Reporters notebook: Kmart under the microscope - Kmart pays lawyers $25 million for bankruptcy services - Brief Article

DSN Retailing Today, Oct 7, 2002 by Laura Heller

CHICAGO -- Being broke doesn't come cheap, as any observer to Chapter 11 bankruptcy proceedings can attest. But when those proceedings surround the largest retail bankruptcy in U.S. history, the costs can seem overwhelming.

Kmart recently submitted a bill for those costs to the court for approval--a $25 million bill for legal, financial and advisory services rendered while in Chapter 11. And that's just for three month's worth of work.

Since Kmart's very first Omnibus hearing, the sheer number of lawyers and advisors present has been mind-boggling. The sizable crowd-necessitated proceedings were moved to a larger courtroom to accommodate them all, while the customary line at the sign-in sheet before each hearing can reach into the hallway. The addition of a third committee representing shareholders has only added to the number of lawyers sitting around the table.

But with each Omnibus hearing, the crowd in the courtroom thins just a bit as Kmart dispenses with the business of navigating Chapter 11 bankruptcy protection. It's not uncommon for an entire afternoon to be devoted to the disposing of leases and confirming of licensing arrangements, each item concluded with nary a protest.

It was in this spirit that the fee application hearing was conducted, complete with glowing remarks and self-congratulatory pats on the back as participating legal teams told U.S. Bankruptcy Court Judge Susan Pierson Sonderby just how pleased each one is with the speed and tone of the process, even as each lawyer asks to be paid. And paid they will be, to the tune of more than $25 million to cover both fees and expenses. Kmart's own legal representation was granted more than $10.5 million in fees and expenses alone.

Court documents filed in conjunction with the hearing state that not only did the Fee Review Committee find these fees to be appropriate, but the costs were actually reduced as attorneys cut in half the fees submitted for non-working travel time as "an accommodation to the debtor," stated the document. "Moreover, the Fee Review Committee believes that all professionals have made an effort to minimize fees and expenses where they could reasonably do so."

But reasonable is an objective term, and one Judge Sonderby chose to quibble with. She voiced the only objections of the hearing and was quick to upbraid counsel when she spotted what she considered to be inappropriate expenses, including a $90 limousine bill and related stay at the Waldorf-Astoria Hotel in New York for members of the creditors committee. Although she signed off on the bill, Sonderby put the parties on notice that such expenses as spa treatments, gift shop charges, martinis and oysters would not be approved in the future. "I suggest they watch any excess," she warned.

It was anticipated that the newly formed Official Committee of Equity Security Holders would call out these kinds of excesses, but that was not to be. Although appointed shareholder representatives sat on the Fee Review Committee, the approval of millions of dollars worth of fees and expenses was unanimous. Even the notorious oysters and martinis slipped by those supposed watchdogs for shareholder interests.

That Sonderby pulled those three items from an itemized list of encyclopedic proportions shows just how under the microscope Kmart really is here. This is no ordinary bankruptcy to be sure, but nor is it an ordinary time in American business. Executives are making regular appearances on the nightly news to testify about suspected corporate malfeasance. Ceos are under fire to justify salaries, perks and parachutes, even as one is lead away in handcuffs.

Politicians, government agencies and the American public are particularly sensitive to corporate excess and these examples from Kmart's first fee application hearing only serve to illustrate just how cloudy the issue is. Even the equity committee--originally established to look after shareholders' rights in a time when this group is put in the spotlight as the most wronged party after non-executive employees--looks to be just another party with its hand out.

Budgets filed with the court for the second term period show anticipated bills of close to $2.7 million for two law firms and one restructuring advisor to that very equity committee.

The next pay period for these institutions is Sept. 1 through Dec. 31, 2002, and the next fee application hearing won't take place until after the New Year. That is, after the holiday season, when Kmart should have a much better idea of when and how it will emerge from Chapter 11, and at which point the lawyers will have to look elsewhere for a fat payday.