In its first-ever lead debtor’s-side assignment in a Chapter 11 case, Sullivan & Cromwell faced a challenge beyond putting Eastman Kodak on a path out of insolvency: keeping the company’s U.K. and global units clear of restructuring proceedings at a time when similar cross-border reorganizations often spawn bankruptcy-related litigation around the world.
The firm accomplished that feat by helping to craft the highly unusual settlement between Kodak and its largest unsecured creditor—the U.K. Kodak Pension Plan—that was central to the reorganization plan S&C filed late Tuesday under which its longtime client expects to emerge from bankruptcy this fall as a far leaner operation focused on commercial printing rather than its iconic, and outdated, film-making and imaging businesses.
According to the lead attorneys on opposite sides of the settlement—which permits Kodak to "sell" two noncore businesses to the pension plan in exchange for a release from the latter’s claims that it is owed $2.8 billion—it is among the rare instances in which a U.K. pension fund has negotiated a deal with a large U.S.–based debtor directly rather than pursuing its claims against a U.K. affiliate (in this case, Kodak Limited) via Britain’s administration process.
"History has few examples of resolving a troubled U.K. pension while reorganizing a global business as a going concern," says Andrew Dietderich, the S&C partner leading the firm’s efforts on behalf of Kodak, citing the more typical liquidations of non–U.S. units that plagued Nortel Networks Holdings and Lehman Holdings. With the pension settlement in place, he adds, Kodak has no non–U.S. creditors of any significance and will be shedding what it has identified as its remaining noncore businesses. "This transaction unlocked value and transcended what was a pretty ugly situation. It’s great for Kodak, and it’s great for the U.K. pension funds."
Hogan Lovells bankruptcy partner Christopher Donoho III, who is leading a team from the firm advising the U.K. Kodak Pension Plan, concurs. "What was done here was creative, as in the ‘value creation’ category," he says. (London-based pension partner Katie Banks, a longtime adviser to the plan’s trustees, also played a key role on the Hogan Lovells team.)
Under the settlement, Kodak will spin off and transfer ownership of two divisions—the personalized-imaging and document-imaging businesses—to the pension plan, which handles retiree benefits for roughly 15,000 current and former company employees in the United Kingdom. The assets changing hands are worth $650 million, according to a Kodak press release. While Dietderich and Donoho acknowledge that the figure is a fraction of what the pension plan is owed, they say it is preferable to the potential takeover of the fund by the U.K.’s official pension rescue agency that a smaller recovery might have prompted. The pension fund also stands to benefit from any future revenues from the two businesses, potentially reducing its long-term deficit. (The transaction still requires the approval of U.S. Bankruptcy Judge Allan Gropper.)
Almost as unusual as the pension fund settlement is the fee structure S&C has employed while working on the Kodak case under an agreement it hammered out within a month of taking on the assignment. That agreement allows the firm to charge premium rates—that S&C says in court filings are "substantially discounted" compared to what it typically charges nonbankrupt clients—for much of its work, while handing more routine bankruptcy tasks off to the lower-priced lawyers at Wilmington-based Young Conaway Stargatt & Taylor.
The Kodak bankruptcy has proved lucrative for S&C so far. Over the past 15 months, S&C has submitted fee applications totaling roughly $44.5 million (less the 20 percent fee holdback routine in bankruptcies) and has collected nearly $20 million to date. Young Conaway, as cocounsel, has submitted applications for some $3.39 million in fees, according to court filings in U.S. Bankruptcy Court.
The assignment’s most lucrative aspects include advising Kodak on the deals portion of the restructuring, according to the court filings. As part of its court-approved arrangement with Kodak, S&C charges a flat rate of $990 per hour for all S&C partners and counsel, and $1,150 hourly for partner-level advice on nonbankruptcy work that includes M&A, litigation, finance, tax, IP, and securities law matters. Factoring in fees for associates, the firm’s blended rate on the case is $762 an hour. (S&C is also billing at half-rates for nonworking travel, according to fee filings.)
Along with Dietderich, S&C’s deal team has been led by M&A partner Steven Kotran and bankruptcy partner Michael Torkin. When handling transactional matters, the firm has also sought assistance from lower-cost counsel, including Nixon Peabody and Harter Secrest & Emery, as well as Kodak’s in-house legal and M&A teams.
S&C’S unusual flat fee system "resulted from the company’s concern with fees as well as our sensitivity to the headline numbers for our top billers," says Dietderich. "What nonbankruptcy clients pay us was, for lack of a better word, too high for a bankruptcy matter. We didn’t want to bust that ceiling" of widely accepted billing rates for bankruptcy partners. The higher fees billed for nonbankruptcy advice are also discounted compared to the firm’s typical fees, he adds, but have been set in a way to more closely track what the firm charges on other matters.
The firm also agreed to additional voluntary discounts requested by a court-appointed fee examiner that totaled $450,000 for the period from January 2012 through August 2012, according to the two most recent filings made by the examiner.
From September 2012 through the end of last year, the most recent period for which S&C has filed comprehensive summaries of its hours and fees, S&C lawyers spent 19,166 hours on the Kodak case and requested fees of $13,425,081. Nearly half the time billed—8,837 hours—was spent on "asset disposition" matters, which generated fees of $6,524,298. A total of 2,727 hours went to financing matters, for which the firm billed $2.1 million. The firm billed $607,504 for the 1,685 hours it spent on "fee and retention applications." (S&C also billed $899,916 for 1,166 hours worked on litigation and more modest amounts for handling employee benefits issues and work in a dozen other categories.)
Because the firm didn’t want to do all the routine work that goes into a large Chapter 11 filing—and doesn’t have the legal staff to perform those tasks anyway—Young Conaway was engaged as "efficiency counsel," Dietderich says. The result? "We’ve saved the client money," he says. "I’m proud of our cost control in Kodak."
Young Conaway’s blended hourly rate for a team of three partners and four associates is less than $400, according to its fee filings. The firm’s duties in the Kodak case, laid out in the debtor’s initial application to retain the firm in January 2012, include handling contracts with vendors, drawing up schedules, establishing a claims process, and other "nuts and bolts" Chapter 11 work "that is very labor intensive," says Pauline Morgan, lead counsel on Kodak for Young Conaway. The firm has also been tasked with monitoring the docket, maintaining service lists, and preparing retention applications for professional firms engaged by Kodak, according to the court filing.
Kodak’s engagement of the firm for cost-savings purposes, says Morgan, is more explicit than she can recall in any previous cocounsel matters. But, she adds, "It’s certainly well-known that our rate structure is more competitive here than in New York."
As for the New York–based S&C, the firm’s restructuring practice has been growing since the financial crisis. And though Dietderich, the practice group’s head, may be in his first role as lead adviser to a major U.S. Chapter 11 debtor, he has been busy on several notable matters over the past three years. He was one of several S&C lawyers advising MF Global Holdings as the commodities and financial derivatives broker descended into Chapter 11 as a result of its exposure to sovereign debt in Europe. He also advised both General Growth Properties’ Chapter 11 case and Fiat S.p.A.’s acquisition of Chrysler Group LLC. S&C and Dietderich also took a hybrid corporate and restructuring role in representing embattled mortgage insurer The PMI Group on its bankruptcy filing in Delaware in late 2011.
In the case of Kodak, Dietderich and Donoho say, the deal with the U.K. pension fund that is the linchpin of the company’s reorganization plan began to take shape 16 months ago. At that point—in a bid to discourage the pension fund from pushing Kodak Limited into U.K. liquidation proceedings—Kodak’s lawyers traveled to London to discuss its restructuring goals with the fund, its trustees, and the U.K. pension regulator. From the beginning, Dietderich says, the enormous outstanding deficit in payments to the pension plan "was the elephant in the room."
The team’s message: “This is the opposite of Nortel. Forget history. This time we, the U.S., want to work for you as our largest stakeholder. So come to the U.S. and join the case as a core part of it, not an outsider," says Dietderich. "We knew the tough-guy approach wouldn’t work here."
The pension fund trustees agreed to continue talking even as Kodak positioned its two noncore imaging businesses for a wider bid by third parties last fall. One reason the dialogue continued was that putting Kodak’s U.K. affiliate into administration also would have posed great risks for the fund. Because Kodak’s business is global, Donoho says, "putting a U.K. entity into administration might have unraveled the entire business" and produced an even lower recovery for pension holders.
Regulators also had to be brought on board. No U.K. pension had ever taken equity control over two non–U.K. businesses—let alone units that hadn’t yet been disentangled from the parent company. "It required the pension regulator and the Pension Protection Fund [the U.K.'s pension rescue agency] to think very commercially," says Donoho, whose firm had more than 50 lawyers working on the case in March and April. "They’re going to have to take on some risk that is different than the normal risk in their fund investments."
In the end, it was something simple that helped the parties overcome those complications: "A big reason this deal succeeded," Donoho says, was the relationship he and Dietderich developed.