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September 16, 2011 5:35 PM

Will Contingency Fee Questions Upend Howrey Bankruptcy?

Posted by Sara Randazzo

UPDATE, September 16, 6:37 p.m., EDT: On Friday afternoon, San Francisco federal bankruptcy court Judge Dennis Montali set a hearing for September 21 at 9:30 a.m. to review a request by the Howrey estate to extend the deadline for finalizing its Chapter 11 plan until February 1.

How much the Howrey estate will ultimately collect from lingering contingency-fee cases has become a key sticking point in the defunct firm's bankruptcy, with dueling documents filed Thursday in San Francisco bankruptcy court spinning the ambiguous answer to that question in favor of parties on opposite sides of the proceedings.

Attorneys for Citibank, Howrey's largest creditor, filed a motion asking that the court intervene and appoint a trustee to oversee the bankruptcy. The Citibank filing coincided with one by attorneys representing the Howrey estate who requested that the deadline for when they must submit a final wind-down plan for the court's approval be pushed back from October 4 to February 1.

In the eyes of Howrey's lawyers, the extra time is necessary to determine whether the estate will be able to collect outstanding contingency fees that could boost its ability to repay its debts. To Citibank, those fees can no longer be counted on.

Citibank's motion, filed by the bank's counsel at Paul, Weiss, Rifkind, Wharton & Garrison and Peitzman, Weg & Kempinsky, points to the $5.8 million in administrative costs the bank has paid to the estate since the bankruptcy began as one reason the court should either appoint a trustee to oversee the Chapter 11 case or convert the matter to an involuntary Chapter 7 proceeding.

The bank also argues in its filing that the Howrey estate is unlikely to ever recover any more of its outstanding accounts receivable, given that $32.7 million of the firm's $33.3 million in uncollected bills date back more than three months ago. Some of those bills may be even older, considering that Howrey officially dissolved on March 15 and that many of its attorneys had already scattered to other firms in the weeks and months before that.

Pushed into a Chapter 7 filing in April by a group of unsecured creditors, Howrey reclaimed control over winding down its affairs by converting the bankruptcy to a voluntary Chapter 11 filing in June. Should Citibank to gets its way, Howrey would relinquish that control.

The bank's motion points to one specific contingency fee case as evidence of "the speculative and uncertain nature of Howrey’s possible future recovery" from such cases "and why it is impossible to ascribe any value to such cases at this juncture."

The case in question—a massive antitrust class action filed by former Howrey attorneys now at Baker & Hostetler on behalf of 7,200 dairy farm plaintiffs from the southeastern United States—ended in a tentative $140 million settlement on July 12 with milk and dairy producer Dean Foods.

At a Howrey bankruptcy hearing a few weeks later, H. Jason Gold—who chairs Wiley Rein's bankruptcy and financial restructuring group and is leading a team from the firm serving as the defunct firm's bankruptcy counsel—told federal bankruptcy court Judge Dennis Montali that the settlement could bring in as much as $22 million in attorneys' fees for the estate by the end of the year.

On August 19, however, a judge overseeing the so-called milk case vacated that settlement, and a new trial date has not yet been set.

The estate has collected some money in recent weeks. Earlier this week, for instance, Montali signed off on disbursing funds from a $1.5 million settlement Howrey reached with North Sea Investments for a case it took on in 2006 involving the sale, lease-back, and subsequent loss of a drilling rig. The Am Law Daily has previously reported on several other ongoing matters Howrey has been handling even after it dissolved that could add cash to the estate's coffers. Those matters include the firm's representation of a group of Hispanic farmers in a discrimination case against the federal government, and a tentative, but controversial, $10.5 million contract to do work for New York State's fledgling North Country Power Authority.

In their Thursday filing, Howrey's attorneys seemed more optimistic about the defunct's firm's chances for collecting fees for unfinished business over the next several weeks and months. A court declaration by former Howrey chair Robert Ruyak, who also sits on the firm's five-person dissolution committee, adds that these potential funds "will result in substantial recoveries to the estate, which may be used to pay its secured obligations and fund a plan of liquidation."

Ruyak joined Winston & Strawn as an equity partner in Washington, D.C., earlier this month. In discussing his move, Ruyak told The Am Law Daily that he didn't want to go to a new firm until "it was clear things would be wound down to a point that wouldn’t demand my full-time involvement." Ruyak said that from his perspective, the bankrupty reached that point for him in mid-July.

In their request to push back the deadline for filing the final Chapter 11 plan, Howrey's attorneys claim that several issues forced them to ask for more time. The complicating factors cited in the filing include: the question of whether the bankruptcy should move to the Washington, D.C., area from San Francisco; a dispute between the firm and its former insurance provider over unpaid claims; lawsuits brought by former employees over alleged violations of the Worker Adjustment and Retraining Notification Act; insolvency actions in Germany over Howrey's former operations there; logistics involved with its IT, technology, and client files; and a lawsuit involving the firm's former D.C. landlord over the terms of its lease.

Even if Montali grants Howrey's extension, Citibank says it plans to cut off the estate's access to money after next Friday, when the terms of its supplemental cash collateral order expires. Citibank requested that a hearing be scheduled for September 21 to consider its motion to appoint a trustee.

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What a mess. I hope they are able to sort all this out but not everyone will be happy, no doubt.

Thanks for the article.

ep

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