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Category: USTP

Courts Call Upon Fee Examiners in Large Chapter 11 Cases

May 6, 2024

A recent Law.com story by Dan Roe, “Nickel and Dimed: Fee Examiners More Common Amid Rise in Contentious”, reports that, within weeks of being ordered by the U.S. Court of Appeals for the Third Circuit to appoint an independent examiner to the bankruptcy of fraudulent cryptocurrency exchange FTX, U.S. Bankruptcy Judge John Dorsey of the District of Delaware issued a related order of his own.  Starting in early February, Dorsey ordered the appointment of fee examiners in all Chapter 11 cases before him where assets and/or liabilities exceeded $50 million—the threshold for “larger Chapter 11 cases,” according to the Office of the U.S. Trustee.

While the U.S. Trustee Program provides for the use of fee examiners in such cases, examiners aren’t required and frequently aren’t appointed in pre-packaged bankruptcies and cases that aren’t particularly contentious.  However, a rise in bankruptcies involving fraud and mass tort litigation is causing more bankruptcy lawyers to face scrutiny over their billing practices.  “Fee examiners have become more prevalent recently because of very significant bankruptcy cases seeking recompense for alleged abuses,” said J. Scott Bovitz, a Los Angeles attorney who represents fee examiner Nancy Rapoport in bankruptcy court.

For instance, fee examiners have lopped six- and seven-figure amounts off of recent cryptocurrency bankruptcies such as Celsius, Voyager and BlockFi as well as recent bankruptcies involving tort claims such as Boy Scouts of America, fire protection company Kidde-Fenwal and LTL Management, a company formed to divert Johnson & Johnson’s tort liability over cancer attributed to the company’s talcum powder.  In their assessments of Big Law bills, fee examiners look for duplicate and redundant tasks, block or “lumped” billing, vague time entries, staffing inefficiencies, excessive expenses and more.

“I always tell professionals that my goal is not to reduce anyone’s fees because everyone did everything perfectly,” said Robert Keach, a fee examiner and the co-chair of the bankruptcy practice at Maine law firm Bernstein Shur.  “I haven’t found that case yet.”  According to Keach, most fee examinations end up taking 5% to 7% off of a legal bill, although some recent cases have been higher. In July, Dorsey cut roughly $1 million in fees off Pillsbury Winthrop Shaw Pittman’s $6 million tab for its work restructuring a California luxury hotel owner.  “It is not the Court’s job to piece together entries and try to make sense of them.  Each entry must be capable of evaluation on its own.  Many of Pillsbury’s entries are not,” Dorsey wrote.

Fee examiners also come at a cost to the estate, although Keach noted that the costs of examining fees are almost always offset by the reduction of professional fees resulting from examiners’ work.  In a December fee application for the BlockFi bankruptcy, examiner Elise Frejka, a New York-based solo practitioner, requested a total of $168,500 for 269 hours of work billed at an hourly rate of $675.

The biggest reductions in recent fee examinations sometimes came from firms that billed smaller amounts than those of debtor’s counsel. Representing debtor Kidde-Fenwal, Sullivan & Cromwell agreed to roughly $100,000 in fee reductions for vague and repetitive time entries and potentially unnecessary attendance levels at board meetings and on calls.

However, while Sullivan & Cromwell billed roughly $9 million in the bankruptcy, Brown Rudnick lost even more money to the fee examiner despite billing less than $6 million representing the creditors committee.  The firm was docked for vague time entries, “certain junior associate time,” potential duplication and overlap of tasks, unnecessary attendance levels and other miscellaneous issues with time entries.

Rapoport, a fee examiner and a professor at the William S. Boyd School of Law at the University of Nevada, Las Vegas, said she doesn’t believe law firms are intentionally inflating their fees so much as not exercising adequate billing judgment.  “What I do see is a combination of two problems: bad billing hygiene, such as block-billing, vague entries, and rounded hours, which is often improved after a few conversations with a fee examiner, and the use of more senior billers to do more junior work than they should be doing,” Rapoport said.  “I also find that the weekly ‘all hands on deck’ meetings need to be able to justify why each professional is in the room.”

In other recent bankruptcies, law firms escaped with 100% of their fees intact, although such firms had already offered discounts for time spent preparing fee applications and “transitory” timekeepers who billed less than five hours in a given month.  In the BlockFi bankruptcy, Kirkland & Ellis made out with 99.9% of its fees intact, while the examiner granted the full requested amounts to Cole Schotz and Haynes and Boone.

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.

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.

New Attorney Fee Request in Kiddle-Fenwal Chapter 11

November 22, 2023

A recent Law 360 story by Jeff Montgomery, “Del. Judge Urged to OK New Kiddle-Fenwal Ch. 11 Atty Fees”, reports that an attorney for bankrupt fire protection company Kidde-Fenwal Inc. urged a Delaware judge to approve debtor payment of counsel fees for an ad hoc group of governmental claimants to help speed and streamline the huge and costly, mass tort-driven Chapter 11.  Brian D. Glueckstein of Sullivan & Cromwell LLP, counsel to Kidde-Fenwal, told U.S. Bankruptcy Judge Laurie Selber Silverstein that the unusual request was driven in part by prohibitions against government entity membership on regular unsecured creditor committees.

The restriction, Glueckstein said, threatens to complicate and delay Kidde's reorganization and handling of billions in pollution and personal injury claims tied to company sales of aqueous film-forming foam, or AFFF.  Chemical foams have been long and widely used to smother fires quickly, but they have also given rise to thousands of lawsuits asserting lingering pollution of public waterways and aquifers and billions of dollars in toxic exposure claims tied to cancers, thyroid diseases, elevated liver enzymes and decreased fertility among those exposed.

Kidde-Fenwal filed for Chapter 11 protection in May, saying it was facing more than $1 billion of liability tied to claims arising from a former subsidiary's manufacturing and sale of AFFF.  "We have a situation here where we have a vast number of lawsuits pending in the tort system.  A number of those cases were filed by governmental units.  A substantial number of those cases have issues that impact the governmental claims," Glueckstein said.

The debtor company, its unsecured creditor committee and its present 23-member "ad hoc" governmental creditor committee all argued that the law allows retention of counsel for the government panel, at Kidde's expense, based on anticipated "substantial contribution" to the litigation.  James S. Carr of Kelley Drye & Warren LLP, counsel to the ad hoc committee, told the judge that the debtors themselves sought clearance to pay the ad hoc committee's fees, based on the debtor's business judgment.

Carr observed that the debtors need the government ad hoc group's participation in negotiations, and is concerned that "they won't [participate] if their fees aren't paid."  The ad hoc group already has played an important role in getting states to "back down and let this case proceed," without waiting on government claim resolution, in order to reach some agreements without further litigation, Carr said.  "If we didn't have this cease-fire," he said, "the fees and expenses of this case would have continued to dramatically increase."

Judge Silverstein cited concerns about limitations on the ability of debtors to deviate from bankruptcy restrictions on estate payments of non-debtor legal fees, and at one point described the arguments as pointing to a "Frankenstein kind of standard.".  But the judge also said: "Quite frankly, I'm more persuaded that the government's voice is an important voice, because it's not on the committee.  That's the beauty of a [creditor] committee — you bring the voices together."

The Office of the U.S. Trustee argued that the Bankruptcy Code prohibits payments from estate for creditors outside regular unsecured creditor panels or by claims of future, prospective contributions to the case.  Fees can be sought based on claims of documented substantial contributions afterward, said Timothy J. Fox Jr., trial attorney for the U.S. Trustee's Office.  But he said seeking the payments prospectively, based on business judgment, "is inconsistent with the statutory scheme" under bankruptcy.

"You're suggesting that the debtor can use its business judgment on the operational aspects of its business, but not on its strategy for exiting the case," Judge Silverstein asked.  Fox said that while the ad hoc committee fee issue had largely surfaced in mass tort cases, it could turn up in other bankruptcies, eroding safeguards.  "If it was done at the appropriate time on a substantial contribution application at the conclusion of the case, you would have this back-and-forth and have concerns about the appropriateness of the fee," Fox said.