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January 22, 2009 11:05 AM

Kaye Scholer's $6.8 Million Tab Latest Twist in Death Row Records Saga

Posted by Zach Lowe

Not many bankruptcy case fee applications include a sentence like this:

"The representation of the Trustee in this case has been particularly complex due to the individuals involved in the company's operations and intentionally illicit, 'gangster-style' business operations of the debtor."

The line comes straight out of Kaye Scholer's Dec. 18 request of $6.8 million for the work it did representing the trustee of bankrupt music producer Death Row Records.

Last week, Death Row, the infamous hip-hop label cofounded by rap legend Dr. Dre and Marion "Suge" Knight in the early 1990s, sold for only $18 million at auction--about $10 million less than even the pessimistic estimates floated by experts six months ago. WIDEawake Entertainment Group, a Toronto-based company, was the winning bidder.

Death Row's unsecured creditors are owed far more than the $18 million auction price (though just how much isn't clear), and the lawyers at Pachulski Stang Ziehl & Jones representing the creditors committee have asked a federal bankruptcy court in California to hold off on approving Kaye Scholer's fee request. The court is scheduled to hear discussion on the fee issue on Thursday. The creditors committee is hoping an alternative arrangement can be worked out that would reserve more money for unsecured creditors.

Those creditors, including Lydia Harris, a cofounder of Death Row who won a $107 million judgment against Knight in 2005, are already upset they likely won't see much--if any--of their money paid back, according to the Los Angeles Times

Kaye Scholer is a priority or administrative creditor, meaning its fees come before other creditors, says Robert Orgel, a Pachulski partner on the case. (Pachulski has billed nearly $1.1 million itself). Orgel speaks highly of Kaye Scholer's work in the matter--and there is reason to do so if Kaye Scholer's description of its services is accurate.

According to the firm's filing, Knight, who has served more than five years in prison on various assault charges, was so sloppy in keeping Death Row's business records that Scholer (and Pachulski) had to scour the country in order to track down the label's assets. Among the rocks the firm says it had to turn over as part of its legal scavenger hunt:

• Identifying and working to recover assets, including a Malibu home, that Knight transferred to friends in an effort to shield those assets from creditors.

• Uncovering a secret storage locker in Michigan that contained a "treasure trove" of unreleased songs by famous Death Row artists. Other secret tracks--and records of hidden bank accounts--were stashed in a southern California warehouse.

• The family of the late Tupac Shakur, perhaps Death Row's most famous artist, fought a protracted legal battle against Kaye Scholer's attempts to exercise a $100,000 option Knight held to purchase previously unreleased tracks by the rapper. The firm won. (Fellow rap legend Dr. Dre filed a similar challenge but withdrew when it became obvious he'd lose). WIDEawake Entertainment Group, the Toronto company that bought Death Row, acquired these tracks as well; they have not divulged their plans for releasing those tracks.

• The two law firms had to negotiate settlements with at least three women who claimed Knight owed them more than $500,000 in child support.

• The firms had to figure out a way to satisfy the IRS, which claimed Knight owed it $11 million. How'd they do it? By promising the IRS a chunk of the profits Knight may reap from future lawsuits against (among other entities) a California prison that, according to Knight, "failed to safeguard" a 15-carat diamond ring that went missing during his stay there. 

Then there were the bidders. At least three had close links to convicted felons, two others (Warner Music Group and Koch Records) offered about $25 million but backed out, citing Death Row's poor record keeping, and a third (Global Music Group Inc.) was disqualified after it missed a deadline to confirm its"winning" $24 million bid over the summer

"This was a messy case," Orgel. He added that "it is no surprise" that the auction drew a lower winning bid than expected given the economy.

Marc Cohen and Ashleigh Danker, the lead Kaye Scholer attorneys on the case, did not return calls seeking comment. Neither did R. Todd Neilson, the trustee whom they represented. 

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