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November 23, 2009 5:51 PM

S&C Cleared for Entry in CIT Bankruptcy

Posted by Zach Lowe

This just in: A federal judge has approved CIT Group's motion to hire Sullivan & Cromwell as special counsel for the duration of its bankruptcy case. S&C, which does not have a traditional bankruptcy practice, will join Skadden, Arps, Slate, Meagher & Flom (CIT's lead counsel) and Curtis, Mallet-Prevost, Colt & Mosle (conflicts counsel) as one of the lead firms on the lending giant's megabankruptcy. 

As we reported earlier this month, S&C has been advising CIT Group's board of directors since August, when the company was trying everything possible to restructure its massive debt load outside of bankruptcy court. But CIT Group's initial bankruptcy petition said S&C would "act as special legal counsel to CIT going forward on certain corporate matters." Why the change from board to company counsel? According to three sources familiar with the case, the switch was meant to keep S&C and Rodge Cohen on the case by guaranteeing that the debtor's estate would be allowed to pay the firm; bankruptcy judges often reject requests to pay board counsel out of the debtor's coffers, those sources said. 

And indeed, the formal application acknowledges the switch and goes to great lengths to convince Judge Allan Gropper that S&C's work will not overlap with Skadden's. The brief flatly says that "Sullivan & Cromwell will not provide advice to the Debtors on the conduct of these Chapter 11 cases." Instead, an S&C team headed by Cohen and Andrew Dietderich will focus on regulatory matters and CIT's future financial structure.

The brief pegs S&C as essential to CIT's existence, claiming the firm's "advice is critical to preserving the going concern value" of CIT, and that "it is imperative that [CIT] continue to have access to Sullivan & Cromwell's expertise." High, high praise.

Also, fairly high billing rates. S&C partners will bill between $850 and $950 an hour, though there is an exception for Cohen, who will bill $965 an hour. Those rates represent a 10 percent discount from what S&C can best estimate as its normal hourly rates, the motion says. That would set Cohen's regular hourly compensation at $1072. The motion says S&C "does not ordinarily determine its fees solely on the basis of hourly rates"; rather, the firm comes up with a fee based partly on rates and partly on other variables, including the "difficulty and complexity of the matter" and "the results achieved."

As you might recall, CIT Group hopes to emerge from bankruptcy in a month. The company has already agreed with major lenders on a prepackaged bankruptcy plan that would wipe out shareholders (including the U.S. government) and leave lenders with 70 cents on the dollar for their notes. Major bondholders, including a group represented by Paul, Weiss, Rifkind, Wharton & Garrison, and Carl Icahn (represented by Sonnenschein Nath & Rosenthal) have agreed to loan CIT about $5.5 billion combined, according to our prior reports.

Judge Gropper today allowed CIT to borrow an additional $500 million in order to issue guarantees on its debt, according to The New York Times.

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