Monday, March 29, 2010

Lawyers Have Billed Tribune Co. $138M Since It Filed For Bankruptcy

By Michael Oneal, Tribune reporter

Kevin Carey isn't likely to win any awards for reining in runaway bankruptcy fees. But at least he took a stab at it.Carey was the U.S. bankruptcy judge in Delaware who last year warned lawyers in the Tribune Co. case that they had better think twice about charging more than $1,000 an hour.Chicago's Sidley Austin, the lead debtor's attorney, filed a top rate of $925.

New York's Chadbourne & Parke, which represents unsecured creditors, charged $955.
Both firms have managed to do pretty well anyway.

In the 15 months since Chicago-based Tribune Co. filed for bankruptcy, law firms and other professionals have billed the media conglomerate $138 million, or about one-quarter of the company's cash flow last year, an analysis of court documents shows.

Sidley's take alone is pushing $25 million, and the case is far from over.As big as those numbers are, experts agree, the spending is hardly unusual.Major cases in recent years — Enron ($793 million), United Airlines ($296 million), Delphi (just under $400 million) — have been colossally expensive. And the monstrous Lehman Brothers case, now under way in New York, will dwarf all of those. After just 17 months it has generated fees of $457 million, and that jumps to more than $700 million if you include management fees earned by restructuring specialist Alvarez & Marsal.

Bankruptcy fees have been rising at a rate of 8 percent to 10 percent annually over the past decade, far outpacing inflation, estimates Lynn LoPucki, a bankruptcy scholar at the University of California at Los Angeles law school. And the upward pressure is likely to build in the coming years as more companies try unsuccessfully to refinance a mountain of bubble-priced debt in a weak, reluctant market."It's very troubling," said Robert White, a retired bankruptcy specialist with O'Melveny & Myers in Los Angeles. "In the last 15 or 20 years it's gotten a lot worse."Despite some grumbling, debtors, creditors and judges seem resigned to the trend.

With the exception of Carey's early flash of concern, neither he nor the U.S. Bankruptcy Trustee charged with overseeing fees in the Tribune Co. case have blinked at the millions of dollars flowing out of the estate each month.

Stuart Maue, the St. Louis firm hired to examine fee applications, has challenged a tiny sliver of the billings so far, and its own $812,642 in fees are almost triple the $265,869 in savings it has found.

The only serious challenge to the Tribune Co. fees has come from junior bondholders. They are contesting an out-of-court agreement under which Tribune Co. paid $25 million to cover professional fees incurred in just the first 10 months of the case by the banks that provided the financing for the company's failed 2007 leveraged buyout. The move has generated lots of claims and counterclaims — and even more fees — but Carey has yet to rule.For the law firms, attention tends to focus on those eye-popping top rates pulled down by a handful of partners like lead attorneys James Conlan of Sidley (who recently got a raise to $950) and Howard Seife of Chadbourne (now at $965).

But the real cost stems from the army of professionals deployed. More than 160 people at Sidley have spent the equivalent of 4.6 years on the Tribune Co. case at an average rate of about $500 an hour.

Sidley's Conlan acknowledges that the costs are high but says they are market rate. The complexity of the case, he said, demands wide and diversified legal resources, and "it would be difficult to argue that Chapter 11 isn't the best way to preserve value."Nevertheless, some costs are hard to fathom. Sidley has spent $110,000 making copies. The top four professional firms in the case have billed a total of $1.2 million to cover the cost of preparing those bills.

Don Liebentritt, chief legal officer at Tribune Co., which owns the Chicago Tribune, said he has little choice but to pay up."Would we like it to be less expensive?" Liebentritt asked. "Sure. But you need to retain the best people possible to do what you need to do. … What I have to pay is determined by the market."

Many bankruptcy experts connect the rising costs to the fact that cases have become infinitely more complex in the years since the federal Bankruptcy Reform Act of 1978 gave corporate managers the ability to design their own restructurings and negotiate solutions with creditors.

Early on, the process was relatively orderly. Debtors obtained a high degree of control over their fate. Unsecured creditors got a single voice in negotiations through a creditors committee paid for by the estate. The senior creditors were usually one or two big banks that presented a unified front. Lawyers tended to follow a regular set of strategies to forge a workable compromise.

The cost of fighting in court can be seen plainly in Sidley's Tribune Co. billings. For the first eight months of the case, Sidley spent $1.3 million on litigation-related issues. But after the case began to focus on charges by junior bondholders that the 2007 LBO was improper, litigation fees jumped to $4.2 million over the next five months.

One byproduct of all these changes is that bankruptcy court became a magnet for the sort of highly paid gladiators who flocked to mergers during the 1980s. Big firms built major practices, creating scarcity value by offering capabilities smaller firms couldn't match.

In Chicago, that has paid dividends as firms like Sidley, Kirkland & Ellis and Skadden carved out major national franchises rivaling New York for big cases."Bankruptcy has become an elite practice," Baird said. "There's a superstar phenomenon like in all professions."

One reason the fee issue is so difficult to solve, said Seton Hall law professor Stephen Lubben, is that the outcomes of Chapter 11 arguably justify the costs. Companies with billions in assets and thousands of employees emerge with unencumbered balance sheets and a new lease on life. Despite the chaos, creditors of all kinds can also get their day in court, or choose to sell into a liquid market.

The problem, critics argue, is that incentives to control costs may be getting lost. Theoretically, all sides are hurt if fees whittle away the value of the bankruptcy estate. So all should be prudent in launching new litigation and vigilant over a sprawling posse of attorneys and investment bankers working by the hour.

But in practice, it is more complicated. Motivations can become so fragmented in a complex case that relying on each party's self interest to protect the estate doesn't always work. Management may be more interested in survival than trimming lawyer fees. If a hedge fund buys a bond for 10 cents on the dollar, the goal may be to simply double its money by fighting for a recovery of 20 cents. The long-term fate of the company may not figure into the calculation at all."If somebody thinks they can get more of a recovery in a courtroom than in a conference room, that means complex litigation at a high cost," Butler said.

Adding to the problem is the industry's reluctance to police itself.

To hold down costs in the Lehman case, for instance, the court formed a fee committee composed of representatives from the debtor, the creditors, the U.S. Trustee and Kenneth Feinberg, President Barack Obama's pay czar.

Feinberg has issued more challenges than the average fee examiner. But he has been met with howls from high-profile firms like Weil, Gotshal & Manges and Jones Day, which have successfully pushed back. Filings show that the biggest battle has been waged over how to account for the hours spent preparing fee applications.

The time spent debating the issue, of course, will be billed to the estate.

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