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.
The settlement, announced in U.S. bankruptcy court in lower Manhattan on Monday, 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 trustee’s office, a U.S. Department of Justice branch that monitors the bankruptcy process, argued that both Kaye Scholer and GSC financial adviser Capstone Advisory Group neglected to say 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 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. According to the trustee’s scathing 112-page January filing, Manzo, who served as GSC’s chief restructuring officer, has known Kaye Scholer managing partner Michael Solow personally and professionally for more than 20 years.
The Monday settlement—which Kaye Scholer partner Aaron Rubinstein said in court does not require the approval of U.S. Bankruptcy Judge Shelley Chapman—is essentially the same as one the two parties reached in February. As part of the deal, Kaye Scholer agreed to repay the GSC estate $1.15 million—nearly a third of the $5 million fee it earned from the assignment—and forgo a pending application for an additional $352,000 in fees. The firm must repay the money within 30 days, Chapman ordered from the bench.
Hedge fund Black Diamond Capital Management, which bought GSC’s assets for $235.7 million at a 2010 auction, filed an objection to the settlement March 15, arguing that its approval would unfairly prevent Black Diamond and others from suing Kaye Scholer for actions related to its GSC work. Rubinstein said Monday that Chapman made it clear during a Friday teleconference that she believes the objection had no merit, which cleared the way for the firm and the trustee’s office to finalize their agreement. Chapman is expected to render a decision that bars the filing of future claims against Kaye Scholer related to the matter, according to Rubinstein.
U.S. trustee trial attorney Andrea Schwartz explained in court that the firm must also hire an independent expert to review its policies and procedures for applying for bankruptcy work. Within four months of finalizing any policy changes, the firm must train its attorneys in the new rules, Schwartz said. In addition, all of the firm’s future applications for bankruptcy work must be vetted by a committee that includes a Kaye Scholer bankruptcy partner not connected to the matter under review and a member of the firm’s ethics committee. That committee must certify in writing that all disclosures have been properly made.
In pushing for the settlement, the trustee’s office said in an April 8 filing that the deal in part "vindicate(s) the public interest in the integrity of the bankruptcy system as a whole and in the faithful adherence to the Bankruptcy Code and Rules by these professionals in all future bankruptcy cases." The office—which had initially sought to have Kaye Scholer return all the money it earned on the assignment—also said that it planned to prosecute all the claims included in its original January motion if it failed to reach an agreement with the firm. "Among other things, this will include the introduction of evidence of similar conduct in other bankruptcy cases," the April 8 filing said.
During a break in Monday’s proceedings, Rubinstein said he thought the deal was good for all of the parties involved, adding: "We have steadfastly contested every objection, and we are pleased we can move forward with the settlement we wanted." Schwartz declined to comment in court Monday, citing the office’s policies. In a press release issued in February, the U.S. trustee’s office touted the settlement as the first in which it has required an independent expert to review a law firm’s practices.
Financial adviser Capstone’s settlement was still being finalized in court as of press time Monday.