DETROIT Are lawyers, consultants billing too much in Kmart bankruptcy?

A law firm in Detroit would have charged about half what the one in Chicago did.
KNIGHT RIDDER NEWSPAPERS
DETROIT -- The final tally for the lawyers and consultants who worked on Kmart Corp.'s bankruptcy will exceed $138 million, raising questions about the rising cost of Chapter 11 bankruptcies and whether the courts can protect employees, creditors and shareholders who lose their money.
Kmart, which listed $16 billion in assets when it filed in Chicago for Chapter 11 on Jan. 22, 2002, was the largest retail bankruptcy in U.S. history and the largest based on number of employees -- 252,000 people.
The law and consulting firms handling the bankruptcy work billed several million dollars each -- and such fees are typical for large corporate bankruptcies. But those fees nonetheless raise the ire of those who lose money.
"It's a gross injustice. In this thing there was no fairness, no balance and no honesty," said Jim Garvie, a retired municipal employee from Fowlerville, Mich., who lost $5,000 when Kmart shares were canceled.
The total cost of the Troy, Mich., retailer's bankruptcy will likely never be determined. But its legal and consulting figures, still subject to court approval, are one measure. Kmart contends it pared down its bankruptcy costs because the company emerged from court protection months earlier than first expected.
"The Chapter 11 process is costly for any company in terms of professional fees," Kmart spokesman Jack Ferry said Thursday. "In Kmart's case, as we've said before, the enormous professional fees were a motivating factor in completing our fast-track emergence from Chapter 11 protection in 15 months."
Big losers
But the $138 million also represents money that many losers in Kmart's bankruptcy won't see. Thousands of employees were fired with no severance pay, Kmart's bankers were paid 40 cents on the dollar, creditors were given newly issued stock, and shareholders lost more than $6.3 billion in equity over two years.
Bankruptcy experts disagree on whether the fees charged in Kmart's bankruptcy are reasonable. Some say the fees are in line with going attorney rates in Chicago and are a small expense for a retailer with $30 billion in annual sales.
But Lynn LoPucki, a law professor at the University of California at Los Angeles who has compiled a database on large company bankruptcies, said that according to his calculations, the legal fees in Kmart's bankruptcy should have been closer to $60 million.
"These are very high fees for the reorganization of a company with $16 billion in assets," LoPucki said. "The real question is did they do a good job on the reorganization? That we have yet to see."
Kmart racked up legal fees and expenses at the rate of $9.2 million a month on average during its 15 months in Chapter 11.
But the overall legal and consulting bill doesn't strike John Pottow, assistant professor at the University of Michigan law school, as all that much for the 22 firms whose bills ranged from $750,000 to $58.4 million. Kmart pays its own fees plus those of the lawyers and consultants working for committees of creditors and shareholders.
"That's not as crazy as it may sound," said Pottow, who worked for the largest U.S. bankruptcy law firm, Weil Gotshal & amp; Manges in New York, before joining the Michigan law faculty.
"Generally, the value you get out of Chapter 11 is if you reorganize your company successfully. If you have to sacrifice 1 percent of the assets to do that, that's a pretty good deal."
Fee comparison
However, Barbara Rom, a bankruptcy attorney at Pepper Hamilton LLP in Detroit, said the hourly fees, which topped out at $700 an hour for Kmart's lead bankruptcy attorney, John W. Butler Jr., are substantially higher than they would have been for top Detroit bankruptcy specialists, who charge $300 to $400 an hour.
Instead of going with a local firm, Kmart chose its outside counsel since 1988, Skadden, Arps, Slate, Meager & amp; Flom LLP of Chicago.
Butler's time is so valuable, it cost Kmart $11.60 for every minute he worked on the case. His firm charged Kmart $100,735 just to prepare its budget of fees. The final request is for $58.4 million after a voluntary 12 percent, or $7.9 million, discount.
A final figure for Kmart's legal and consulting tab was not available, Ferry said.
The $138 million figure was compiled by the Free Press based on final fee requests 16 firms filed with bankruptcy court in Chicago totaling $125.9 million in fees and expenses. Added to that was another $12 million in fees and expenses Kmart paid to other firms through March 26, 2003, the most current monthly report Kmart filed with the court.
But those numbers do not include some other key costs in Kmart's bankruptcy. For example, Kmart hired Southfield, Mich., turnaround management firm AlixPartners early in its bankruptcy.
Al Koch, AlixPartners chairman, became Kmart's chief financial officer. And Ted Stenger, a principal of AlixPartners, became Kmart's treasurer.