The Business of Bankruptcy

The lead bankruptcy attorney for Circuit City Stores Inc. charges $945 per hour, or $15.75 a minute.

The restructuring firm supervising the dismantling of LandAmerica Financial Group Inc. routinely bills the bankrupt company about $1 million a month for its services, including between $60,000 and $70,000 a month for travel and lodging expenses.

Lawyers, accountants, analysts and others had billed more than $65 million in professional fees and expenses to both companies from last November, when Circuit City and LandAmerica filed for bankruptcy protection, through the end of August.

Welcome to the business of bankruptcy, where lawyers and other professionals charge tens of millions of dollars in fees—and get paid first—while creditors may recover only pennies on the dollar of what they are owed.

Reorganizing or liquidating companies in bankruptcy court and maximizing those assets for creditors is an intricate process that requires mastering both high-stakes finance and the minutiae of the federal bankruptcy code, lawyers and experts say.

“The bigger the case, the more it costs,“ said Robert Lawless, a professor at the University of Illinois law school who specializes in bankruptcy.

Most fees go to lawyers who are charged with the complex job of reorganizing or dissolving companies. But those fees, which must be approved by the bankruptcy court, must be deemed reasonable and the work done must be beneficial to the estate.

“It’s a very lucrative area of practice right now,“ said Lynn M. LoPucki, a visiting law professor at Harvard University’s law school who maintains a bankruptcy research database.

Bankruptcy lawyers argue that the work they do should increase the value of the company, which in turn should increase the amount of money available to pay back to creditors.

“Is there an economic benefit to the legal community? Sure there is,“ said Douglas M. Foley, an attorney with Richmond-based McGuireWoods who is working on the Circuit City case. “But I don’t think anyone in the bar association celebrates the demise of a company or the loss of jobs.“

The fees for larger bankruptcy cases tend to run higher simply because they are more difficult to execute—which means more professionals, longer hours and lawyers who charge more because of their expertise, Lawless said.

From far-flung inventory to thousands of employees, cases have a lot of moving pieces to be resolved.

“When you have a large company, every piece of equipment could be subject to a dispute,“ Lawless said.

. . .

Circuit City and LandAmerica—once Richmond-area stalwarts and major employers—are winding down their cases in the U.S. Bankruptcy Court in Richmond.

In these cases, the companies will cease to exist once they leave the bankruptcy court’s oversight.

A bankruptcy judge last week approved LandAmerica’s plan to exit from the court’s protection. Circuit City’s hearing on its plan is tentatively scheduled for Dec. 21.

But since Chapter 11 bankruptcy proceedings began last November through Aug. 31, lawyers and professionals have racked up fees of $35.8 million in the LandAmerica case, with an additional $2.2 million owed but unpaid, bankruptcy court records show.

During the same period, Circuit City paid $29.5 million in fees, with an additional $3.4 million yet to be paid. That’s an average of about $3.3 million billed per month since the retailer filed for bankruptcy a year ago.

The fees are the most recent figures available for both companies.

The trip through bankruptcy court has been an especially arduous process for the two companies, given the size of Circuit City—more than 600 stores and 39,000 employees when it filed—and the scope of LandAmerica—a case that includes nine subsidiaries, and one that has been subject to more than 100 fraud complaints filed with the court.

Circuit City listed $3.4 billion in assets when it filed and LandAmerica had assets, including its nine subsidiaries that also filed, of nearly $702 million.

In comparison, Chrysler LLC, the nation’s third-largest automaker with $39.3 billion in assets, has paid $29 million in fees to lawyers and other professionals through September since filing for bankruptcy protection in April.

Discount menswear retailer S&K Famous Brands Inc., which filed for bankruptcy in February with $41.4 million in assets, has paid $2.4 million in fees for professionals working its case. The Henrico County-based chain has since shut down all its operations.

Movie Gallery Inc., once the nation’s second-largest video rental chain, has racked up fees of $20.6 million since it filed for bankruptcy in Richmond in October 2007. It had $892 million in assets.

. . .

The majority of the professional fees that have been paid in the Circuit City and LandAmerica cases has gone to the attorneys who are charged with the complex job of dissolving the two local companies.

Skadden, Arps, Slate, Meagher & Flom LLP & Affiliates, the global law firm running Circuit City’s bankruptcy and liquidation, has been paid more than $6 million through August.

During one three-month period, Skadden’s lead attorney, Gregg M. Galardi, who works out of the firm’s Delaware offices, billed 125.8 hours at $945 an hour, or $118,881. The court approved the fees in October. There were no objections.

The work that Galardi and his team have done includes spearheading talks to sell the chain, negotiating settlements with creditors, and constructing a plan of how creditors would be repaid. His team includes 17 associate attorneys.

In all, Galardi has billed 870.45 hours—or about $822,500, based on his hourly billing.

Wilkie Farr & Gallagher LLP, the New York-based law firm representing LandAmerica, has billed more than 18,000 hours—or nearly 750 24-hour days—for a total of $10 million.

It has had upward of 75 professionals working on the case at any given time.

Fees range from $105 per hour for legal assistants to up to $995 per hour for attorneys who are partners at Wilkie Farr.

. . .

Every three months, law firms and other professionals working on the Circuit City and LandAmerica cases must submit interim fee reports for approval by Bankruptcy Court Judge Kevin R. Huennekens, who presides over both cases.

Experts say it’s rare to have the fees challenged.

Circuit City has not seen any major skirmishes over fees. Last month, for instance, the latest compensation requests for several professionals working the case were approved with no objections filed.

Even though fees haven’t been much of an issue in the Circuit City case, the University of Illinois’ Lawless said the judge is likely keeping an eye on what is being charged.

“A bankruptcy judge is obligated to look at fees during a case, regardless if there are no objections,“ he said.

Objections to fees in the LandAmerica case is a different story.

During a fee hearing in August, more than three dozen objections were filed, including one from an attorney and creditor of a LandAmerica subsidiary, LandAmerica 1031 Exchange Services Inc.

U.S. Trustee Robert B. Van Arsdale, who works for the Department of Justice and is charged with monitoring fees and upholding bankruptcy laws, also warned about the mounting fees in the LandAmerica case.

“It’s unfortunate that bankruptcy is expensive and big bankruptcy cases are very expensive,“ he said during a LandAmerica hearing.

McGuireWoods attorney Dion W. Hayes defended the fees, saying during the August hearing that the LandAmerica case was complicated and the firm had many people working on it.

The LandAmerica exchange company alone involved more than 100 complaints alleging fraud. Those complaints led Huennekens to order several trials, with each one requiring motions for evidence, depositions and lots of work hours.

“The case is a complex case,“ Hayes said. “I don’t think anyone can dispute that.“

. . .

Bankruptcy fees are on the rise, said LoPucki, the Harvard Law School visiting professor.

Fees have increased on average by 10 percent each year between 1998 and 2007, his research shows.

And, he said, the fees in the Circuit City and LandAmerica cases still seem high.

“This is a very expensive case for the size of the company, the length of the case and the number of professionals working the case,“ LoPucki said of the LandAmerica case.

Instead, LoPucki’s database estimates the fees in LandAmerica and related subsidiaries cases should range between $7.68 million and $21.82 million, well below the $35.8 million that has already been charged.

Seventeen professional firms are working on the LandAmerica case.

In Circuit City’s bankruptcy case, LoPucki’s database estimates fees should be between $12.9 million and $36.7 million. The fees in the case are already approaching the top of that range.

LoPucki’s database allows users to estimate what the professional fees may come to in a case, based on the costs associated with previous cases.

The amount is based on the duration of a case, a company’s assets, the location of the filing and the number of professional firms approved to apply for fees.

. . .

The fees that have been awarded on an interim basis can be revised, Van Arsdale from the trustee’s office said during a LandAmerica hearing.

“All of these fees will be re-evaluated at the end of the case to see if it was worth it,“ he said.

Huennekens said the fees could get a second look. However, he said, he thought the attorneys were working to increase the value of the estate and therefore the amount of money creditors would receive.

“I think the work performed in this case has been good for the estate,“ the judge said of the LandAmerica case.

Tom Arnold, a professor of finance at the University of Richmond’s Robins School of Business, said fees become controversial as a case winds down when creditors start to learn what they might receive.

“This can create a contentious situation in that creditors may be questioning fees because the fee . . . eats away at what cash is being created through the liquidation,“ he said.

LandAmerica and Circuit City are at that point now.

Creditors for both firms had to vote by Nov. 10 on whether to support plans detailing how the remaining funds will be divvied up among creditors.

The LandAmerica plan to exit bankruptcy court and repay claims was supported by 97 percent of voting creditors. Huennekens approved the plan last week.

LandAmerica creditors, depending on what group they are in, are estimated to get 2 cents to 81 cents on each dollar owed.

A hearing to confirm Circuit City’s plan is tentatively scheduled for Dec. 21.

Circuit City’s unsecured creditors, such as vendors, are expected to get as much as 13.5 cents on each dollar owed. Secured creditors, or those that had a lien or loan that was secured by inventory or some other part of the business, should recover 100 percent of what they are owed.

A final amount of what creditors will receive won’t be known until next year, when final checks likely will be sent out.

For comparison, when catalog showroom retailer Best Products Co. Inc. decided to shut down operations in 1997, company officials believed unsecured creditors would get about 68 cents on each dollar owed. Two years later, creditors of the former Henrico County-based chain got 95.88 cents on every dollar owed.

While creditors and others may believe professional fees are excessive, voting against a plan only causes more work to be done by attorneys, which further increases the fees.

“One of the biggest reasons for my clients to vote for the plan is to end the administrative expenses and the administrative drain that we’ve seen in this case in the past year,“ said attorney Ronald A. Page Jr., a lawyer with DurretteBradshaw PLC in Richmond who represents customers of the bankrupt LandAmerica 1031 Exchange Services Inc.

. . .

While the fees continue to rack up, some employees still wait to get paid.

In some cases, the amount they are owed represents less than the cost of a meal billed to the companies by a professional.

For instance, David Harrison, a Pennsylvania college student, wrote the bankruptcy court last month saying he has yet to receive his last paycheck from Circuit City for $165.96.

He could still get paid, but that will require him to prove his claim.

The process is confusing and “these documents [are] very difficult to follow,“ he wrote.

Unlike Circuit City and LandAmerica, Harrison wrote that he can’t afford an attorney to help make the process work for him.