Pillowtex bankruptcy billing bonanza

Brent Felgner, July 26, 2004

New York — In the first month of Pillowtex's Chapter 11 bankruptcy, attorneys for the foundering mill billed nearly $500,000 in fees and expenses as they rushed to make the filings, protect the company's assets, make the proper notifications and lay the groundwork for a planned liquidation.

Now, at the one year anniversary of the bankruptcy, lawyers and other professionals involved in the liquidation have billed more than $8.2 million in professional fees and expenses covering roughly the first 10 months, payable out of Pillowtex's coffers, according to filings with the United States Bankruptcy Court for the District of Delaware.

The information was culled by Home Textiles Today in a review of dozens of documents involving more than 1,000 pages of invoices along with supporting and other documentation.

According to the pleadings for payment, and confirmed where the bankruptcy court judge Peter Walsh has approved the payments, all of the bills are customary and reasonable in a case such as this. Indeed, there are a number of instances where it is particularly clear the billing entities were attempting to control expenses and fees.

But there are also some instances of large negotiated and agreed-upon fees, particularly for some consulting organizations that assisted in the highly successful October auction of most of Pillowtex's assets.

It is from that cache, along with the proceeds of the sale of much of Pillowtex's hard assets — real estate, inventories and the like — that unsecured creditors will ultimately be paid. It still uncertain precisely how large that pool will be.

But how much the unsecureds will receive and, just as importantly, when, is still unclear.

"It was a very involved case and, so far, it's got good results," said Mark Indelicato, a partner in Hahn & Hessen, New York, the lead attorneys for the creditors' committee.

"So far, no payments have been made to the unsecureds," he continued. "We have some very significant employee issues — Warn Act, severance, vacation pay — that we need to resolve before we can begin distribution to unsecured creditors. We're working diligently to get that done, but right now I have no timeframe. It depends on whether they get resolved or get litigated."

Indelicato, whose firm has been paid slightly more than $1 million in the 10-month period covered by the filings, suggested the payout process has become a victim of its own success, since most of the employee issues arose after the successful auction last October in which liquidation consortium GGST LLC purchased most assets for $121 million, more than double its original $56 million stalking-horse bid.

Those results were obtained largely through a challenge by the creditors' committee to the original bidding structure that resulted in Trenwith Securities of Costa Mesa, Calif., being brought in to consult.

Working on behalf of the committee, Trenwith threw itself into the process already undertaken by Credit Suisse First Boston, on behalf of the mill, to sell off the company's assets.

CSFB already had a $2 million consulting agreement with Pillowtex prior to the bankruptcy; $1.1 million of that amount was billed post petition — whittled slightly in another challenge by the committee.

According to its own records filed at the request of the court, CSFB recorded approximately 571 hours over three months working on the Pillowtex matter. It should be noted, however, that the agreements with CSFB and Trenwith were not based on billable hours but on transaction fees and other incentives surrounding the success of the deal. For its part, Trenwith billed a total of $763,502 showing 716 total hours.

"We believe that if not for the efforts of Trenwith, we would not have been able to sell the assets for the amounts that we did," said Indelicato. "They're a bargain, given what they've recovered."

Likewise, Indelicato said he was, for the most part, satisfied with the contribution of CSFB.

"If you recall, we objected to their fee structure because of the way the sale was being proposed, and there were some modifications made to their fee structure. But at the end of the day there was a successful sale," he added. "To spend money (to challenge them) would be a waste of resources and time, so we negotiated a settlement."

To be sure the burden for initiating most of the bankruptcy work fell to Pillowtex's lead legal firm, Debevoise & Plimpton, one of the largest and most highly respected in the country.

For its efforts, the firm has billed more than $3.5 million — roughly $350,000 per month — led by the efforts of senior partners Richard Hahn and Michael Wiles.

The partners bill at the rate of $700 per hour and, during the first month of the filing, Hahn billed $72,205 as Wiles recorded $23,030 in billings.

Debevoise recorded $405,656 in charges for the filing and the month of August, while Morris, Nichols Arsht & Tunnell, of Wilmington, Del. — the local attorneys of record for the bankruptcy court — added another $93,295 in billings.

In all instances, the firms broke down their charges by the individual and by the project being worked on, offering "blended" hourly charges in their invoices. For example, Debevoise's blended charge early on was $438.62, averaged between the partners, paralegals and support staff, which billed as low as $80 per hour.

The creditors' committee representatives consistently billed at lower rates. For example, the blended rate at Hahn & Hessen was $368.20 at one point, with Indelicato and partner Mark Power topping out at $495 per hour.

The committee's Delaware attorneys of record, Blank Rome, cumulatively billed $87,191.10 over the 10 month period.

Accountants also represented a large portion of the outlay, with Pillowtex-employed KPMG billing a total of $278,295.50. By contrast, the committee's accountants, BDO Seidman, billed $1,109,512.60 for the 10 months.

The Pillowtex bankruptcy case has also experienced some lighter, perhaps more trifling moments. Last November, the U.S. Trustee informally objected to Trenwith's expense charges, so the consultant, in a separate filing, reduced its $13,599.81 billing by $97.63.

But individual members of the creditors' committee seemed the most frugal. Entitled to claim expense reimbursement, those most heavily involved seemed restrained, at a minimum. John Hodge, president of MISR Spinning and Weaving, filed a December reimbursement claim for $32.34 for telephone conference calls.

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