‘Greedy’ Attys Fight Low Fee Award at 9th Circ,” reports that attorneys who extracted a confidential settlement from Kraft Foods over mislabeling claims defended their $1.8 million fee request before the Ninth Circuit, saying the $11,000 award by a district judge who called them “greedy” didn’t come close to compensating them for hundreds of hours spent on the case.

Gregory S. Weston of The Weston Law Firm, who represented buyers of Kraft Foods Inc. snack products, argued that U.S. District Judge George H. Wu didn’t explain exactly how he determined that counsel was owed for only 200 hours of work, or how he arrived at the $11,000 figure.  Weston said the consumers prevailed in the case’s pleading stage, which he said involved three-years of litigating six different hearings and required much more than 200 hours of work.  “There’s no way that gets done in 200 hours,” he said.

Judge Wu rejected the $1.8 million fee request in June 2014, calling the consumers’ attorneys “greedy.”  At the time, the consumers had reached a confidential settlement with Kraft that ended the suit, which had been filed by lead plaintiffs Evangeline Red and Rachel Witt in 2010.  They alleged the company violated false advertising provisions of the Lanham Act by making misleading claims that several Kraft products were nutritious when they actually contained trans fats.

Weston said that state law requires courts to compile submitted hours carefully to determine attorneys’ fees, but that Judge Wu appeared to use an “arbitrary” and nonspecific method to determine the fees owed.  There’s also “no indication” Judge Wu actually reviewed counsel’s hours, or used an initial lodestar calculation or a negative multiplier to calculate the fees, he said.

But the three-judge panel pressed Weston on his argument, asking him why he believes he’s entitled to higher fees when it’s not apparent the consumers were the prevailing party in the case.  U.S. Circuit Judge Richard C. Tallman said that keeping the lawsuit alive for as long as the consumers did didn’t make them the prevailing party, especially, he said, when they basically lost on their theory of the case.

Weston disputed that view, arguing that the consumers, having won an injunction against Kraft, didn’t lose on their theory of the case at all.  Additionally, he said, even if the case’s merits didn’t go to trial, the consumers prevailed on six motions, including two motions to dismiss.  The only thing the consumers didn’t succeed at was achieving monetary relief for the class, he said.

And regardless, Weston said, case law has established that only awarding fees to parties who are successful on their theories would end up undercompensating attorneys, and it wouldn’t recognize the “inevitable exploratory nature of litigation.”

Meanwhile, Kraft attorney Dean N. Panos of Jenner & Block LLP said Judge Wu applied the correct, pragmatic approach to “trimming the fat” by broadly determining that the consumers’ “outrageous” fee request was too high and awarding a lower fee.  Panos argued that there’s no precise formula to calculate fees, and the court is not required to conduct an hour-by-hour analysis of time spent on a case.  Judge Wu had presided over three years of litigation and therefore he was in the best position to determine how much counsel should be paid, Panos said.

The case is Evangeline Red v. Kraft Foods Inc., case number 15-55760, in the U.S. Court of Appeals for the Ninth Circuit.

Bankruptcy Attorney Can Get Fees for Fees

November 3, 2016

A recent Bloomberg BNA story, Bankruptcy Attorney Can Get Fees for Supplementing Fee Application,” reports that an attorney employed by a Chapter 7 trustee can recover $27,520 in fees he incurred for supplementing his fee application after the U.S. Trustee objected to it as deficient (In re Stanton , 2016 BL 356911, Bankr. M.D. Fla., No. 8:11-bk-22675 Chapter 7, 10/26/16).

Judge Michael G. Williamson of the U.S. Bankruptcy Court for the Middle District of Florida concluded that the challenged fees were “more akin to the preparation — rather than defense — of a fee application.”  The work was in service of the bankruptcy estate and recoverable under Bankruptcy Code Section 330(a), the court said.

In Baker Botts v. ASARCO, 135 S. Ct. 2158 (2015), the U.S. Supreme Court held that Section 330(a) doesn’t authorize attorney’s fees for work performed defending a fee application because that work isn’t performed for the estate.

The U.S. Trustee interpreted Baker Botts broadly and tried to impose a “bright-line” rule that any fees incurred supplementing a fee application after it has been objected to are unrecoverable.  The court, however, rejected that “bright-line” rule, concluding that it is the “nature of the work — not when it is performed — that determines whether it is compensable.

The court approved the attorney’s second fee application, which supplemented his first application, because it benefited the estate and was necessary for the administration of the case.

The Chapter 7 trustee employed Herb Donica as his attorney and Ed Rice as special counsel.  Donica and Rice pursued fraudulent transfer claims against debtor John Stanton’s ex-wife.  Ultimately, they settled those claims and recovered $3.5 million in proceeds for the bankruptcy estate.

In his first fee application, Donica asked for $748,875 in attorney’s fees for nearly 2,000 hours of work.  The UST objected to the fee application because it didn’t contain the level of detail required for a fee application in a Chapter 11 case, which isn’t required in a Chapter 7 case.

Donica filed an 18-page supplemental fee application providing more details.  He then filed a second interim fee application seeking $33,840 for time spent on his initial application and other fees.

The UST objected that $27,520 of the fees were unrecoverable under Baker Botts.

The court held that Donica’s $27,520 in fees was for work in service of the estate that was recoverable as reasonable compensation under Section 330(a).  Using Justice Clarence Thomas’ analogy that he used in Baker Botts, Donica’s work supplementing his fee application and responding to the UST’s objection was “akin to the mechanic’s preparation of an itemized bill as part of his ‘services’ to the customer.”

The UST was concerned that the court’s ruling will lead to a “de facto two-step fee application process” where professionals will be encouraged to file “bare-bones” fee applications and when challenged, will supplement their applications to provide more detail.

Those concerns are “misplaced,” the court said.  The UST’s proposed bright-line rule would cause more problems than the “minor ones it solves,” the court said.  Such a rule would (1) increase the cost of estate administration; and (2) increase the time and expense in litigating over fees, the court said.