If Fair Finance Co.’s bankruptcy trustee fails to win a massive settlement from the company’s lenders, he is going to have a lot of explaining to do.
That’s because Trustee Brian Bash’s legal team has racked up more than $6.2 million in fees battling Textron Financial Corp. and Fortress Credit Corp., which are accused of turning a blind eye to the fraud orchestrated by Fair CEO Tim Durham.
That 21-month-old lawsuit, now wending toward trial, represents perhaps the greatest chance of recovering a large sum for the 5,000 mom-and-pop Ohio investors who bought more than $200 million in ultimately worthless notes from Fair.
For now, though, the high legal costs are salt in the wounds of investors, who are increasingly frustrated that, even as the fees pile up, they have yet to receive a single distribution that would shrink their losses.
Those tensions came to the fore this month when Bash’s law firm, Cleveland-based Baker & Hostetler, sought court approval for $7.3 million in fees rung up from September 2012 through August 2013.
It is requesting court approval for $4.3 million in fees covering the first eight months of 2012 that Ohio bankruptcy Judge Marilyn Shea-Stonum deferred action on when they were submitted a year ago.
The fee requests totaling $11.6 million dwarf the $6.6 million that the trustee holds in a money market account after reaching settlements in dozens of smaller lawsuits, many of them brought against friends and business associates of Durham who received payments from the disgraced financier. The trustee charged the payments were improper because Durham took the money out of Fair at a time the company was insolvent.
It’s not clear how the fee request will fare with Judge Shea-Stonum. At a hearing last fall, she lamented, “Claimants can very reasonably ask, will this case be administered solely for the professionals?” And in a hearing this month, she said she believes investors ultimately should get no less than half of whatever collection efforts recover for the estate.
The fee request doesn’t seek full payment of the fees immediately. Instead, it asks the judge to pay out an amount “the court deems appropriate in its discretion, subject to the availability of funds.”
Baker & Hostetler’s attorneys, of course, are merely trying to apply their professional expertise to clean up a mess they had no role in creating. Even so, the legal team acknowledges it is veering into sensitive territory.
“I understand the gut reaction from some investors,” Kelly Burgan, a partner with Baker & Hostetler, told the Akron Beacon Journal. “I understand they haven’t been paid at all.”
Baker & Hostetler already has been paid $4.3 million for its legal work from February 2010, when the bankruptcy case began, through 2011. Court records show its attorneys billed at rates ranging from $305 an hour to $735 an hour.
Other professionals also have collected payments, including Faegre Baker Daniels, the Indianapolis counsel for Bash, which has received $135,000 and has a request pending for another $83,000.
Attorneys pursuing recoveries for investors say the real villain is Durham, who was convicted last year of looting Akron, Ohio-based Fair to fund a lavish lifestyle, ply friends and fund failing businesses he owned.
Durham, 50, is serving a 50-year sentence at a federal penitentiary in Kentucky as he pursues an appeal.
Investors aren’t alone in being frustrated by the process. Some of the Indianapolis businesspeople whom Bash sued to recover money say they reached settlements because mounting a defense would have been prohibitively expensive—not because they believed they owed anything.
Among those was Joan SerVaas, Durham’s ex-wife. She and one of her sons this month agreed to pay $110,000 they didn’t think they owed. SerVaas said she otherwise would have had to hire a forensic accountant and pay to access and analyze the mountain of financial records.
Other defendants express a similar lament—and say the fact that none of the settlement proceeds have gone to the investors only adds to their irritation.
“I feel bad for [the investors], and everybody involved,” SerVaas said. “There has to be a better way.”•