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When Howrey trustee Allan Diamond struck a $41 million settlement with Baker & Hostetler last year to claim a chunk of the fees tied to a pair of contingency cases that Howrey partners took with them amid the firm's 2011 collapse, the deal handed the defunct firm's bankruptcy estate some much-needed cash to help pay off its largest secured creditor, Citibank, AmericanLawyer.com reported on Friday. But that wasn't the settlement's only effect as the financial infusion it yielded will come back to haunt former Howrey partners this year in the form of a hefty tax bill — and some of them don't believe that's fair. Under provisions of partnership and tax laws, former Howrey partners are obligated to pay taxes on the $41 million the estate took in related to the Baker & Hostetler settlement, as well as recoveries from other lingering contingency fee cases. That money will appear as "phantom income" on those attorneys' tax filings this year, with each of them liable to cover a portion of what could be a sizable tax obligation. Three former Howrey partners — all of whom joined the firm in July 2009 when Howrey absorbed intellectual property boutique Day Casebeer Madrid & Batchelder — asked bankruptcy judge last week to rule that they are not obliged to pay taxes on the estate's settlement-related income.

Partners at struggling law firms may find it harder to jump ship in the future after a new ruling raised the risk of lawsuits against the firms that hire them, the Wall Street Journal reported today. Firms that hire lawyers from bankrupt law firms have long been subject to "unfinished business" claims, which seek to recover profits from ongoing legal work that partners take with them to their new homes. Such claims have typically been confined to firms that take on lawyers once a firm has shut down, under the theory that pending matters are assets that rightfully belong to the failed firm. But a ruling this month in the case of defunct Washington, D.C., law firm Howrey LLP has rattled some in the industry because it said that partners who leave a firm before it dissolves also have a duty to return any profits from unfinished legal work. The result could constrict a key escape hatch for law-firm partners at a time when many firms, caught between frugal clients and a dearth of business, are struggling to boost revenue. At least 10 major law firms have gone under in the past 15 years, scattering hundreds of partners who typically take ongoing legal work with them to their next job. On Feb. 7, Bankruptcy Judge Dennis Montali ruled that "there is no reason to limit the definition of Howrey unfinished business to matters pending as of dissolution." He gave bankruptcy trustee Allan B. Diamond the green light to try to recoup any profits from such work from firms that hired Howrey partners prior to the firm's demise. (Subscription required.)

MF Global Inc.’s trustee should be forced to account for expenses he has racked up liquidating the commodity brokerage, said a creditor that claims the case has cost more than $263 million in professional fees, Bloomberg News reported yesterday. Winding down MF Global has been proportionately more expensive than Lehman Brothers Inc.’s more complex liquidation, Knighthead Capital Management LLC said in papers filed yesterday in U.S. Bankruptcy Court in Manhattan. Knighthead said total fees for MF Global Inc. have reached $263.2 million, including attorney fees of $55.9 million. The fund seeks a Feb. 13 court hearing to demand more information about costs from James Giddens, the trustee who oversaw the liquidations of both MF Global Inc. and Lehman Brothers Inc. under the Securities Investor Protection Act.

U.S. Trustee William Harrington is protesting a potential $2.7 million bonus for Personal Communications Devices LLC Chief Executive George Appling, arguing that lawyers haven't proven that he worked hard enough to earn that bonus before the mobile phone distributor was sold in bankruptcy last fall, Dow Jones Daily Bankruptcy Review reported today. Harrington said in court papers that the proposed bonus for Appling, who remained CEO after the sale, wasn't designed to encourage him to work harder during the company's search for buyers who could purchase the company out of bankruptcy.

As New York’s highest court considers whether defunct law firms’ estates may collect hourly fees made by other firms that take up the collapsed firm’s client matters, experts say that the decision will boil down to how heavily the judges value a client’s right to choose its lawyers, Law360.com reported today. Though the provision of the Uniform Partnership Act known as the unfinished business rule says collapsed firms are entitled to “any property, profit or benefit” a partner receives that derived from the firm after that partner leaves, courts have differed on whether that applies to profits gleaned from hourly fee matters attorneys take from their old firm to their new firm. Determining which firm rightly owns the profits of those cases will depend to some degree on how the courts view the importance of lawyer autonomy and clients’ right to choose who represents them, attorneys said. “On one side of the equation, you have lawyer mobility and the ability of a client to choose its counsel,” said Paul Labov, an Edwards Wildman Palmer LLP attorney. On the other, trustees overseeing the dissolved firm’s wind-down can argue that under the unfinished business doctrine, the profits made really belong to the firm in which the work began because the attorney used the now-defunct firm’s resources to obtain the client in the first place, he said. The New York Court of Appeals recently agreed to address how the unfinished business doctrine applies to hourly fees made by partners for work performed on matters that they took from their old firm to a new firm, as well as what defines “client matter.” Until now, that question has not made its way through the appellate courts because in most situations, the trustees and the firms that took on the dissolved firms’ casework settle.

A bankruptcy court judge has approved up to $1 million in insurance payments to help cover defense costs for two former executives of Furniture Brands International, Furniture Today reported on Tuesday. Bankruptcy Judge Christopher S. Sontchi authorized the American International Group and National Union Fire Insurance Company of Pittsburgh to advance the funds for future legal expenses for former FBI Chairman and CEO Ralph Scozzafava and Vance Johnston, former senior vice president and chief financial officer. The funds are part of up to $15 million in coverage that the executives purchased prior to Furniture Brands International's chapter 11 bankruptcy that was filed Sept. 9. The policy is aimed at helping defray legal and other related costs that are associated with the shareholder lawsuits filed in August that allege that the company failed to disclose information about its true financial condition. These suits could be consolidated into a single class-action complaint.

The attorney who filed a now-defunct bankruptcy petition for the city of Harrisburg, Pa., sued the city and some of its officials on Friday for $289,000 plus interest for allegedly not paying him for the job, Reuters reported. Mark Schwartz sued the city, which recently closed on the sale of its incinerator and a deal to lease parking lots in order to erase $360 million in debt that kept the city teetering near insolvency. Schwartz also sued City Council President Wanda Williams and three other officials in the Court of Common Pleas for Dauphin County. The City Council retained him to file its chapter 9 municipal bankruptcy in October 2011, but the case was thrown out the next month after state lawmakers barred it. Since then, Schwartz hasn't been paid for any of his fees or expenses, he stated in the suit. Pennsylvania sold nearly $289 million of parking revenue bonds on Dec. 17 as part of the parking garage deal.

Loehmann's Holdings Inc.’s top executive is in line to collect a bonus from the discount retailer, which filed for bankruptcy and plans to begin shutting down its 39 stores next month, Dow Jones Newswires reported yesterday. The Bronx, N.Y.-based company has proposed to pay Chief Operating Officer William Thayer and another employee up to $650,000 in bonuses, according to court papers filed Monday in U.S. Bankruptcy Court in New York. In court papers, bankruptcy lawyers said that Thayer has been "working the equivalent of three jobs" as the company prepares to hold a Jan. 3 auction for the right to liquidate Loehmann's stores, which employs about 1,600 people. The company has already received $19 million bid from a team of three liquidators: SB Capital Group LLC, Tiger Capital Group LLC and A&G Realty Partners LLC. Under the proposed bonus pay-out plan, the amount that Thayer collects would grow with the amount of money that the liquidation sales bring in. In addition, he would be required to provide "transition services," according to court papers.

A judge cut the fees of financial adviser Capstone Advisory Group by about $1.57 million on Monday for its work on the bankruptcy of GSC Group Inc, saying it withheld information about a relationship with one of its contractors, Reuters reported yesterday. The ruling brings to a close a nearly year-long saga over how bankruptcy professionals handled GSC's insolvency and eventual sale to Black Diamond Capital Management. Bankruptcy Judge Shelley Chapman said that Capstone should have disclosed that Robert Manzo, the restructuring expert who helped sell and liquidate GSC's assets, was working as a contractor rather than a direct employee of Capstone. However, Judge Chapman said that the relationship itself, and the associated fee-sharing arrangements between Capstone and Manzo, did not violate bankruptcy rules, a blow to Black Diamond, which had accused Manzo of gross negligence.

Lawyers and other professionals tasked with tracking down the money Madoff stole and returning it to investors have earned more than $820 million to date in the 5-year old case and this week will head to bankruptcy court to request payment of millions of dollars more, the Wall Street Journal reported today. Trustee Irving Picard, an attorney with Baker & Hostetler LLP, is requesting $31.5 million in fees and $810,000 in expenses for the nearly 82,000 hours work that he and his firm performed between May 1 and July 31, a request the U.S. Bankruptcy Court in Manhattan will take up Thursday. According to Mr. Picard, “no single document” can adequately capture all the “hundreds of thousands of hours” of work that his firm and others have put in over the past five years. “Given the unprecedented fraud perpetrated by Madoff, the issues presented by this liquidation are complex, discovery is wide-ranging, and the litigation that has ensued is hotly contested,” his attorneys wrote in court papers filed last month. “All of this requires an enormous effort by the trustee and his counsel for the benefit of the victims.”