Bankruptcy Law News

Trustee Tries to Ditch Sears’ IP Law Firm Deal (Corrected)

Dec. 4, 2018, 10:35 PMUpdated: Dec. 5, 2018, 2:15 PM

The trustee overseeing bankruptcy matters at the Justice Department is opposing the continued employment in the Sears Chapter 11 bankruptcy case of the Chicago-based intellectual property boutique law firm McAndrews, Held & Malloy Ltd.

McAndrews has represented Sears in IP matters since May 2012, according to court documents.

The U.S. trustee asked the U.S. Bankruptcy Court for the Southern District of New York Dec. 4 to deny McAndrews’ employment application as intellectual property counsel. The law firm’s employment application doesn’t support the law firm’s request for pre-approval of fees, improperly allows the firm to subcontract work to foreign associates, and improperly seeks post-bankruptcy petition retainers, according to the trustee.

Challenging the reasonableness of fees—the essence of this objection—is one of the roles of a U.S. Trustee in Chapter 11 to protect the integrity of the bankruptcy system.

Professionals hired in the case must seek court approval of their fees and may be employed on “reasonable terms and conditions,” under Bankruptcy Code Section 328(a).

A hearing on the matter is scheduled for Dec. 20.

Attorneys Same as Other Creditors

The trustee questions why one group of employment professionals, the IP lawyers, should be treated differently than other professionals when they must all share as unsecured creditors of any available assets of the bankrupt company.

As IP counsel, the 77-attorney firm of McAndrews has been involved in and has expertise in clearing, drafting, prosecuting, and maintaining Sears’ more than 500 active patents and patent applications, and more than 2,200 registered or applied-for trademarks worldwide, according to court documents.

The law firm asked to be compensated on a monthly fixed fee of $43,750, a flat fee of $750 to $11,000 for services rendered in connection with their flat fee service, and an hourly rate for services that aren’t included in either fixed or flat fee services.

McAndrews’ application fails to specifically identify the flat fee for each of the flat fee services, the trustee said. They merely provide the range of $750 to $11,000, which makes it impossible to determine if the fee is reasonable, the trustee said.

McAndrews should also be required to submit appropriate time records that comply with bankruptcy court rules in New York, the trustee said.

The law firm asked for a waiver of the requirement to file time records in 1/10 of an hour increments for its fixed fee and flat fee services, but didn’t provide a basis for this request, the trustee said.

McAndrews plans to subcontract certain services to “foreign associates that assist [McAndrews] outside of the United States,” according to court documents. Subcontracting to third parties “isn’t appropriate,” and it isn’t clear from their application how these associates will be billed to the estates, and whether they will undergo the same conflict checks required for disclosure under the Federal Rules of Bankruptcy Procedure, the trustee said.

Finally, McAndrews failed to prove it was entitled to hold and replenish its “evergreen retainers,” the trustee said.

Evergreen retainers are used to “minimize a professional’s exposure to the risk of non-payment,” but McAndrews hasn’t show any basis for being treated differently than any other administrative creditors, the trustee said.

McAndrews wanted an $80,000 post-petition retainer for fees incurred for its representation, and a $50,000 post-petition retainer for post-petition disbursements to foreign associates. If any portion of the retainers are used, McAndrews wanted authority for Sears to be able to replenish the amount used.

Sears filed Chapter 11 Oct. 15.

Weil, Gotshal & Manges LLP, New York, and Paul Weiss Rifkind Wharton & Garrison LLP, New York, represent Sears; Paul K. Schwartzberg, New York, represents U.S. Trustee William K. Harrington.

The case is Sears Holdings Corporation, Bankr. S.D.N.Y., No. 18-23538 (RDD), objection 12/4/18.

((corrects headline and first paragraph to say that trustee objecting to law firm's proposed employment in Sears bankruptcy is U.S. Trustee at the Justice Department))

To contact the reporter on this story: Diane Davis in Washington at ddavis@bloomberglaw.com

To contact the editor responsible for this story: Seth Stern at sstern@bloomberglaw.com

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