The Work

November 30, 2011 7:29 PM

The Bankruptcy Files: AMR, Lehman, MF Global, PMI, and Power Balance Bracelets

Posted by Brian Baxter

The economy's ongoing struggles are proving to be fruitful for bankruptcy lawyers betting on a second wave of corporate restructuring work in the United States and abroad.

The Am Law Daily reported Tuesday on the bankruptcy filing in Manhattan by AMR Corp., parent company of American Airlines. While the Chapter 11 case, which will be overseen by relatively new bankruptcy judge Sean Lane, is the second-largest filing ever by a major U.S. airline, it doesn't rank among the largest bankruptcy cases in U.S. history.

The No. 1 spot on that list still belongs to Lehman Brothers, which this week inched closer to a $65 billion liquidation plan after reaching an agreement with creditors holding $450 billion in claims. The deal agreed to by 95 percent of creditors—including members of Lehman's creditors' committee, an ad hoc group of senior bondholders, and note holders—is a significant step toward making disbursements after more than three years of bankruptcy battles. A confirmation hearing on the liquidation plan has been scheduled for December 6.

Last week Lehman filed its monthly operating report for October, which detailed the defunct investment bank's mounting payments to lawyers, accountants, and other professional advisers. The $36.6 million in fees accrued during October bring Lehman's total bankruptcy bill to more than $1.4 billion, according to The Wall Street Journal.

Once again leading the way on the fees front is Lehman's lead bankruptcy counsel at Weil, Gotshal & Manges, whose bill for October totaled $15.3 million, a sum taking into account $8.1 million in holdbacks from June 2010 through September 2010. Weil's total take from the Lehman case so far is roughly $358.6 million, more than double the $164 million the firm made as lead debtor's counsel in the Enron bankruptcy. (Weil is also serving as bankruptcy counsel to AMR.)

Lehman's conflicts counsel at Curtis, Mallet-Prevost, Colt & Mosle billed for nearly $3 million in October, bringing its total tab in the record-setting Chapter 11 case to almost $36 million—about what Weil made in the WorldCom bankruptcy.

Other leading legal billers for Lehman in October were special counsel for Asia and domestic litigation Jones Day ($591,000), special real estate counsel Dechert ($367,000), and special counsel for mortgage litigation and claims Reilly Pozner ($316,000). Jones Day's total tab from the Lehman case now stands at nearly $57.9 million.

Milbank, Tweed, Hadley & McCloy, lead counsel to Lehman's official committee of unsecured creditors, billed for $2.9 million in October. The firm has reaped more than $117.6 million for its work in the case.

In the United Kingdom, meanwhile, Magic Circle firms Allen & Overy and Slaughter and May have secured roles on a nearly $315 million financing deal for struggling travel service company the Thomas Cook Group, according to U.K. publication Legal Week. Thomas Cook was on the brink of bankruptcy before lenders agreed to provide funds for a loan facility available until April 2013, the BBC and Reuters report.

And at a time when Saab owner Swedish Automobile posted a third quarter loss of $185 million, the company's British subsidiary has gone into administration in the U.K. Saab was set to be sold to two Chinese automakers earlier this month for $140 million, but former parent General Motors blocked the deal because of worries its technology licenses would fall into Chinese hands.

Some additional news on other recent bankruptcies of note:

MF Global Holdings

Commodities and derivatives broker MF Global took its place as the eighth-largest bankruptcy in U.S. history when it filed for Chapter 11 in New York on Halloween. The New York Times reports that the discovery of a $1 billion shortfall in customer funds helped short-circuit a potential sale of MF Global to another brokerage firm.

About $200 million in customer money that went missing at the time of the company's Chapter 11 filing has been located at JPMorgan Chase in the U.K., according to the Times. Hughes Hubbard & Reed bankruptcy and corporate reorganization cochair James Giddens, who is serving as the liquidating trustee for MF Global's brokerage, has asked a bankruptcy judge in New York for permission to pay out $2.1 billion to 36,000 commodities customers.

A team of Hughes Hubbard lawyers that includes litigation partners James Kobak, Jr., Sarah Cave, and Ethan Litwin, and bankruptcy partner Christopher Kiplok, are advising Giddens. Despite having handled some work for JPMorgan, the firm has denied it has a potential conflict in the case, claiming its work for the banking giant is minimal and doesn't affect Giddens in his role as liquidating trustee.

Bloomberg reported last week that the fees stemming from that liquidation could reach $100 million given that Giddens oversees a team that includes 100 Deloitte consultants, 60 Ernst & Young forensic accountants and consultants, and 190 former MF Global employees.

MF Global, which is being represented by attorneys from Skadden, Arps, Slate, Meagher & Flom, Curtis Mallet, and Kasowitz, Benson, Torres & Friedman, received permission from a bankruptcy judge on Monday to save $84 million by breaking its leases at a half-dozen U.S. offices and consolidating some of its operations by signing a new one-year lease in downtown Manhattan.

On the Friday after Thanksgiving, former Federal Bureau of Investigation director Louis Freeh was appointed as trustee for MF Global's Chapter 11 case. The appointment of Freeh came the same week that he was named to head an international investigation into an unfolding child sex abuse scandal at Penn State University. Reuters reports that Freeh's appointment essentially ends the role of MF Global's bankruptcy lawyers in the case, as Skadden partner Kenneth Ziman said in court on Wednesday that he was passing the baton to Freeh's counsel at Morrison & Foerster.

Freeh, a founding partner of Freeh Sporkin & Sullivan, wasn't the only bankruptcy trustee appointed last week.

The Great Falls Tribune reports that Lee Freeman, Jr., a former Jenner & Block partner now of counsel with Chicago's Katten & Temple, was appointed trustee in the Chapter 11 case of the Southern Montana Electric Generation and Transmission Cooperative. SME, which consists of five electric cooperatives that provide power to utilities throughout Montana, filed for bankruptcy in late October.

The PMI Group

Reeling from the October seizure by Arizona insurance regulators of two key subsidiaries, embattled mortgage insurer The PMI Group filed for bankruptcy in Delaware on November 23. PMI, which has posted 16 straight quarterly losses in a moribund housing market, listed $225 million in assets against $736 million in liabilities in its Chapter 11 filing.

Pauline Morgan, chair of the bankruptcy and corporate restructuring practice at Delaware's Young Conaway Stargatt & Taylor, is serving as lead debtor's counsel to Walnut Creek, California–based PMI, along with firm chairman James Patton, Jr., and partner Joseph Barry.

Sullivan & Cromwell restructuring and bankruptcy head Andrew Dietderich—who is also advising MF Global—is serving as special counsel to PMI as it examines its strategic alternatives. Phoenix-based Osborn & Maledon is serving as special counsel to the company with regard to litigation matters in Arizona. None of the three firms have yet filed billing statements with the bankruptcy court.

Neither of the two PMI units seized by Arizona regulators—PMI Mortgage Insurance and PMI Insurance—were included in the parent company's bankruptcy filing. An Arizona judge denied PMI's effort to overturn the seizures, which prevented the two units from writing new policies that had provided an important revenue stream for PMI.

Power Balance LLC

Whether or not bracelets based on "holographic technology" improve one's performance on the athletic field remains an open question, but marketing them is apparently one way to wind up in bankruptcy court. After being hit with a series of lawsuits accusing Power Balance of misleading advertising over the performance bracelets it sells for $30 a pop, the company filed for bankruptcy in Santa Ana, California, on November 18.

TMZ reported in late November that Power Balance had settled one suit for $57.4 million, but a spokesman for the Laguna Niguel, California–based company told The Orange County Register that the figure was incorrect and that it had settled another case for $1 million. Power Balance maintains that it was "inappropriate marketing claims" by an Australian distributor that landed it in legal trouble, while admitting earlier this year that there's no scientific basis for any performance-enhancement claims, according to an NBC Sports report.

Bankruptcy court records state that Power Balance bracelets contain "hologram technology adopted from Eastern philosophies that is believed to improve and enhance people's lives," but the company makes no promises that they're an easy substitute for hard work and diligent training. Nonetheless, Power Balance has plenty of high-profile sporting customers.

According to a list of Power Balance's 20 largest unsecured creditors, the company owes $400,000 to Los Angeles Lakers star Kobe Bryant on an endorsement deal, $250,491 to the Los Angeles Kings hockey team, $131,375 to training facility IMG Academies, $100,000 to the Sacramento Kings basketball team, $25,000 to pro golfer Ian Poulter, $25,000 to pro skateboarder Ryan Sheckler, and $20,000 to basketball player Blake Griffin. The debtor also owes $35,122 to Bradley Arant Boult Cummings, which has handled some litigation work for Power Balance.

Marc Winthrop, a founding partner of Newport Beach, California–based bankruptcy boutique Winthrop Couchot, is advising Power Balance in the Chapter 11 case, along with partner Garrick Hollander. The firm has not yet filed billing statements with the bankruptcy court.

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