It’s easy to see why a ruling last week on fees in the GSC Group Inc. Chapter 11 caused a stir in the New York bankruptcy bar: The 126-page decision, issued Dec. 12, paints a disturbing picture of missteps and failures by firms advising GSC and by the asset management company’s largest creditor. And while former GSC Group adviser Kaye Scholer says its own conduct was vindicated by the ruling, the judge warned that “big firm-itis” contributed to carelessness in the case.
U.S. Bankruptcy Judge Shelley Chapman hacked $1.5 million off of the $5.9 million in fees requested by Capstone Advisory Group LLC, citing the advisory firm’s failure to disclose its true relationship with a consultant overseeing GSC’s restructuring. She also disparaged Capstone’s request last year for a 50 percent bonus for its work on the case.
“The court’s exercise of its discretion is informed in part by Capstone’s lack of any second thoughts, let alone remorse, at what has here transpired,” the judge wrote. “When Capstone next seeks to be retained in a case in this district or elsewhere, its conflicts check, retention, and billing practices will come under scrutiny … and they will have to pass muster.”
By contrast, GSC’s law firm, Kaye Scholer, got a full reprieve on the grounds that it had already taken its lumps. The firm agreed earlier this year to trim $1.5 million from its requested fees and to submit to an outside monitor because of disclosure failures in the case. “The message here is, if you can get out of a dispute like this with a settlement, get out,” noted a lawyer in the matter, who asked not to be identified because his client had not given him permission to speak.
The decision resolves a fight that began in January 2013, when the U.S. Trustee monitoring the case filed a motion seeking to oust both Kaye Scholer and Capstone as advisers and demanding disgorgement of fees. The trustee alleged that both Capstone and Kaye Scholer neglected to disclose that a key employee listed on Capstone’s application, Robert Manzo, who was serving as chief restructuring adviser, was actually a contractor who used a type of fee-sharing agreement barred by the bankruptcy code. (The disclosure issue surfaced after GSC exited bankruptcy in February 2012, during final fee applications by advisers.)
Kaye Scholer initially settled the trustee’s claims back in February, agreeing to forfeit nearly a third of its fees—an extraordinarily large reduction, according to bankruptcy experts—and consenting to an independent review of its conflicts and disclosure procedures. Capstone likewise agreed to settle for $1 million.
Judge Chapman rejected both settlements during trial in late April, however. She excoriated the trustee, Tracy Hope Davis, for agreeing to release the advisers from potential claims by third parties, as we reported here. (Davis has since been transferred to the U.S. Trustee’s office in San Francisco.) Capstone, meanwhile, withdrew from its own settlement, arguing that the firm’s arrangement with Manzo wasn’t a prohibited fee sharing arrangement under the bankruptcy code and thus didn’t require disclosure. Capstone is represented by Andrew Leblanc at Milbank Tweed Hadley & McCloy and Steven Mandelsberg at Hahn & Hessen.
In her decision last week, Judge Chapman agreed with Capstone that the arrangement wasn’t prohibited. But she found that Capstone should have disclosed the relationship anyway. Ironically, she noted, the issues would never have come to light had the financial adviser not requested a 50 percent bonus last year, leading GSC’s top creditor to object.
As for Kaye Scholer, the firm struck a new settlement with the trustee in May that didn’t include the broad legal releases that troubled the judge. But it remained for Chapman to approve the final, reduced fee request that the settlement laid out. The latest ruling confirms that the reduced fee request “is reasonable and shall be approved.” Kaye Scholer had other remaining worries going into Thursday’s ruling: GSC’s largest creditor and stalking horse bidder, Black Diamond Capital Management, had pressed the court to preserve its right to sue the firm on unspecified malpractice claims. (Black Diamond tapped Daniel McGuire and Gregory Gartland at Winston & Strawn for the matter.)
Judge Chapman wouldn’t have it. Black Diamond’s threatened claims, the judge wrote, belonged in “the waste bin of frivolous and mean-spirited pleadings.” In fact, the judge noted, Kaye Scholer’s overall contribution in the case was “stellar,” leading to an enormous bump in the price of GSC assets at a court-supervised auction that benefited all creditors—including Black Diamond.
“We have been vindicated,” said Kaye Scholer partner Aaron Rubinstein, lead partner defending the firm. “This is a fitting conclusion to a protracted and unwarranted ordeal.” In the end, the judge concluded, the larger fault was with Capstone, which knowingly kept quiet about Manzo’s relationship with Capstone, not with Kaye Scholer for failing to catch the omission.
Kaye Scholer “fell victim to what can best be described as ‘big firm-itis’ —the particular affliction that befalls big law firms when their partners and associates hand responsibility off to one another. .… When this happens, process fails and details fall through the cracks,” Chapman wrote. In this case, the Kaye Scholer lawyer taking notes during a key meeting and who drafted a disclosure document, Matthew Micheli, asked the senior partner involved, Michael Solow, to review the document—but Solow never did.
Kaye Scholer represented itself in the dispute and also tapped outside counsel Scott Hazan at Otterbourg, Steindler, Houston & Rosen.
This story originally appeared in sister publication The Litigation Daily.