Bankruptcy Work Falls, but Megacases Still Provide Hefty Fees

Free-flowing corporate loans for struggling companies coupled with the conclusion of Enron's and WorldCom's massive bankruptcy cases cut into corporate bankruptcy last year, but there was still plenty of lucrative work to go around.

Companies with high-risk financing structures, massive tort claims and international operations continued to ramp up the complexity of the largest bankruptcies.

Lawyers expect even greater complexity along with an uptick in filings as companies propped up by financings from nontraditional lenders such as hedge funds falter.

Although corporate bankruptcy filings dropped overall last year, firms handling the top cases continued to collect millions of dollars in billings from a handful of key cases.

Business-related Chapter 11 bankruptcies, which help companies restructure their debt and continue operating, slid by 8 percent to 5,345 for the year that ended on Sept. 30, 2006, from 5,776 in 2005, in turn a drop from more than 9,000 cases in both 2003 and 2004 and more than 10,000 in 2002, according to statistics from the Administrative Office of the U.S. Courts.

The debtor's counsel representing the company in bankruptcy typically claims the largest share of the legal work and billings from a bankruptcy, but several other legal teams share a substantial slice of the pie. Firms represent various groups of creditors, sometimes individual major creditors, the equity committee and parties unique to particular bankruptcies, such as unions or personal injury plaintiffs.

THE BIG PLAYERS

Throughout the lifespan of this year's top finished or "emerged" bankruptcies as ranked by the BankruptcyData.com division of New Generation Research Inc. in Boston, several firms collected massive payouts, according to court documents. Kirkland & Ellis of Chicago collected $90.7 million for the three-year restructuring of United Airlines' parent UAL Corp. of Elk Grove Township, Ill., and Philadelphia-based Saul Ewing requested a total of $50.6 million for leading the restructuring of Toledo, Ohio-based Owens Corning.

Next, Jones Day collected $43.5 million in fees in the case filed by industrial aluminum products maker Kaiser Aluminum Corp. of Foothill Ranch, Calif.; Skadden, Arps, Slate, Meagher & Flom has so far asked the court for $34.8 million for the reorganization of New York-based international commodities broker Refco Inc., which officially emerged from bankruptcy during the last week of 2006; and New York's Weil, Gotshal & Manges requested $23.3 million to help reorganize Lancaster, Pa.-based floor products manufacturer Armstrong World Industries Inc.

The top five new cases of 2006 range from the reorganization of the $9 billion in assets of Toledo, Ohio-based car parts maker Dana Corp. led by Jones Day to the restructuring of the $777.1 million in assets of Schaumburg, Ill.-based packaging products maker Pliant Corp. by Sidley Austin. New York's Milbank, Tweed, Hadley & McCloy led the fourth-largest filed case of 2006 through both a U.S. and a Mexican bankruptcy last year. Mexican satellite operator Satelites Mexicanos S.A. de C.V. had $925.3 million in assets.

'STUNNING' RESULT

Although fewer companies entered bankruptcy this year, megacases are still providing ample legal challenges to go along with the hefty legal fees.

Most of this year's top finished bankruptcies faced unusual and multifaceted legal issues, such as Kaiser Aluminum's use of five trusts, each with its own representation by legal professionals, to handle different categories of tort claims. The claims included more than 100,000 asbestos lawsuits, silica and hearing-loss claims and a separate trust to manage funding of the four other trusts. In re Kaiser Aluminum Corp., No. 02-10429 (Bankr. D. Del.).

Kaiser's other bankruptcy problems ran the gamut from underfunded pension plans and retiree medical plans to legal issues among the affiliated companies, said lead debtor's counsel Gregory Gordon of Jones Day's Dallas office.

"There were chicken-and-egg problems," Gordon said. "The outcome of one was affected by the outcome of the other."

In the United Airlines case, lawyers led the company through two rounds of labor negotiations, both before and after the company's failed loan application to the Air Transportation Stabilization Board, which offers loan guarantees to airlines. In re UAL Corp., No. 02-48191 (Bankr. N.D. Ill.).

Throughout the case, a Kirkland & Ellis debtor's counsel team led by David Seligman in Chicago also negotiated with four main unions and four main pension plans associated with the airline company. The pension plan disputes and battles over restructuring aircraft debt found their way to the 7th U.S. Circuit Court of Appeals, said Seligman.

"The way United handled its pension situation and reached settlements with [the federal pension insurer] Pension Benefit Guarantee Corp. has become a template and has been followed," Seligman said. "Delta Air Lines Inc. picked up a lot of elements and the same thing with Northwest Airlines Corp."

Refco became the first megacase filed after the new bankruptcy rules tightening deadlines for key filings took effect and one of the first involving a prenegotiated Chapter 7 liquidation case. In re Refco Inc., No. 05-60006 (Bankr. S.D.N.Y.).

Refco used the Chapter 7 liquidation process to sell one of the company's stock broker subsidiaries and sidestep bankruptcy rules that exclude stock brokerages from Chapter 11 cases, said Skadden's Greg St. Claire in the firm's New York office.

After hashing out a deal with the buyer, the bankruptcy team went to the courthouse for four hours on the day after Thanksgiving, St. Claire said.

The rest of the case was much more contentious. Although the company carried no second-lien debt, the sheer number of parties with a financial interest in the company, including multiple bond and credit committees, brought 40 lawyers to the table for negotiations, St. Claire said. "There was a lot of litigation and fighting over dollars and cents," he said.

Gridlock between the more than 150,000 asbestos claimants and the company's financial interests kept the No. 6-ranked USG Corp. case in the court system for five years, but a negotiated $1.8 billion equity rights offering to existing shareholders and a $2.8 billion credit facility broke the stalemate, said lead debtor's counsel David Heiman of Jones Day's Cleveland office. In re USG Corp., No. 01-2094 (Bankr. D. Del.).

Both sides were rewarded for their perseverance: The asbestos group received $3.95 billion, and the creditors were reimbursed for 100 percent of their claims plus interest, a result that Heiman called "stunning."

"I can't say there was never a case like that before, where the shareholders retained 100 percent of their interest, but I'm unaware of it," Heiman said.

DISPARATE INTERESTS

One of the newer cases, involving Satelites Mexicanos, moved in and out of U.S. bankruptcy this year after the company finished a bankruptcy proceeding in Mexico. The disparate interests of the major equity owners, which included the Mexican government and New York-based satellite maker Loral Space & Communications Inc., which is also a supplier to Satelites Mexicanos, delayed consensus, said Matt Barr, a New York-based Milbank attorney. In re Satelites Mexicanos S.A. de C.V., No. 06-11868 (Bankr. S.D.N.Y.).

The competing interests forced filings through the U.S. and Mexican bankruptcy systems to get the deal done, said Dennis Jenkins of Wilmer Cutler Pickering Hale and Dorr, a Boston attorney who represented the ad hoc committee of floating-rate note holders in Satelites Mexicanos.

"It was in some respects a perfect storm of constituencies that all had some point of leverage they were very reluctant to give up," Jenkins said. "There was no law in the U.S. alone or Mexico alone that would enable us to get a restructuring done."

A protracted negotiation among investors with markedly different needs is "probably more lucrative" for bankruptcy firms because they bill by the hour, Jenkins acknowledged.

"Because of their complexity there's more legal work," Jenkins said.

Similar forces are at play in cases involving second-lien debt, which adds both another layer of complexity and another team of lawyers to the mix, said Heiman.

Heiman said some of his bankruptcy cases became contests between lien creditors to "see who will take control."

"The [second-lien debt holder] and hedge funds expect to get a certain yield out of it pretty quickly," Heiman said. "It changes how you restructure or how you negotiate a restructuring."

Seligman has also wrestled with second-lien debt holders, including in the ongoing bankruptcy of San Jose, Calif.-based power producer Calpine Corp., which is the top-ranked ongoing restructuring, according to BankruptcyData.com. "I think as people get more sophisticated [about financing] it makes everything more complicated," he said.

THE NEXT WAVE

Lawyers like Saul Ewing's Jay Shulman, a Baltimore attorney who worked on the Owens Corning case, anticipate an upswing in bankruptcy filings next year.

Shulman pointed to economic factors like slower housing starts along with inflation and fuel price hikes. The airline and automotive sectors have already floundered, and Shulman expects other sectors to follow.

"There are some indicators of softness," Shulman said. "That puts pressure on more marginal firms."

The abundance of second-lien financing is also a harbinger of future bankruptcy filings, lawyers say. The money helps distressed companies survive, but such investments simply delay the inevitable for many companies.

"There is still all this money out there, but certain industries can only go so long," Heiman said.

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