The Price of Success: Enron's Bankruptcy Court Approves $12.5 Million Success Fee for Stephen Forbes Cooper, LLC
With eyes glued to the daily happenings in Houston's trial of the century, surprisingly little attention has been given to the $12.5 million success fee recently granted to Stephen Forbes Cooper, LLC, by Judge Arthur Gonzalez (former 13 year veteran schoolteacher in New York's public schools who won the equivalent of the "Bankruptcy Judge Lottery" by having been randomly selected to be the presiding judge -- at the same time -- over the two largest bankruptcies of all time: Enron and Worldcom). In re Enron Corp., 2006 WL 1030421 (Bankr. S.D.N.Y. 4/12/06) (pdf).
Back in September 2004 when Mr. Cooper first requested (motion here) a $25 million success fee for his firm (Stephen Forbes Cooper, LLC), the W$J and others suggested that Enron's "feed trough" had become a "fee bonanza" for those, like Cooper's firm, who could get the work.
Fourteen months later, on the eve of an 11/15/05 hearing on the fee request, Mr. Cooper submitted a reply brief (parts 1 and 2) and affidavit (with exhibits A-1 [retention order], A-2 [engagement agreement], A-3 [conflicts affidavit], B-1 [revised engagement agreement], B-2 [duty of loyalty agreement], C [retention order], and D [fascinating comparative analysis of success fees awards in 22 mega-cases]) in support of his firm's success fee request.
The Department of Justice, through the Office of the US Trustee, jumped into the fray with both feet, advising the Court at the November 15, 2005 hearing (313 page transcript here) that it had "undert[aken] an investigation that uncovered billing practices and billing irregularities unacceptable to the U.S. Trustee, which the U.S. Trustee maintains were not disclosed to the bankruptcy court." (pdf)
After much legal wrangling, the parties resolved their differences with the help of Bankruptcy Judge Burton R. Lifland (the famed judge of the Johns-Manville, Calpine, and Dana bankruptcies and upcoming recipient of the NY Inst. of Credit's 1st Annual Conrad B. Duberstein Memorial Award For Excellence and Compassion in the Bankruptcy Judiciary). As reflected in this stipulated settlement with the U.S. Trustee, Cooper's firm agreed to slice its requested success fee request in half, to $12.5 million.
For its part, the Court had this to say about how to define -- and price -- "success" in bankruptcy:
[M]ost of the ... objectors raise the issue that many of the tasks performed by [Cooper's firm, "LLC"] were done with the assistance of an advisor or broker, and others. Related to this point, the objections focus on the issue of who should receive credit for any success. It may be appropriate to put the term "success" in its proper context.
Both sections 363 and 330 as paid under section 503 reflect congressional intent that ordinary and reasonable expenses be based upon marketplace criteria for the services provided during the administration of the case. Thus, under both 363 and 330, through 503, the Court looks to the marketplace to determine the reasonableness of any payment. However, the standard applied to awarding these two types of fees in the marketplace is fundamentally different.
In a request for section 330 compensation, the rate charged by the professional is set by the marketplace, which incorporates the professional's high level of skill and expertise into the rate. When such a professional seeks a fee enhancement, premium or bonus, it is necessary to determine whether the professional exceeded the high level of skill and expertise built into the market price, and whether any extraordinary success was achieved that was unanticipated. Although a professional may be retained under section 330 based upon a contingency fee or rate plus contingency arrangement, as at least one professional was retained in these cases, nevertheless, as a general matter, section 330 professionals are retained on an hourly basis and any bonus, etc., is reviewed as set forth above.
The term "success" is referenced in the Agreement but not defined. The determination is left to the Debtor, Creditor's Committee and LLC to agree upon a reasonable amount, if any, for an award subject to Court approval. A success fee, as referenced in the Agreement, is not a "bonus," "premium" or "fee enhancement" as such terms are often used to describe a request by a section 330 professional based upon extraordinary results, inter alia, not otherwise compensated for in the hourly rates, etc. of the professional. See Transcript of hearing held on December 21, 2004 in WorldCom Inc. et al., attached to Order entered in In re WorldCom, Inc, et al., Docket No. 02-13533 (Bankr. S.D.N.Y. Dec. 28, 2004) (Order Denying Request by Akin Gump Strauss Hauer & Feld, LLP Counsel for the Official Committee of Unsecured Creditors for Award of a Premium).
However, when retaining a CEO or top management, the marketplace ordinarily includes a salary component as well as a success fee based upon performance. The success component operates as an incentive to enhance value for the benefit of the enterprise. Here the enterprise stakeholders are the pre-petition creditors. Thus, regarding the Success Fee, the Court is asked to rule under a section 363 analysis consistent with the standard used to approve the Agreement. As noted, the concept of additional consideration is built into the Agreement to incentivize performance and was part of the original fee structure from the outset of these cases. The role of LLC was to provide management to the Debtors. In conjunction with the size and complexity of Enron, the CEO was retained with certain incentives built into the relevant employment contract. As previously indicated, the Agreement is reviewed under the section 363 standard as applied to an employment agreement with a corporate officer. Ultimately, the standard is a reasonable amount as established by the relevant marketplace.
The measure of success is certainly not precise and often subject to much debate. Nevertheless, the initial measuring point, or in other words the time at which one must assess the debtor's status as a reference point to measure progress, is more precise. A number of objectants have, in effect, argued that success should be measured based upon a comparison of Enron's status at confirmation with what "Enron once was." Although it is understandable that some creditors, employees, and equity holders may well measure the success factor by a comparison with what Enron once meant to them-- economic stability and growth--it is not a true measure of success in the context of the bankruptcy process.
On December 2, 2001, the bankruptcy process began and soon thereafter it was readily apparent that any effort to stabilize these cases to achieve value was not a task that could be accomplished by its then top management. Each day brought further erosion of their ability to lead the Debtors in a meaningful way. The Creditors' Committee took the lead, in many respects, to find a stabilizing force. Although a motion for a Chapter 11 trustee was filed with respect to Enron Corp., and a similar motion was also filed, among other types of fiduciary relief sought, in the ENA case, it was apparent to the Creditors' Committee, the Debtors, and to many other constituents, that retaining a restructuring professional and an Enron Corp. Examiner would resolve the Enron Corp. trustee motion without engaging in disruptive litigation. Apparently, this view was shared by the Enron's parties in interest, as evidenced by the fact that after the retention of LLC and the appointment of the Enron Corp. Examiner, no party, including state and federal government officials, commissions, agencies or departments, and equity holders sought to prosecute the Enron Corp. trustee motion. In addition, this resolution and the appointment of the ENA Examiner virtually eliminated innumerable motions that would have ensued as creditors rushed to file motions in the other Enron-debtor cases.
Although it is uncertain how much litigation would have ensued, it is certain that embarking on that course of action would have been extremely disruptive, and the efforts to preserve value greatly undermined. This conclusion was fully supported by the record of the November 15, 2005 hearing and the Confirmation hearing. In terms of the costs of a chapter 11 trustee, even assuming that there were only one such trustee, the fee structure of section 326 does not support the conclusion that a fee sought under that section would have been less than any of the amounts paid, to be paid or requested by LLC. Moreover, any such compensation still would be subject to the same "reasonableness standard" as would be applied to a fiduciary such as a CEO or other management staff.
Therefore, regarding the general issue of stabilizing the Debtor, LLC must be given substantial credit for those efforts. It was under its leadership that numerous governmental agencies, departments and commissions found sufficient confidence in LLC's management not to take action, which may well have been within their power and authority, but which would have had a negative impact on efforts to stabilize the Debtors.
Regarding the Portland General and the Mega Complaint achievements, the argument that many highly compensated advisors and brokers aided the process in varying degrees warrants consideration. These matters have employed highly qualified professionals whose skills, whether they be in investment banking and related issues or in litigation strategies, have played a greater role in the decision process by management than in other areas where management may rely more on its own expertise than outside advisors.
Regarding the largely consensual plan and energy trading settlements and preservation of value, the same analysis is appropriate--in essence, how much of the achievement it these areas is attributable to LLC in such a manner as to warrant a portion of the Success Fee. The record of the November 15, 2005 hearing and the confirmation hearing fully support the conclusion that the economic attributes of rehibilitation were achieved through the overall preservation of value, including the orderly and timely sale of business units, during the administration of these and cases and under the plan as confirmed in July 2004.
Cooper and LLC provided substantial value to the estates from the perspective of what would have happened to these cases. The key to the success of this bankruptcy proceeding, from the prospects foreseeable in January 2002 to the confirmation, is due largely to the stabilization of the Debtors with its concomitant benefits. For that effort, as well as the confidence that was restored in the operational ability of the Debtors, in addition to the other areas of success in varying degrees, the credit belongs in substantial measure to LLC.
The other professionals, Creditors' Committee, and employees of the Debtors brought about the results achieved as well. But, just as the failure of the cases would have been, in large measure, placed upon the shoulders of LLC, so too should much of the success be placed there.
Regarding the U.S. Trustee's Office, the objection deadline, as mentioned, was extended because the U.S. Trustee needed additional time to receive certain records it had requested from LLC.
As the time neared for the U.S. Trustee to file its objection, the Court had a conference in February 2006, with the Debtor, LLC and the U.S. Trustee in which the Court encouraged the parties to reach an economic settlement if one were possible to avoid a protracted litigation.
As the Court has done on a number of occasions, it sought assistance of another judge to act as mediator in an attempt to resolve any and all issues that might have been raised regarding LLC's compensation, or any matter related thereto.
Judge Lifland thereafter conducted a mediation with the parties as set forth above. Ultimately, his efforts resulted in the Stipulation entered into by LLC and the U.S. Trustee, whereby LLC agreed to reduce its Success Fee request to $12.5 million and the U.S. Trustee agreed to accept such as a resolution of any issue it might have raised concerning Cooper's compensation. Further, in consideration of the terms of the Stipulation, the U.S. Trustee does not object to the payment to LLC of the $12.5 million Success Fee. Thus, as mediator, Judge Lifland assisted the parties in achieving an economic resolution reflecting a Success Fee that falls within a range of reasonableness taking into consideration all the facts and circumstances.
Under congressional mandate, marketplace-based rates are paid to those who provide services during the administration of a bankruptcy proceeding. Often in large, complex chapter 11 cases, the administrative services are provided by highly skilled, highly paid professionals. The payment of market-based rates ensures that an estate receives the level of expertise necessary in order to preserve value and, ultimately, to return the maximum amount of value possible to the prepetition constituencies. Needless to say, the extraordinary complexity of these cases with respect to the corporate financial structure and unique legal issues all required the retention of professionals with a comparable level of expertise and the concomitant associated costs.
As previously noted, this policy, by which the actual and necessary costs of administration are measured and paid under a reasonableness standard as referenced by the marketplace, prevails the relevant Code sections and the case law. Recently, by amendment, Congress has limited the amount that may be paid to induce an insider to remain with the debtor during the administration of the case. 11 U.S.C. § 503(c)(1) This restriction, however, neither by language nor intent, alters the marketplace compensation policy underlying section 503 and related sections regarding the post-petition retention of professionals or management who provide services to debtors.
In sum, the Court has considered the record of the November 15, 2005 hearing and the entire record of these cases, including the Stipulation, and the issues resolved therein, and the objections. The Court finds that based upon a comparison of the prospects envisioned at the time of the commencement of these cases with the results actually achieved, the relevant standard in the marketplace and other evidence in support of the Success Fee, none of which was challenged by the submission of any evidence to the contrary, the Success Fee in the reduced amount of $12.5 million (10 basis points under Debtors' Exhibit 3) is within the range of reasonableness in the context of the Debtors' size, corporate structure and financial complexities.
Therefore, the Court will enter an order directing and authorizing the Reorganized Debtors to pay a $12.5 million Success Fee to LLC.
In the end, Cooper's firm earned about $120 million in Enron's bankruptcy, thus paving the way for Mr. Cooper to earn another success fee in his next "sweet role," as CEO of beleaguered Krispy Kreme.
© Steve Jakubowski 2006