When Residential Capital LLC, once the fifth-largest mortgage servicer in the United States, filed a plan of reorganization Thursday that called for unsecured creditors to recover 36.3 cents per dollar owed, the company moved a giant step closer to exiting bankruptcy.
But for the dozen-plus law firms and hundreds of lawyers who have racked up hours working on the matter over the past year, ResCap's emergence from Chapter 11, which is expected to come in December, will bring a halt to what may well be the most lucrative bankruptcy assignment of the past year. Court filings show that fees paid out for work done in connection with the case in its first seven months alone totaled just under $100 million. And with six months' worth of bills yet to be tallied, that tab will climb substantially higher.
The ResCap bankruptcy filing, the largest of 2012, is as complex as the debtor's business is arcane. The company—formerly the mortgage lending unit of General Motors Acceptance Corporation (GMAC)—originated and services billions of dollars of subprime loans, and its bankruptcy has involved tens of thousands of creditors and potential creditors. The failure of the loans and securities it serviced amid the subprime market's collapse in 2007 spawned billions of dollars' worth of legal claims against both ResCap, and its parent, which is now known as Ally Financial Inc. It was those claims that ultimately compelled Ally to put ResCap into bankruptcy on May 14, 2012, with assets and liabilities both in excess of $15 billion.
Given the complexity of the case and the number of warring parties, it's not surprising that the ResCap bankruptcy has generated huge fees for the law firms involved. Lead debtor's counsel Morrison & Foerster, for instance, collected $31 million in fees through the end of 2012. The firm's top billers on the matter are partners Jeremy Jennings-Mares, a derivatives specialist ($1,195 an hour), and Thomas Humphreys, a federal tax expert ($1,125 an hour). Gary Lee, the partner leading the MoFo team, billed at $975 an hour.
Kramer Levin Naftalis & Frankel, which is serving as lead counsel to the official committee of unsecured creditors, has collected some $23 million in fees for its work on the case through the end of 2012. The Kramer Levin lawyers spent much of their time reporting, investigating, and analyzing ResCap's proposed $8.7 billion settlement with hundreds of trusts related to representation and warranty claims over residential mortgage–backed securities. The firm also billed a substantial amount of time for analyzing ResCap's sales of its mortgage origination business and loan portfolio and for scrutinizing relationships and transactions between ResCap and its corporate parent, whose majority owner is the U.S. Treasury. Kramer Levin's top billers include lead partner Kenneth Eckstein, who amassed $599,000 in fees during the last three months of 2012 at a rate of $990 an hour (Eckstein's hourly rate was the highest charged by the firm).
Rivaling the fees reaped by MoFo and Kramer Levin are those accumulated by Chadbourne & Parke, which was tapped to assist former U.S. Bankruptcy Court Judge Arthur Gonzalez in his role as court-appointed bankruptcy examiner. Chadbourne has collected roughly $21 million for its efforts on Gonzalez's behalf through the end of 2012, with much of the firm's work on the matter going into preparing a massive report completed by Gonzalez in early May and placed under seal until late June.
The anticipated release of that report—which suggests that ResCap would be likely to succeed if it pursued $3.1 billion in claims against Ally—prompted Ally and its Kirkland & Ellis lawyers to reach a settlement with ResCap creditors in late May. Under the terms of that settlement, which received court approval on June 26, Ally is to pour $2.1 billion into the ResCap estate—nearly triple the $750 million it originally agreed to contribute in May 2012. (That sum is on top of the $4.5 billion the ResCap estate has already collected in connection with the sale of the company's loan portfolio and mortgage-servicing unit.)
With the settlement in place, ResCap's major bondholders and creditors agreed to support the consensual reorganization plan filed with the court Thursday, according to participants in the matter.
U.S. Bankruptcy Court Judge Martin Glenn—who had authorized Gonzalez to spend up to $80 million on his investigation—indicated on June 26 that the money had been well spent, calling the examiner's 2,200-page opus "masterful" and saying the settlement it helped produce had allowed ResCap and Ally to avoid a "nuclear war" of litigation.
Chadbourne bankruptcy practice head Howard Seife says that unlike most examiners' reports, which offer only measured legal opinions, the document Gonzalez signed off on stakes out a firm position about how likely ResCap would be to prevail in a variety of contract and preference disputes. "Some examiners just debate issues," says Seife, who led the 100-lawyer Chadbourne team assisting Gonzalez. "We made judgment calls here on the merits. That's what Judge Gonzalez is good at—he's used to deciding things."
Gonzalez—who, as a judge, presided over the Chrysler, Enron, and WorldCom bankruptcies—was appointed examiner amid unsecured creditors' complaints about Ally's original $750 million agreement with ResCap. At the heart of those complaints was the long-standing relationship between the two parties: Ally purchased mortgage loans from ResCap via agreements under which the latter assumed certain risks and gained certain rewards related to market changes.
Creditors, however, argued that Ally, which remains solvent, should be held liable for all of ResCap's debts under the theory that Ally and ResCap were really acting as a single corporate entity. Under this argument, Ally intentionally shifted losses to its subsidiary while preserving its own financial well-being. In legal terms, the creditors were attempting to "pierce the corporate veil."
Drawing on evidence that showed creditors treating ResCap and Ally as distinct entities, Gonzalez concluded that the corporate-veil theory couldn't succeed in court. "The evidence supports the proposition that ResCap became unable to satisfy its creditors because of the billions of dollars in operating losses it recorded beginning in the fourth quarter of 2006—not because of an abuse of the corporate form by [Ally]," he wrote.
And though he did not find that Ally had intentionally pushed ResCap into insolvency, Gonzalez and his team did find that the parent company would likely be liable for some big-ticket breaches of contract and state-specific insider preferences claims totaling $3.1 billion. On the flip side, Gonzalez found that ResCap's claim that it was owed $3.5 billion more in a variety of other claims was unlikely to prevail.
Gonzalez pulled Chadbourne in to assist on an inquiry that in his words was "exceptionally broad." The firm's task, he wrote in his report, was to investigate "the entire course of conduct and all material intracompany dealings" involving the parent, the subsidiary, and its major investors over the course of a nearly decadelong period. (Glenn concurred with Gonzalez's assessment of the inquiry's scope, referring to it on April 24 as "an enormous undertaking.")
Seife calls the timing of the ResCap assignment "fortuitous" for Chadbourne, noting that the firm's work as counsel to the creditors committee in the Tribune Company bankruptcy ended in December 2012 and that its role representing Citibank N.A. as agent to the bank lenders in Tousa Inc.'s litigious Chapter 11 case was also winding down.
The next round of ResCap-related fee applications, which are to due to be submitted later this month, are likely to yield Chadbourne another welcome financial boost. A charter member of The American Lawyer's Am Law 100 rankings, the firm fell off the list for the first time this year after seeing its gross revenue decline 5.1 percent in 2012, to $290.5 million.
Seife says he and his colleagues originally expected to wrap up the ResCap assignment and finish their work on the examiner's report by the end of 2012. That estimate proved to be overly optimistic. The firm's first three months on the case were mostly spent on the monumental task of collecting and analyzing roughly 9 million pages of documents from 23 different parties. Then, working out of multiple conference rooms at Chadbourne's Rockefeller Center headquarters office from last fall through May, Chadbourne lawyers interviewed 83 witnesses, secured multiple written submissions from a dozen parties, and deposed or reviewed depositions of 18 witnesses involved in pending litigation. Writing draft after draft of the final report, Seife says, was completed over "many late nights and weekends, and many, many cups of Starbucks coffee."
All told, the Chadbourne team included some 30 partners and roughly 70 associates, with a mix of litigators, corporate, derivatives, and tax specialists all lending their expertise to the effort. Of the more than 30,000 hours the firm's attorneys and staff worked on in just the last three months of 2012, one-third were spent on document review and analysis, and another third were devoted to witness interviews and discovery. Seife and tax partner Richard Leder billed the highest rate charged by the firm: $995 an hour.
In addition to MoFo, Kramer Levin, and Chadbourne, the ResCap bankruptcy also generated substantial fees to 10 other law firms through the end of 2012, mostly for litigation work.
Bradley Arant Boult Cummings, special litigation and compliance counsel, received $7.3 million; Ohio's Carpenter Lipps & Leland, which has handled a huge RMBS class action lawsuit against ResCap, and California's Severson & Werson, special California litigation counsel to ResCap, received roughly $2 million apiece; Orrick, Herrington & Sutcliffe, special securitization, transactional, and litigation counsel; conflicts counsel Curtis, Mallet-Prevost, Colt & Mosle; and Morrison & Cohen, counsel to ResCap's independent directors, each received at least $1 million. Fees totaling just under $1 million apiece have been granted to several other firms, including special litigation counsel Locke Lord; Zeichner Ellman & Krause, litigation counsel for residential foreclosure claims; Troutman Sanders, counsel on consumer lending claims; creditors committee cocounsel Pachulski Stang Ziehl & Jones; and Dorsey & Whitney, representing a group of former ResCap executives.