The U.S. Trustee Program yesterday demanded extraordinary penalties for financial adviser Capstone over alleged coverups during GSC Group Inc.'s bankruptcy, seeking to strip millions of dollars in fees as a heated trial came to a close, Reuters reported today. The U.S. Trustee Program alleged that Capstone deliberately misrepresented the employment status of the adviser assigned to the GSC case in an effort to cover up unlawful fee arrangements. It earlier settled similar allegations against the adviser, Robert Manzo, and against Kaye Scholer, the law firm that advised GSC, which the U.S. Trustee said knew about the fee arrangements. Kaye Scholer agreed to pay $1.5 million and to appoint an independent expert to review its disclosure policies. Both Kaye Scholer and Manzo agreed to leave the case.
A federal bankruptcy watchdog filed a rare letter defending her personal role in negotiating settlements to resolve a professional fee dispute in GSC Group Inc.’s chapter 11 case, the Wall Street Journal reported today. In an eight-page letter addressed to Bankruptcy Judge Shelley C. Chapman, U.S. Trustee Tracy Hope Davis responded to the “concerns” the court raised about the trustee’s role in a settlement process that has taken several twists and turns in recent months. “The UST has endeavored to handle this matter with the utmost integrity and professionalism and in compliance with the court’s guidance and rulings,” Davis wrote. “The UST regrets any confusion that has arisen over the course of many hearings and conferences held in this case and hopes that the UST has satisfied the court’s concerns.” GSC Group, an investment manager whose funds targeted distressed debt as well as U.S. and European corporate debt, sought chapter 11 protection in August 2010 and eventually sold its assets to Black Diamond Capital Management LLC. Its case heated up earlier this year, when Davis claimed that law firm Kaye Scholer LLP and financial adviser Capstone Advisory Group LLC hid conflicts of interest and fee-sharing agreements, and also made “inaccurate and incomplete” disclosures. The trustee settled the allegations, but Capstone’s deal later fell apart, paving the way for a trial to go forward last month on the advisory firm’s conduct.
A federal judge has approved plaintiffs counsel fees in a $219 million settlement related to Bernard Madoff's Ponzi scheme, rejecting objections by the New York attorney general that the fees were "wildly excessive" but trimming a portion of the request for what she said were unnecessary hours reviewing some documents, the New York Law Journal reported on Friday. The settlement arises from separate actions brought by Attorney General Eric Schneiderman, the U.S. Labor Department and 13 plaintiffs firms on behalf of investors against Ivy Asset Management, a subsidiary of Bank of New York Mellon, accusing it of advising clients to invest with Madoff despite serious concerns about his operations. The parties reached a $219 million settlement, in which Ivy would pay most of the funds. Plaintiffs lawyers had requested $40.8 million in fees, about 20 percent, and $1.2 million in expenses as part of the settlement. Schneiderman and other objectors criticized the number of hours reflected in the request and said plaintiffs counsel had merely "piggybacked" on the attorney general's work to reach the settlement with Ivy (NYLJ, March 8, 18). But Southern District Judge Colleen McMahon rejected the attorney general's argument that the fee award should be rejected because the attorney general had earlier been offered a $140 million settlement.
The U.S. Trustee Program is expected to unveil the first overhaul in nearly 17 years of the guidelines intended to keep bankruptcy costs in check on July 1, the Wall Street Journal reported today. The effort aims to tamp down on fee and expense applications submitted by attorneys for corporate debtors and sometimes creditors. The challenges come from the U.S. Trustee Program, the wing of the Department of Justice that monitors bankruptcy cases, as well as some bankruptcy judges. Spurring the effort to alter the guidelines are concerns that unjustified costs can give the impression that professionals are billing for money that rightly belongs to the people and businesses they are serving. The U.S. Trustee Program has attempted to curb fees and expenses for decades, but with the guidelines, under review for at least the last 18 months, it is refocusing its sights. "Evidence of improper expense reimbursements, even small ones (e.g., a professional billing an estate for a pack of chewing gum), reinforces the perception of abusive billing," according to a 2011 paper on bankruptcy fees co-written by U.S. Trustee Program Director Clifford J. White III. "While such reimbursements are frequently dismissed as isolated mistakes, the picture that emerges can be one of professionals who see the bankruptcy estate as an easy source of revenue." The proposed guidelines, which are expected to apply to attorneys in bankruptcy cases with $50 million or more in assets or liabilities, have gone through two drafts so far. Among the proposals: Expenses should be prorated where appropriate, and applicants shouldn't request reimbursements for "overhead" such as word processing and phone calls. The updated guidelines will be posted on the program's website and published in the Federal Register, and are expected to go into effect a few months later, according to the U.S. Trustee Program.
With a liquidation trustee now overseeing Dewey & LeBoeuf's bankruptcy, the professional advisers who guided the defunct firm through its first nine months of chapter 11 proceedings want to be paid the balance of the $23.6 million that they say they have earned for their contributions to the case, American Law Daily reported yesterday. The advisers—10 law, financial, and restructuring firms—submitted final fee requests in bankruptcy court this week that detail hours worked and expenses incurred from the time Dewey filed for bankruptcy in May 2012 through March 22 of this year, when the firm's chapter 11 plan became effective.
U.S. Trustee Tracy Hope Davis is arguing against pay boosts for two financial-advisory firms that evaluated American Airlines' parent AMR Corp.'s pursuit of $3.25 billion in new financing, Dow Jones Daily Bankruptcy Review reported today. The financing would help the struggling airline pay off some bond debt and fund its exit from bankruptcy protection after merging with U.S. Airways Groups Inc. Under proposed tweaks to their hiring agreements, financial advisory firms Rothschild Inc. and Moelis & Co. would split another $15 million for their help in evaluating the financing deal—an additional payment that is unwarranted for firms that already have "generous fee arrangements," Davis argued in court papers filed on Thursday.
Bankruptcy Judge Shelley Chapman was critical of the U.S. Trustee Program's handling of GSC Group Inc.'s settlement talks with law firm Kaye Scholer and financial adviser Capstone, which the U.S. Trustee had accused of covering up conflicts of interest to enhance fees, Reuters reported yesterday. The judge is presiding in a trial over the alleged conflicts of interest by advisers to GSC Group Inc., an investment manager that eventually sold its assets to its lender, Black Diamond Capital. The dispute stems from the role of Robert Manzo, the adviser tasked with liquidating GSC's assets after the sale. Capstone listed him as an employee, but the U.S. Trustee said that he was a contractor subject to fee-sharing agreements, which are largely barred under bankruptcy laws. The parties also covered up long-standing professional and personal ties between Manzo and partners at Kaye Scholer, the Trustee alleged. U.S. Trustee Tracy Hope Davis said in court that her office plans to respond more fully to Judge Chapman's concerns.
Kaye Scholer has finalized a settlement with the U.S. Trustee's Office that requires the firm to forfeit a total of $1.5 million it was paid or expected to be paid for its work on the chapter 11 case of investment firm GSC Group and to revamp its procedures for applying for bankruptcy assignments, American Law Daily reported today. The settlement resolves claims brought by the trustee's office in January that accused Kaye Scholer of failing to disclose key details when it applied—and was chosen—to represent GSC as debtor's counsel in 2010. The U.S. Trustee's Office argued that both Kaye Scholer and GSC financial adviser Capstone Advisory Group neglected to report that a key employee listed on Capstone's application was actually a contractor who used a type of fee-sharing agreement barred by the bankruptcy code. The U.S. Trustee also faulted the firm for failing to mention that it had been employed previously by other entities owned by the contractor, Robert Manzo, creating a potential conflict of interest.
Billionaire investor Wilbur Ross told the ABI Commission to Study the Reform of Chapter 11 that the hourly billing system that they use to get paid is “primitive” and encourages frivolous legal actions, the Wall Street Journal's Bankruptcy Beat blog reported. A bankruptcy professional’s hourly rates have grown "infinitely faster than inflation for as long as I can remember," Ross said Friday at ABI's Annual Spring Meeting, which more than 1,000 people had registered to attend. Bankruptcy judges who are tasked with approving the fees have a tough time figuring out what’s appropriate, he said. Ross suggested that the problem could be fixed if attorneys either were not paid for pursuing losing actions or if compensation were capped using a benchmark that could be based on hourly rates in recent cases. Bankruptcy professionals who are working on exceptionally difficult cases like that of Lehman Brothers or Washington Mutual could ask a judge for special permission to be paid more, he said.
DLA Piper's public feud with an ex-client who alleged the firm overbilled him has been resolved quietly, a month after the client released headline-grabbing internal emails by DLA attorneys who discussed a "churn that bill, baby" approach to billing, the New York Law Journal reported today. Adam Victor reached a settlement with the firm this week, said Larry Hutcher, a partner at Davidoff Hutcher & Citron who represents Victor. "The parties resolved their dispute to their mutual satisfaction in a confidential settlement agreement," Hutcher said yesterday. Victor exposed the emails obtained in discovery in response to a lawsuit brought by DLA claiming Victor owed the firm $679,000 in legal fees. DLA was hired in April 2010 by Project Orange Associates, which was owned by Victor, to handle its bankruptcy. The firm was later disqualified due to a conflict, but DLA said Victor requested that the firm represent him personally.
