Developer Lauth Group Inc. is sparing no expense on attorneys in the Chapter 11 reorganization of key subsidiaries.
The company has hired two of the nation’s most prominent bankruptcy and restructuring specialists to handle the cases of Lauth Investment Properties LLC and two other units, all filed in May. The bill for that first month easily will exceed $1 million, including $726,000 for AlixPartners, a Southfield, Mich.-based advisory firm poised for another windfall, from the bankruptcy of General Motors Corp.
Lauth executives argue they need the best attorneys and advisers to make sense of the developer’s complex structure, renegotiate loans and fight to retain control of properties. But creditors who have a claim to Lauth’s remaining cash aren’t so convinced.
Lauth has predicted bankruptcy and professional fees through September could reach $5.5 million—an amount it won’t be able to afford without spending down cash balances and securing $15 million in so-called debtor-in-possession financing. It’s been trying to line up the financing for weeks. Without it, the company is on track to run out of cash this month.
The company’s largest creditor, Chicago-based Inland American Real Estate Trust, alleges in court filings that Lauth is using its army of highly paid attorneys to protect corporate parent Lauth Group Inc., which did not file for bankruptcy, and its principals, before it is even clear if the company can get financing.
The attorneys and other advisers would have priority over other creditors in getting fees paid even if efforts to line up financing fail.
Other creditors also are bristling at Lauth’s decision to add management fees ($480,000 per month) for about 60 properties controlled by the bankrupt entities. A 13-week cash-flow forecast from Lauth shows $2.4 million in management fees, leaving just $903,000 for the LLCs that own the actual properties.
Creditors say the fees, which Lauth did not charge before the filing, are just another excuse to transfer money from bankrupt entities to non-bankrupt entities. An attorney for Lauth said the fees are being assessed on existing properties since fees from construction and development have dried up.
Lauth CEO Bob Lauth said in a statement that the filing would not have been necessary if Inland had not moved to take control of the locally based company. Inland moved to take over two Lauth subsidiaries in April after Lauth defaulted on an equity investment agreement. Inland, which invested $250 million in 2007, has argued Lauth did not have the authority for the bankruptcy filing. A judge has not yet ruled on the claim.
“In response to Inland’s aggressive actions, we hired the caliber of legal and restructuring professionals necessary to handle a company of LIP’s size and complexity,” Lauth said in the statement.
That the bankruptcy case is generating a bonanza of fees should be no surprise—since the debtors in many Chapter 11 cases are no longer playing with their own money, said one local bankruptcy attorney. Such companies often have seen their economic interest evaporate yet are able to retain control through the courts.
The principals of such companies often use legal maneuvers to buy time as they hope for a Hail Mary pass to save their businesses.
“There’s no reason not to gamble with someone else’s money,” said the attorney, who spoke on condition of anonymity. “If they had actual money at stake, they wouldn’t make that bet.”
Lauth attorney Reed Oslan begs to differ. He said the company’s principals still believe they have equity, though an exact figure won’t be determined until properties are refinanced or sold over the next few years. The bankruptcy proceedings should help maximize the assets for every creditor, Oslan said, instead of letting Inland determine the outcome in a “dark closet.”
Inland’s aggressive stance has made the already-expensive bankruptcy process even more pricy for Lauth, said Oslan, a partner at Chicago-based Kirkland & Ellis LLP and Lauth’s lead counsel.
Kirkland & Ellis had not filed its own first itemized bill by IBJ’s deadline, but Oslan said the total probably would be in the same ballpark as the submission from AlixPartners.
Kirkland got a $1 million retainer when it signed on for the case, a fee Inland has argued should be considered an asset available to other creditors. The firm’s highest-paid attorneys in the Lauth matter are head bankruptcy attorney Jim Stempel, who bills at $860 per hour, and Oslan, who bills at $795 per hour.
Oslan said Inland’s lead attorneys at Chicago-based Jenner & Block LLP probably are making roughly the same hourly rate. That firm would not share its fees, which are being paid by Inland and not the bankruptcy estate. Inland’s local attorney, Jeff Hokanson of Hostetler & Kowalik, bills at $325 an hour.
The highest-paid adviser working on the Lauth case for AlixPartners is Managing Director Jared Yerian, who earned an undergraduate business degree from IU. In May, he billed just under 190 hours at $730 per hour. His bill alone for the month was $139,000.
The AlixPartners tab includes $15,000 for air fare, $13,000 in lodging, and $1,800 for meals. The attorneys expensed an average of about $150 for each hotel night in Indianapolis, but several nights far exceeded that. One attorney spent $661 for a night at the Marriott; another paid $256 a night for two nights in a suite at the Sheraton.
The bill, which includes 1,500 billable hours, asks for an advance of 80 percent of the hourly fee and the actual expenses of $38,000. The other 20 percent will be held back to allow other parties in the case to object.
Lauth has asked Judge Basil H. Lorch for permission to set aside $3.5 million for legal services, and he so far has authorized $2.5 million.
Attorney’s fees in the Lauth bankruptcy should total roughly $3 million—far less than the $5.5 million the firm predicted through September alone—based on the company’s claim of $100 million of assets held by the entities that filed, said Lynn M. LoPucki, a law professor at UCLA who has studied the cost of bankruptcy filings.
“This is a relatively high fee, but not as high as some,” he said.
According to LoPucki’s research, the top end of bankruptcy fees should be about $6.8 million for companies with $100 million in assets. The rates have been rising about 8 percent per year.
Lauth is entitled to its team of attorneys, and it’s the court’s job to scrutinize the fees, said Howard R. Cohen, an attorney in the local office of Frost Brown Todd who represents Huntington and Irwin Union banks, two of Lauth’s secured creditors.
“This is an expensive process,” Cohen said. “Of course, it would be better for everyone if the funds were used on the projects instead of the cost of the action.”
Until the dispute between Lauth and Inland is settled, creditors whose loans are secured by Lauth properties are somewhat in limbo, Cohen said. But the lenders are not waiting for the bankruptcy case to play out to try to protect their interests.
Columbus, Ohio-based Huntington began foreclosure proceedings this month against a Lauth-developed distribution building at Eaglepoint Business Park in Brownsburg.
And San Francisco-based Wells Fargo is suing Lauth’s top executives for what it calls illegal moves to avoid paying back five loans.
The suit, filed June 17 in U.S. District Court, claims partners Robert Lauth Jr., Gregory Gurnik, Lawrence Palmer and Michael Curless committed felony fraud by secretly transferring millions of dollars in assets to their wives or family trusts. They had promised the assets as collateral for the loans. The executives deny wrongdoing.
The next hearing in the bankruptcy is July 23 in New Albany.•