Trial Set for $20 Million Success Fee in PG&E Bankruptcy

By Published On: September 25, 2004

The U.S. Trustee claims Pacific Gas & Electric?s investment banker and financial adviser, Rothschild Inc., is not entitled to a $20 million ?success fee? in the utility?s Chapter 11 case. Assistant trustee Pat Cutler said that Rothschild did not play a major role in developing the utility?s original plan to emerge from bankruptcy or the settlement agreement. This was the one claim challenged by the U.S. Trustee?out of the nearly $475 million invoiced by lawyers, investment advisers, and bankers, which were largely approved last week (<i>Circuit</i>, September 17, 2004). Rothschild played a ?backbench role? and was ?busy rearranging creditors? claims,? Cutler told bankruptcy judge Dennis Montali September 20. She said that UBS Warburg and Lehmann Brothers did the heavy lifting, and that the success fee, which was ?four times higher than [Rothschild?s] monthly retainer,? could not be justified. Warburg and Lehmann collected a $43 million underwriting fee. Rothschild challenged the trustee?s claim, which was based on testimony provided by PG&E chief financial officer Kent Harvey during the bankruptcy proceeding. The investment banker?s lawyer said he will depose Harvey later this month or in October, and Montali agreed to hold a half-day trial on the matter. ?You are looking at an outrageously high fee,? noted Lynn LoPucki, University of California at Los Angeles bankruptcy law professor. ?They are asking for a bonus fee that is larger than the entire fee?for months or years of work?requested by nearly all of the highest-paid professional firms in comparable cases.? LoPucki, however, was critical of far more than Rothschild?s multimillion-dollar claim submitted to Montali. In a study of recent large bankruptcy cases across the country, PG&E?s $475 million in professional fees and expenses tops the scale. LoPucki compared it with claims awarded to law firms working for 48 companies of like size that had their bankruptcy plans confirmed between 1998 and 2002. Calling the claims arising out of the PG&E case ?Enron-like,? he said PG&E?s bankruptcy help tab was ?four standard deviations above the mean predicted value.? An $89 million tab in professional fees and expenses would have been in line with like cases, or a maximum $200 million if you add an 80 percent confidence level, he said. Bankruptcy courts approve all but about 1 percent to 2 percent of claims. ?The courts are afraid they will lose business if they don?t approve professional fees,? LoPucki added. In addition, bankruptcy counsels? fees are rising at a rapid clip, about 8 percent a year, with lawyers and other professionals ?experimenting with what they can get away with,? according to LoPucki. The other success fee that was contested in Montali?s courtroom was Saybrook Capital?s $7 million. It was, however, slashed to $200,000 under a stipulated agreement filed September 17. Saybrook declined to comment. PG&E has not taken a position on success fee claims for Saybrook or Rothschild, according to utility spokesperson Ron Low. A far smaller claim, but one that drew long-winded arguments this week, was a $1 million bill submitted by the defunct California Power Exchange to cover its attorneys? fees, largely those paid to the participants? committee. PG&E argued that CalPX shouldn?t recover those fees. The judge asked PG&E why it was contesting the claim, noting that it didn?t really matter what form the claim took?via an amended prepetition claim or a claim for substantial contribution. ?They are not really amending a claim but really filling in a blank,? the judge noted. PG&E argued that although CalPX probably paid fees to the now-defunct participants? committee, it ?doesn?t make them a legal claimant.? The matter will be heard on November 4. <b>Comparative Bankruptcy Fees</b> Fees charged in cases of similar size (figures compiled by UCLA professor Lynn LoPucki) include:<ul><li>Kmart?s lead counsel, Skadden & Arps: $57 million</li> <li>Global Crossing?s lead counsel: $27 million</li> <li>Bethlehem Steel?s lead counsel: $12 million</li> <li>Sunbeam counsel: $5 million</li></ul>PG&E counsels? fees and expenses—from the U.S. Trustee’s final report—include:<ul><li>Howard Rice: $37 million</li> <li>Heller Erhman: $26 million</li> <li>Latham & Watkins: $29 million</li> <li>CPUC lead counsel Paul Weiss: $20.5 million</li></ul>

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