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Category: Practice Area: Bankruptcy / Restructuring

Law Firms Seek $10M in Fees in Kwok Chapter 11

February 23, 2024

A recent Law 360 story by Aaron Keller, “Paul Hastings, Others Seek $9.9M in Kwok Ch. 11 Case Fees”, reports that Paul Hastings LLP and six other law firms and professional services organizations have filed applications seeking more than $9.9 million in fees and expenses in the global Chapter 11 saga of Chinese exile Ho Wan Kwok, leaving the cost of the two-year-old case at well more than $30 million.

Leading a recent spate of interim expense requests is one for $6.9 million for services rendered between Sept. 1 and Dec. 31, 2023, by Paul Hastings LLP, where Chapter 11 trustee Luc A. Despins and most of his team of attorneys are partners, of counsel or associates.  Paul Hastings is also seeking $718,000 in expenses in the Kwok case over the same period.

The lead attorneys' fee request, filed in the U.S. Bankruptcy Court for the District of Connecticut, adds to the nearly $21.8 million in combined fees and expenses Paul Hastings has already been paid to litigate the complex case.  "Given the vast network of companies affiliated with the individual debtor, and the fact that these companies or their assets are located around the world, the trustee's investigation was, and continues to be, extensive," the firm noted in its application.

Despins recently told U.S. Bankruptcy Judge Julie A. Manning that Kwok's financial empire and myriad challenges filed by Kwok's associates and relatives have slowed his asset recovery operation and added significantly to the cost of the case.  Local and conflicts counsel at Connecticut law firm Neubert Pepe & Monteith PC filed a recent bid for close to $1 million in fees and nearly $35,000 in expenses, citing more than 2,470 hours of work on the case between Sept. 1 and Dec. 31.

Neubert Pepe attorneys played a key role in Despins' recent blitz of approximately 200 avoidance actions in the Kwok case, and the firm's work on those filings, which hit the docket before a Feb. 15 deadline, is not fully included in its recent application.  Previous asset recovery maneuvers, such as the sale of a luxury yacht connected to Kwok, helped pay for additional investigations that led to the clawback claims, Despins has said.

Its hourly rates in the $500 and $600 range, as indicated in the filings, are a fraction of the rates in the $1,675 to $1,975 per hour for lead attorneys at Paul Hastings, a key reason why Despins said in a recent court hearing that the firm's assistance in the case would result in significant savings for the Kwok estate.

Chapter 11 Fee Examiner OKs $20.4M in Fees for 15 Firms

February 8, 2024

A recent Law 360 story by Alex Wittenberg, “Kidde-Fenwal’s Ch. 11 Fee Examiner Oks $20.4M for 15 Firms”, reports that the fee examiner appointed in fire-suppression company Kidde-Fenwal's Chapter 11 case has recommended that a Delaware bankruptcy judge approve $20.4 million in pay for 15 firms working on the proceedings, after they agreed to cut their requested compensation by about $333,000.

In a report submitted, examiner Diana G. Adams detailed interim fees requested by law firms and others working on behalf of Kidde-Fenwal Inc., its unsecured creditors committee and an ad hoc group of governmental claimants.  The fees cover work conducted from Aug. 1 to Oct. 31 by professionals for the debtor and the creditors committee, and work done from mid-May or June 1 to July 31 by firms representing the ad hoc group.

U.S. Bankruptcy Judge Laurie Selber Silverstein ordered the appointment of a fee examiner in July to help avoid duplication of efforts by counsel for unsecured creditors in the case.  Kidde-Fenwal is one of the companies at the center of massive multidistrict litigation over the sale and use of toxic firefighting foams.

The debtor's attorneys, from five separate firms, requested about $9.61 million in total for their work during the period and agreed to reduce their fees to $9.49 million following discussions with Adams, according to the report.  Sullivan & Cromwell LLP stands to be the highest-paid firm representing the debtor, with reduced fees of $5.27 million and an hourly rate of $1,347.

Seven firms representing unsecured creditors asked for $10.1 million in total and agreed to reductions of about $187,000. Brown Rudnick LLP's reduced fees for representing the committee amount to about $4.05 million.  Three companies working for the ad hoc committee of governmental claimants would reap $1.01 million after cuts of around $23,000.

Kidde-Fenwal filed for Chapter 11 protection in May 2023, saying it faced more than $1 billion of liability tied to claims arising from a former subsidiary's manufacture and sale of aqueous film-forming foam.  The chemical foams have given rise to thousands of lawsuits alleging the companies caused lingering pollution of public waterways and aquifers, and to billions of dollars in toxic exposure claims tied to cancers, thyroid diseases, elevated liver enzymes and decreased fertility among those exposed.

After Judge Silverstein ordered the appointment of an examiner in July, Kidde-Fenwal asked the court to approve its request to pay the ad hoc group of governmental claimants, an atypical arrangement.  The debtor said doing so was necessary in part because of prohibitions against government-entity membership in regular unsecured creditor committees.

Law Firm Steps Down From Case Amid Fee Ethics Probe

February 7, 2024

A recent Law 360 story by Clara Geoghrgan, “Jackson Walker Steps Down From 4E Ch. 11 Amid Fees Probe”, reports that Jackson Walker LLP, the firm at the center of a legal ethics scandal over the undisclosed relationship between a lawyer and a bankruptcy judge, has stepped down as Chapter 11 counsel to hand sanitizer maker 4E Brands Northamerica LLC as a Texas bankruptcy judge considers revoking $800,000 in legal fees paid to the firm in the case.

In the brief notice filed and signed by Jackson Walker attorneys Matthew D. Cavenaugh and Genevieve M. Graham, the firm told the court it no longer represents the debtor or its plan agent.  The announcement comes as the court is considering requests from creditors and the Office of the U.S. Trustee to order the return of legal fees in the case after it came to light that ex-Jackson Walker attorney Elizabeth Freeman was the live-in romantic partner of former U.S. Bankruptcy Judge David R. Jones, who oversaw the case.

4E is one of over a dozen cases where the Office of the U.S. Trustee, the U.S. Department of Justice's bankruptcy watchdog, is trying to claw back payments to Jackson Walker in cases overseen by Jones between 2017 and 2022 when Freeman worked at the firm.  Jackson Walker has represented 4E since it filed for bankruptcy in 2022.

During that time period, neither Jones nor Freeman, who left Jackson Walker at the end of 2022 to start a solo bankruptcy practice, disclosed that they were live-in-romantic partners.  In December 2023, the Office of the U.S. Trustee said it plans to file up to 35 disgorgement motions to recover tens of millions of dollars in legal fees Jones approved for the firm while Freeman worked there.  Jones resigned in October 2023, hours before the Fifth Circuit Court of Appeals issued a complaint against him stating there was probable cause that his actions rose to judicial misconduct.

4E, a Mexican subsidiary of consumer products maker Kimberly-Clark, filed for bankruptcy to wind down its business following a 2020 recall of its hand sanitizer products for potential methanol, or wood alcohol, contamination.  The company also faced a wave of personal injury and wrongful death litigation connected to the recall. In October 2022, 4E confirmed a Chapter 11 liquidation plan.  According to information from the Office of the U.S. Trustee in November 2023, Jones awarded Jackson Walker $859,462 in legal fees and $7,301 in expenses in connection with representing 4E.

Following Jones' resignation, the trustee and one of 4E's creditors, the estate of Joshua Maestas, who died after consuming 4E sanitizer, asked U.S. Bankruptcy Judge Marvin Isgur, who took over the case after Jones resigned, to order Jackson Walker to return fees from the case.  Judge Isgur, who survived a bid to remove him from the case due to his friendship with Jones, is currently considering the matter alongside a motion from 4E's official committee of unsecured creditors to amend the confirmed Chapter 11 plan.

SCOTUS Examines Proposed Retroactive US Trustee Fee Fixes

January 9, 2024

A recent Law 360 story by Vince Sullivan, “Justices Examine Proposed Retroactive US Trustee Fee Fixes”, reports that the U.S. Supreme Court scrutinized competing proposals for fixing a bankruptcy fee structure that was applied unequally for several years to debtors in different jurisdictions, asking how refunds of overpaid U.S. Trustee's Office fees or clawbacks of underpaid fees could be applied.  During oral arguments in Washington, D.C., justices focused on issues with the competing fixes proposed by the U.S. Trustee's Office and former debtor John Q. Hammons Hotels & Resorts, with some asking how it would be possible to claw back additional payments from debtors that paid lower fees for several years.

"This whole fight is about the clawback," Justice Sonia Sotomayor said when questioning the U.S. Trustee's Office counsel.  "Do you get a pass on trying to get the money from people who benefited [from the disparate treatment], or can you keep the fees from the people who withheld it? That's the whole issue."

The application of the new fee structure led to disputes between the U.S. Trustee's Office and debtors in most of the country who paid the higher fees immediately, because debtors in North Carolina and Alabama don't utilize the trustee system and thus didn't pay the increased fees until a 2020 act of Congress brought the fee structure into uniformity nationwide, as required by the Constitution.

The U.S. Trustee's Office argued in its briefs that since that act of Congress brought the fee structure into uniformity, all that is needed for equality is to ensure the fees are equal going forward, regardless of whether a debtor's case is pending in a jurisdiction governed by the U.S. Trustee's Office or by a bankruptcy administrator.  Failing that, the office argued, clawing back the difference in fees that would have been paid by debtors in the administrator districts is the way to go.

As this court has recognized time and again, the touchstone of a remedial inquiry is congressional intent," attorney Masha G. Hansford of the U.S. Solicitor General's Office, representing the U.S. Trustee's Office, said during the hearing.  "Here, there's unusually strong evidence that Congress would choose to fix this constitutional violation by mandating uniformly higher fees."  A 2017 law altered the U.S. Trustee's Office fee schedule in an attempt to bolster the account used to fund the trustee program, which is sustained mostly by fees paid by Chapter 11 debtors.

The increase initially applied to the 88 districts that employ the trustee system, which is funded by the U.S. Department of Justice primarily through the fees charged to Chapter 11 debtors.  The hike was triggered in the first quarter of 2018 because the trustee fund balance dropped below the $200 million threshold established in the law.  Bankruptcy administrator districts in North Carolina and Alabama are funded by the judiciary, so rules in place before the hike permitted — but did not require — the administrator districts to charge the same fees as trustee districts.

It wasn't until October 2018 that these six districts adopted the fee increase. Congress amended the governing statute in 2021 to require the same fee structure regardless of whether a debtor filed in a trustee or an administrator district.  The trustee fees are charged based on the amount of disbursements made by a debtor to its creditors in a given quarter.  Before the increase, a debtor's maximum fee bill could only be $30,000 per quarter, but the 2017 law raised that cap to $250,000 per quarter.

Alfred H. Siegel, the liquidating trustee of former electronics retailer Circuit City, challenged the increase all the way to the Supreme Court, successfully arguing the disparate treatment ran afoul of the constitutional requirement to enact bankruptcy laws uniformly.  The justices, however, left it to the lower courts to determine the appropriate remedy for the constitutional violation.

During arguments, Justice Neil Gorsuch questioned the mechanics of ordering a clawback from about four dozen debtors in the administrator districts who paid lower fees than hundreds of debtors whose cases were pending in the trustee districts.  "That's premised on the idea that a court can compel this clawback," Justice Gorsuch said.  "Honestly, I haven't seen something like that before," he said.

Hansford said if the court rules in favor of the clawback remedy, then trustees could go back to the bankruptcy court and seek orders there that would essentially enable trustees to send debtors bills for the difference in fees.  Daniel L. Geyser of Haynes & Boone LLP, representing Hammons, said a proposal for clawing back fees not already paid would be virtually impossible and would fly in the face of both Supreme Court precedent and the authority of Congress.

"It is stunning for the government to ask this court, without a hint of authority from Congress, to impose this kind of profound retroactive cost on dozens of bankruptcies and hundreds or thousands of stakeholders across two separate states," Geyser said.  "That is a policy decision reserved for the political branches, and it is Congress' alone to make."

Justice Ketanji Brown Jackson asked whether Congress' subsequent action to bring all districts into uniformity by requiring the higher fees provided evidence of intent toward a remedy, and cut against the debtors seeking a refund.

Geyser said the 2020 amendment actually helps his case, because it sets out in the legislation itself that Congress believed the debtors in the administrator districts should have been paying the higher fees all along, but stopped short of requiring them to make retroactive payments to bring them in line.  "You would expect, then, if Congress were fine with this retroactive implication, a retroactive clawback, the next sentence would be, 'And now they have to pay those fees,'" Geyser argued.

But no such remedy was suggested in the 2020 act, and Geyser said the U.S. Trustee Office's clawback proposal would run afoul of several provisions of the Bankruptcy Code, including protections for final and unappealable confirmation orders.

Kirkland’s Billing Rate Nears $2500 in Big Bankruptcy

December 15, 2023

A recent Reuters story by David Thomas, “Top Bankruptcy Firm Kirkland Boost Billing Rates, Nearing $2,500 an Hour”, reports that one of the world's busiest bankruptcy practices is raising its top hourly billing rates to $2,465, as law firms press for higher and higher fees in major corporate restructurings.  U.S. law firm Kirkland & Ellis disclosed the new maximum rate in a series of court filings in bankruptcy cases involving its clients Rite Aid, We Work and Yellow Corp.

Hourly lawyer rates reaching $2,000 were nearly unheard of just a decade ago, but more recently they have been steadily creeping above that mark for some attorneys.  U.S. litigator David Boies’ hourly billing rates this year in a class action lawsuit against Deutsche Bank was $2,110. Covington & Burling said last year in a filing that senior partners’ top rate at that firm was $2,500 an hour.

The $2,465 top rate for Kirkland, which lists 329 restructuring lawyers on its website, matches what prominent Hogan Lovells appellate lawyer Neal Katyal charged for his time last year in a high-stakes bankruptcy case involving a Johnson & Johnson subsidiary.  Bankruptcy work can be a major source of revenue for large law firms, as corporate restructurings often require armies of lawyers and sometimes drag on for many years.

Under the new ranges unveiled by Kirkland, bankruptcy partners will charge between $1,195 to $2,465 an hour; of counsel bill $820 to $2,245 an hour; and associates bill $745 to $1,495 an hour. The rates will be in effect by Jan. 1, court filings said.  The filings said Kirkland's billing rates are "subject to periodic adjustments to reflect economic and other conditions," as well as lawyer promotions.  Its top hourly rate was previously $2,245, according to a Nov. 20 filing in the We Work Case.

Chicago-founded Kirkland is the highest-grossing law firm in the United States, according to data collected by The American Lawyer, with revenues of $6.5 billion in 2022 and more than 3,400 lawyers.

Kirkland has represented more than 120, or 10%, of the large public companies that filed for bankruptcy since Oct. 1, 1979, according to a research database co-created by University of California, Los Angeles law professor Lynn LoPucki.  Nearly half of those cases were filed between 2013 and Dec. 31, 2022, according to the database.