Bankruptcy Law

Plan to have Kaye Scholer give up $1.5M in fees to settle disclosure case is withdrawn

A planned settlement of a case over lack of disclosure by a law firm and others in a corporate bankruptcy case has been withdrawn without explanation by the feds.

The settlement would have required Kaye Scholer to forgo $1.5 million in attorney fees in a Chapter 11 case and have a special committee sign off on representations to the court in applications to work on future bankruptcy cases. It resulted from a case initiated by the U.S. Trustee’s office in the Department of Justice, over alleged violations of bankruptcy court rules about disclosure and fee arrangements.

Earlier, after creditors in the GSC Group Inc. case expressed outrage about the proposed settlement and Black Diamond Capital complained that would be prevented from seeking relief, the release terms were narrowed by the Trustee’s office to address that concern, reports Reuters.

However, the amended settlement, which apparently did not address a Black Diamond demand for sanctions, was subsequently withdrawn, according to the news agency.

Initially, the Trustee’s office had sought to remove the law firm and two other entities from the case, Capstone Advisory Group and restructuring officer Robert Manzo, and claw back $10 million in fees. The feds accused the law firm of cooperating with Capstone and Manzo in failing to reveal to the bankruptcy court a longstanding professional relationship and friendship between Manzo and the Kaye Scholer partner on the case. Meanwhile, Capstone and Manzo allegedly did not reveal to the court, as required, that they had an independent contractor relationship that involved fee-sharing, which is generally not permitted in bankruptcy cases.

“It is reasonable to conclude that Kaye Scholer would be hard pressed to take issue with Capstone’s bills,” said a court filing by the trustee, pointing out that the Kaye Scholer partner had worked together on other major bankruptcies.

If the parties cannot reach agreement about settling the disclosure case, it may go to trial in bankruptcy court in New York.

The article does not include any comment from those involved as defendants in the disclosure case, and Reuters said most could not be reached Wednesday for comment.

See also: “Kaye Scholer cedes $1.5M in Chapter 11 fees, OKs new policy to end US Trustee’s disclosure case”

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