Although its pending sale to the University of Iowa leaves Mercy Iowa City with more financial breathing room for paying all the attorneys and restructuring agents it hired to navigate its bankruptcy, a U.S. trustee has objected to fees for one law firm — arguing the amount “shocks the conscience.”
The number Acting U.S. Trustee Mary R. Jensen objects to is the $922,897.50 that McDermott Will & Emery of Chicago accumulated over just the first three weeks of the bankruptcy case — from Aug. 7 to 31. Besides charging a “blended rate of $1,273.49 an hour,” McDermott also received a pre-petition retainer of $761,951.
“The case was initially presented as a vehicle to effect a sale where the stalking horse was chosen, (assets purchase agreement) was redlined, and the sale was all but complete,” Jensen wrote. “Naturally, issues arose and the case became more complex, but this was not the way the case was initially presented.”
Given that Mercy is using two law firms, a financial adviser and a restructuring agency — while owing hundreds of its creditors millions and pensioners their retirement savings — attorney fees “should be carefully examined by the court to determine whether the services were reasonable and necessary,” according to Jensen, who did just that.
Poking holes and highlighting concerns through her objection filed this week, Jensen noted McDermott paid itself $18,223 for “pre-petition fees” and post-petition expenses from an “interest on lawyers’ trust account” — despite agreeing, upon being retained, to waive pre-petition expenses.
“Those funds must be immediately returned to the estate,” Jensen argued.
In reviewing the firm’s fee application, Jensen said she found overbilling in the form of “a significant amount of conferencing, reviewing, and revising each other’s work.”
During the case’s first hearing Aug. 8, U.S. Bankruptcy Judge Thad Collins noticed the large number of attorneys appearing for Mercy and warned he’d be reviewing their fees.
“Despite this caution, McDermott’s fee application is replete with duplication of effort and overstaffing with multiple attorneys reviewing, revising, and conferencing on multiple issues,” Jensen wrote. “McDermott continues to have multiple attorneys appear at hearings.”
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As an example, Jensen pointed to an Aug. 25 telephonic hearing to continue two motions that was attended by four Mercy attorneys. McDermott sent three of those attorneys, billing a total $5,509 for that one hearing.
Another recent example — outside the three-week August period Jensen is specifically objecting to — involved four Mercy attorneys listening into a hearing on whether hospital pensioners should be established as an official committee.
“A partner from the McDermott firm used the hearing to announce that (Mercy) had determined the University of Iowa was the winning bidder, not the bondholders,” according to Jensen’s report, noting that the hospital determined bondholder Preston Hollow Community Capital of Texas was not the winner as it had earlier announced. “Although the information was important to the case and drastically changed the course of the case moving forward, the hearing was entirely unrelated to the news.”
Additionally, the number of Mercy attorneys “who were merely monitoring the proceedings evidence a clear pattern of overbilling and overstaffing that should not be reflected in future fee applications,” Jensen warned. “As this is the first application for compensation for the McDermott firm in the case, the issue is ripe now for decision and a resolution that should govern attorney practices for the remainder of the case.”
Jensen said when Mercy sought court approval to hire McDermott — and received it — the application listed names and rates for six professionals.
“McDermott’s fee application, on the contrary, reflects that it had 24 individuals that worked on the case instead of the six professionals listed in the retention application,” Jensen wrote, reporting the application included eight partners, eight associates, one paralegal, one discovery consultant, three technology managers and three technology data analysts billing for a total of nearly 725 hours in that first three-week span.
“The retention of McDermott inevitably includes the retention of the entire McDermott team, but the current application shows a complete lack of teamwork, resulting in just more professionals billing the estate rather than each professional adding something new, unique, and necessary to the resolution of this case,” Jensen argued.
Breaking down her concerns further, Jensen said some billing entries for work completed by an attorney would have been better suited for a paralegal — who bills at a “substantially lower rate.” Such work includes drafting routine documents, filing them with the court and uploading documents electronically.
“The associate charges an hourly rate of $1,105, whereas the paralegal rate is $670,” according to the trustee, who noted that even the paralegal rate “exceeds the hourly rate for seasoned bankruptcy attorneys in the northern district of Iowa.”
Jensen said a partner, associate and paralegal on Aug. 16 corresponded “on ever the most minor of tasks” and charged $442.30.
“This court has held that ‘secretarial work performed by lawyers’ is not compensable,” according to Jensen’s objection, urging McDermott to show how its work has benefited Mercy — including for charges tied to a bondholder request for an examiner on Aug. 14.
Preston Hollow and master trustee Computershare asked the court to appoint an examiner to look into “leadership and financial failures” at Mercy — an issue that was set for a hearing on several occasions, but never heard.
“In total, $92,712 was billed to (Mercy) related to the motion to appoint an examiner, of which $86,433 was for research, drafting, review, and conferences related to a potential objection,” Jensen wrote. “No objection has been filed and the issue is not resolved to date.”
Arguing the compensation application includes language that can’t be checked for reasonableness — like charges for “attention,” “strategy” and “conferencing” on certain issues — Jensen said the court can deny them.
McDermott isn’t the only firm seeking compensation — with Cedar Rapids-based Nyemaster Goode requesting $67,869.62 for those first three weeks. Roy Leaf, a shareholder with Nyemaster, billed an hourly rate $295 while McDermott partners billed hourly rates of $1,850, $1,450 and $1,105.
In addition to the law firms seeking payment approval, H2C Securities — a financial adviser and investment banker for Mercy — is seeking $49,157 in payment for September. Jensen, who objected to the original application to hire H2C, questioning its ability to add benefit for Mercy, has asked for more time to file an objection.
According to the UI purchase agreement to pay $28 million for most of Mercy’s assets, the university is not covering attorney fees for the hospital’s restructuring and bankruptcy. That leaves those costs to the dwindling assets of Mercy, which still owes millions to creditors. The university has agreed to pick up Mercy’s operating losses after Dec. 1, helping it stay open until the sale closes despite its mounting dues.
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The number Acting U.S. Trustee Mary R. Jensen objects to is the $922,897.50 that McDermott Will & Emery of Chicago accumulated over just the first three weeks of the bankruptcy case — from Aug. 7 to 31. Besides charging a “blended rate of $1,273.49 an hour,” McDermott also received a pre-petition retainer of $761,951.
“The case was initially presented as a vehicle to effect a sale where the stalking horse was chosen, (assets purchase agreement) was redlined, and the sale was all but complete,” Jensen wrote. “Naturally, issues arose and the case became more complex, but this was not the way the case was initially presented.”
Given that Mercy is using two law firms, a financial adviser and a restructuring agency — while owing hundreds of its creditors millions and pensioners their retirement savings — attorney fees “should be carefully examined by the court to determine whether the services were reasonable and necessary,” according to Jensen, who did just that.
Poking holes and highlighting concerns through her objection filed this week, Jensen noted McDermott paid itself $18,223 for “pre-petition fees” and post-petition expenses from an “interest on lawyers’ trust account” — despite agreeing, upon being retained, to waive pre-petition expenses.
“Those funds must be immediately returned to the estate,” Jensen argued.
In reviewing the firm’s fee application, Jensen said she found overbilling in the form of “a significant amount of conferencing, reviewing, and revising each other’s work.”
‘Complete lack of teamwork’
During the case’s first hearing Aug. 8, U.S. Bankruptcy Judge Thad Collins noticed the large number of attorneys appearing for Mercy and warned he’d be reviewing their fees.
“Despite this caution, McDermott’s fee application is replete with duplication of effort and overstaffing with multiple attorneys reviewing, revising, and conferencing on multiple issues,” Jensen wrote. “McDermott continues to have multiple attorneys appear at hearings.”
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As an example, Jensen pointed to an Aug. 25 telephonic hearing to continue two motions that was attended by four Mercy attorneys. McDermott sent three of those attorneys, billing a total $5,509 for that one hearing.
Another recent example — outside the three-week August period Jensen is specifically objecting to — involved four Mercy attorneys listening into a hearing on whether hospital pensioners should be established as an official committee.
“A partner from the McDermott firm used the hearing to announce that (Mercy) had determined the University of Iowa was the winning bidder, not the bondholders,” according to Jensen’s report, noting that the hospital determined bondholder Preston Hollow Community Capital of Texas was not the winner as it had earlier announced. “Although the information was important to the case and drastically changed the course of the case moving forward, the hearing was entirely unrelated to the news.”
Additionally, the number of Mercy attorneys “who were merely monitoring the proceedings evidence a clear pattern of overbilling and overstaffing that should not be reflected in future fee applications,” Jensen warned. “As this is the first application for compensation for the McDermott firm in the case, the issue is ripe now for decision and a resolution that should govern attorney practices for the remainder of the case.”
Jensen said when Mercy sought court approval to hire McDermott — and received it — the application listed names and rates for six professionals.
“McDermott’s fee application, on the contrary, reflects that it had 24 individuals that worked on the case instead of the six professionals listed in the retention application,” Jensen wrote, reporting the application included eight partners, eight associates, one paralegal, one discovery consultant, three technology managers and three technology data analysts billing for a total of nearly 725 hours in that first three-week span.
“The retention of McDermott inevitably includes the retention of the entire McDermott team, but the current application shows a complete lack of teamwork, resulting in just more professionals billing the estate rather than each professional adding something new, unique, and necessary to the resolution of this case,” Jensen argued.
Breaking down her concerns further, Jensen said some billing entries for work completed by an attorney would have been better suited for a paralegal — who bills at a “substantially lower rate.” Such work includes drafting routine documents, filing them with the court and uploading documents electronically.
“The associate charges an hourly rate of $1,105, whereas the paralegal rate is $670,” according to the trustee, who noted that even the paralegal rate “exceeds the hourly rate for seasoned bankruptcy attorneys in the northern district of Iowa.”
Jensen said a partner, associate and paralegal on Aug. 16 corresponded “on ever the most minor of tasks” and charged $442.30.
“This court has held that ‘secretarial work performed by lawyers’ is not compensable,” according to Jensen’s objection, urging McDermott to show how its work has benefited Mercy — including for charges tied to a bondholder request for an examiner on Aug. 14.
Preston Hollow and master trustee Computershare asked the court to appoint an examiner to look into “leadership and financial failures” at Mercy — an issue that was set for a hearing on several occasions, but never heard.
“In total, $92,712 was billed to (Mercy) related to the motion to appoint an examiner, of which $86,433 was for research, drafting, review, and conferences related to a potential objection,” Jensen wrote. “No objection has been filed and the issue is not resolved to date.”
Arguing the compensation application includes language that can’t be checked for reasonableness — like charges for “attention,” “strategy” and “conferencing” on certain issues — Jensen said the court can deny them.
Money for lawyers
McDermott isn’t the only firm seeking compensation — with Cedar Rapids-based Nyemaster Goode requesting $67,869.62 for those first three weeks. Roy Leaf, a shareholder with Nyemaster, billed an hourly rate $295 while McDermott partners billed hourly rates of $1,850, $1,450 and $1,105.
In addition to the law firms seeking payment approval, H2C Securities — a financial adviser and investment banker for Mercy — is seeking $49,157 in payment for September. Jensen, who objected to the original application to hire H2C, questioning its ability to add benefit for Mercy, has asked for more time to file an objection.
According to the UI purchase agreement to pay $28 million for most of Mercy’s assets, the university is not covering attorney fees for the hospital’s restructuring and bankruptcy. That leaves those costs to the dwindling assets of Mercy, which still owes millions to creditors. The university has agreed to pick up Mercy’s operating losses after Dec. 1, helping it stay open until the sale closes despite its mounting dues.
U.S. trustee: Mercy Iowa City attorney fees ‘shock the conscience’
Although Mercy Iowa City – given its pending sale to the University of Iowa – now has more resources to pay all the attorneys and restructuring agents it hired to navigate its bankruptcy, a U.S. trustee has objected to fees for one law firm, arguing the amount “shocks the conscience.”
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