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January 19, 2012 5:40 PM

With Kodak Bankruptcy, a First for Sullivan & Cromwell

Posted by Brian Baxter

Sullivan & Cromwell doesn't usually serve as lead debtor's counsel in bankruptcy cases, but the firm made an exception on Thursday when longtime client Eastman Kodak initiated Chapter 11 proceedings in Manhattan.

S&C was founded in 1879, the same year Kodak founder George Eastman sought to obtain a patent on a plate-coating machine that would eventually give rise to his iconic camera company, which has struggled in recent years to adapt to a changing market, most recently seeking to use its many patents to shore up a cash shortfall.

When that last-ditch effort stalled, bankruptcy seemed almost inevitable. And when Kodak submitted its Chapter 11 petition, the filing contained a first: S&C listed as general bankruptcy counsel to the debtor. (Court filings also show that Delaware-based Young, Conaway, Stargatt & Taylor is serving as special conflicts counsel to Kodak, which secured a $950 million line of credit from Citigroup to continue its operations in bankruptcy.)

Andrew Dietderich, the head of S&C’s bankruptcy and restructuring group, spoke with The Am Law Daily early Thursday ahead of Kodak's 4 p.m. hearing in U.S. bankruptcy court near Battery Park, just a few blocks from the firm’s downtown headquarters.

"This is the first debtor's case [S&C] has done itself as 327(a) debtor's counsel," Dietderich said. "We have previously served as 327(e) corporate counsel to clients, but this was a special circumstance. We've represented Kodak since 1972 and [this bankruptcy filing] is the 173rd matter the firm has handled for the company."

When Kodak's various efforts to restructure its operations out of court proved unsuccessful, Dietderich says the company requested that S&C manage its Chapter 11 case. It's an unusual assignment for S&C, which uses a "value billing"—rather than hourly—approach to charging for its services, and prefers to serve as special corporate counsel to clients restructuring their operations.

Despite its aversion to serving as debtor's counsel, S&C knows its way around bankruptcy court. The firm was counsel to the board of directors for New York-based CIT Group at the time of the commercial lender's bankruptcy filing in October 2009.

S&C then switched its status to corporate counsel to CIT in order to ensure the payment of future fees, as attorneys advising boards or individual directors are not usually paid from a debtor's estate, according to our previous reports. Dietderich and S&C senior chairman H. Rodgin Cohen led a team from the firm advising CIT, with Cohen billing $965 an hour—a 10 percent discount from his normal $1,072 hourly rate at the time. (CIT emerged from bankruptcy in December 2009.)

Dietderich himself has handled several high-profile bankruptcy cases, including advising fund manager Fairholme Capital Management and hedge fund Pershing Square Capital Management on their joint bid backing a debt reorganization plan for bankrupt General Growth Properties in 2010. GGP, the nation's second-largest mall owner, emerged from Chapter 11 later that same year. Fairholme subsequently cashed out of its GGP investment, turning to S&C for the corporate work.

In October, Dietderich was one of several S&C lawyers advising MF Global Holdings as the commodities and financial derivatives broker descended into Chapter 11 as a result of its exposure to sovereign debt in Europe.

S&C and Dietderich also took a hybrid corporate and restructuring role in representing embattled mortgage insurer The PMI Group on its bankruptcy filing in Delaware shortly before Thanksgiving. The firm is serving as special counsel to Walnut Creek, California–based PMI, with Young Conaway providing lead debtor's counsel.

The PMI case offers a glimpse of the approach S&C may take to billing in the Kodak bankruptcy. In a late December filing on behalf of PMI, S&C stated it "does not ordinarily determines its fees solely on the basis of hourly rates."

Instead, according to the filing, S&C takes into account its "contribution to the matter, the responsibility assumed, the results achieved, the difficulty and complexity of the matter, the amount involved, the experience of, and demands on, the lawyers involved and the fees customarily charged for such matters."

Court records show that S&C was paid a $1 million retainer for its services in the PMI case, as well as an additional $3 million in fees in the year prior to the company's Chapter 11 filing. S&C states that PMI has agreed to have partners and special counsel from the firm bill between $990 and $1,150 per hour, while associates bill between $395 and $875 an hour.

The firm emphasizes in the PMI filing that those rates are just estimates: "[S&C] has informed [PMI] that the agreed hourly rates set forth above are derived from notional hourly rates utilized by [S&C] for certain internal budgeting and planning purposes . . . the rates for certain timekeepers have been reduced from such notional hourly rates in light of the company’s circumstances."

In his own declaration in the PMI case, Dietderich states that because S&C's "fees for services rendered to clients on other matters take into account factors other than the number of hours spent, the amount of fees charged by [S&C] for other matters may be different than the amounts that would result simply by the mathematical exercise of multiplying the rates above by the number of hours spent by personnel of comparable seniority."

On the Kodak matter, Dietderich is part of an S&C team that includes restructuring of counsel John Jerome and special restructuring counsel Michael Torkin. Young Conaway bankruptcy and restructuring chair Pauline Morgan and partner Joseph Barry are serving as cocounsel to Kodak. (The Delaware firm has an office at New York's Rockefeller Center.)

Dietderich says S&C's role is essentially "global coordinating counsel" for Kodak's restructuring efforts, with only about 25 percent of the work actually being done in the United States. As a result, S&C is just one of several firms advising Kodak on its attempt to right itself through the restructuring process.

Magic Circle firm Linklaters has been busy advising Kodak on its restructuring initiatives in Europe, while Gibson, Dunn & Crutcher is representing the debtor on securities matters and Williams & Connolly is handling some IP issues, according to Dietderich.

Based in Rochester, New York—recently described by The New York Times as "once the ultimate company town"—Kodak has turned to other firms in recent months on its various endeavors. The Am Law Daily reported last summer that Kodak retained Wachtell, Lipton, Rosen & Katz to help the company craft a poison pill to protect it against unwanted takeover attempts.

Rochester-based Harter Secrest & Emery, meanwhile, advised Kodak in November on the sale of its image sensor solutions unit to private equity firm Platinum Equity, according to our previous reports. Kodak also turned to Harter Secrest for a patent licensing deal it inked with IMAX last October.

As Kodak's financial problems worsened, news emerged that the company had retained Jones Day to prepare a possible bankruptcy filing. The assignment didn't last, though, with Kodak dumping Jones Day in favor of S&C, according to an early December report by The Wall Street Journal.

Jones Day is advising Kodak in other matters, including patent litigation, which the company continues to pursue. Indeed, just before filing for Chapter 11 protection this week, Kodak filed a series of digital imaging patent infringement suits against Apple, HTC, Fujifilm, and Samsung before the International Trade Commission and in U.S. district court in Rochester.

Court records show that Jones Day partners James Wamsley III, Blaney Harper, and Garfield Simms are advising Kodak in the suit against Fujifilm. Litigation practice chair Tim Delaney and ITC chair Laura Beth Miller from Chicago-based IP boutique Brinks Hofer Gilson & Lione are representing Kodak in its suits against Apple, HTC, and Samsung.

Neal Slifkin, leader of the IP practice and cohead of the Internet law practice at Harris Beach in suburban Rochester, is serving as local counsel on all of Kodak's recently filed patent suits, along with partners Laura Smalley and Paul Yesawich III.

Kirkland & Ellis restructuring partners James Sprayregen, Paul Basta, Brian Lennon, and David Seligman have entered their appearances for Apple in the Kodak bankruptcy, while Akin Gump Strauss Hauer & Feld bankruptcy partners Michael Stamer, David Botter, and Abid Qureshi are advising an ad hoc committee of second-lien noteholders. Davis Polk & Wardwell insolvency and restructuring cohead Marshall Huebner is representing Citigroup.

Laura Quatela took over as Kodak's general counsel and chief IP officer in November 2010 after the retirement of predecessor Joyce Haag, who, in turn, took over in 2005 from Gary Van Graafeiland, who now busies himself predominantly with pro bono work in the Rochester area.

Joel Seligman, president of the University of Rochester and a former law professor and leading expert on U.S. securities law, has served on Kodak's board of directors since 2009.

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