Next Chapter in Relativity Media Bankruptcy Case: Millions in Professional Fees

James Rainey

Relativity Media is struggling to pay its bills and facing a possible liquidation sale, just six months after the company exited bankruptcy. So do the lawyers and other advisers, who made the studio’s reorganization sound like a sure-fire success, stand to suffer any reduction in the more than $19 million they are still owed in the case?

Not likely, if it’s up to the U.S. Bankruptcy Court in New York. An expert in compensation for bankruptcy professionals said the Manhattan court gets a huge share of America’s big Chapter 11 cases in large part because judges there do little, if anything, to rein in gigantic legal bills.

If the dozens of lawyers and financial advisers who steered Relativity’s reorganization take any hit to their fees it will be for another reason: The special fund set aside by Relativity to pay professionals in the case has shrunk to $8 million, said an individual close to the case. Claims in the case totaled more than $47 million, and $19 million of those fees had not been paid as of the last public accounting, court records show.

Judge Michael Wiles, who presided over the Relativity bankruptcy, signed an order last week giving professionals in the case until this Friday to submit fee applications. To date, no formal objections to the fees have been filed. A hearing on the issue has been set for Nov. 3.

With some partners billing at up to $1,200 an hour, costs in the nine-month-long case mounted quickly. The biggest totals came from the two firms that led representation of Relativity, the multi-media company founded by Ryan Kavanaugh. Jones Day billed more than $11.9 million in fees and expenses, and Sheppard, Mullin, Richter & Hampton charged more than $6.1 million. The firm representing Relativity CEO Kavanaugh — Skadden, Arps, Slate, Meagher & Flom — has submitted bills for $4.9 million in fees and expenses.

Richard Wynne, Day’s lead lawyer in the case, did not return a request for comment. Craig A. Wolfe, of Sheppard Mullin, said he believes the fee issue can be resolved at next month’s hearing. He declined to comment on the shortage of funds to pay professional claims in the case.

The quick swoon by Relativity, after an April emergence from Chapter 11, creates a rare situation where a company’s reorganization appears to be coming unglued even before the legal bills for the do-over have been paid.

In the U.S. bankruptcy court system, a high percentage of cases are directed toward courts in Delaware and New York. Those jurisdictions are favored because the courts do little to reduce professionals’ fees, said Lynn LoPucki, a UCLA law professor who conducted a comprehensive review of fee payments.

Judges in Dallas, Philadelphia, and other locations who attempted to control charges suffered a backlash. They lost the professional recommendations from members of the bankruptcy bar that are crucial in winning reappointment to the bench, LoPucki said. Evidence also shows that bankruptcy lawyers pushed to keep cases out of jurisdictions where their fees might be questioned, the UCLA expert said.

“If a judge tries to get some control, future cases will just go somewhere else,” said LoPucki. “It’s a market for something that shouldn’t be a market.”

The bankruptcy system assigns a public bureaucracy – the Office of U.S. Trustee – to oversee some bankruptcy cases. Lawyers from the Office of the U.S. Trustee were appointed in the Relativity case. The lawyers pushing the case through Judge Wiles’ court also agreed to the appointment of a “fee examiner” to make sure that professional fees did not spiral out of control.

Even though such a review is not required, attorneys in the case asked for a fee examiner to be sure that all charges are “completely vetted,” said Wolfe, of Sheppard Mullin.

But neither the U.S. Trustee nor fee examiners typically slash meaningful amounts from bankruptcy charges, according to LoPucki. A review of fee-examiner cases actually showed total charges were higher than in cases where fee examiners were not appointed. The UCLA professor called the fee examiner “the man who puts the lipstick on the pig.”

A primary goal of Chapter 11 reorganizations is to avoid allowing companies to return to business, only to see them fall into financial insolvency again. Lawyers in the Relativity case persuaded Judge Wiles that the reorganization was “not likely to be followed by the liquidation, or the need for further financial reorganization.” That imperative appears broken in the Relativity case, with the company now putting itself up for sale.

But the future success of a bankruptcy reorganization plan is not one of the criteria judges use to assess whether lawyers should get the money they demand. “There is an incentive for everybody to approve these plans and get them out the door whether they are going to work or not,” said LoPucki.

Asked if fees in the case should be reduced because Relativity’s reorganization appears to have fallen flat, Sheppard Mullin’s Wolfe said: “I think it would be premature to comment on that.”

An unusual aspect of the Relativity case is that a reserve fund designed to pay lawyers and other professionals may not cover all the bills that have been submitted. Informed that the reported shortfall could leave some lawyers’ bills unpaid, LoPucki said: “So perhaps the lack of money is going to impose the kind of limit a judge would not impose.. …It’s a kind of natural justice.”

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