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Firms Want High Bankruptcy Fees, Until They Have to Disgorge Them!

After reading this article, Trustee Wants Pillsbury to Repay $4 Million, Law.com (3/7/07), I'm guessing that Pillsbury Winthrop wishes that its bankruptcy fees were more like this than this. (Hat tip to Ernie the Attorney for the links). According to the article, the U.S. Trustee's office is attempting to disqualify Pillsbury Winthrop from representing SonicBlue in a bankruptcy proceeding because of conflicts of interest and to force the firm to disgorge $4 million in fees collected during the course of its representation. From the article, here's what's at the heart of the conflict:

The motion claims that in a 2002 opinion letter, issued before the company went bankrupt, Pillsbury assured senior note holders that SonicBlue would repay a $75 million bond obligation in full. Last September, the bond holders -- three hedge funds -- threatened to sue Pillsbury unless it indemnified them.  This, trustee's attorney Nanette Dumas wrote, underscored a conflict Pillsbury should have recognized from the beginning. The firm is "arguably 'on the hook' for any shortfall," because of the 2002 letter, Dumas wrote. With creditors in a bankruptcy often receiving a fraction of what they are owed, Pillsbury could be motivated to protect itself by not cutting the senior note holders' claim. "For ever dollar the senior note holders' claim was reduced, [Pillsbury's] corresponding exposure would increase," Dumas wrote.  Because Pillsbury, which had represented SonicBlue for years, should have recognized and disclosed the conflict at the start of the 2003 bankruptcy proceedings, it should disgorge all fees it assessed in the case, Dumas concluded.

The firm defended itself in its response, though it did acknowledge that it should have disclosed the potential threat to sue by the senior note holders. Experts quoted in the article stated that conflicts are common in bankruptcy matters and that a motion to disqualify and disgorgment is "an aggressive move."   

Posted by Carolyn Elefant on March 7, 2007 at 04:20 PM | Permalink | Comments (0)

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