Failed Company Overpaid Millions in Fees

An investigation into Collins & Aikman’s bankruptcy and decision to liquidate finds that many fees did not pass the reasonableness test.
Stephen TaubOctober 25, 2007

An examiner probing the fees paid out in Collins & Aikman Corp.’s bankruptcy concluded that a number of firms received millions of dollars in unnecessary fees from the company. She also said the decision by the one-time auto parts maker to liquidate should have been made earlier, according to

More than $123 million in fees had been billed as of June 30, according to the report. Judy O’Neill of Foley & Lardner, hired by the bankruptcy court to investigate the fees, laid out her findings in a 112-page report.

She did point out that several recipients agreed to settlements that led to a reduction in their fees, said. Three firms cut their compensation by a total of about $7.3 million, according to the website. They include lead counsel Kirkland & Ellis LLP, which agreed to pare its fees by $1 million; financial adviser Lazard, which slashed its fee by $6.09 million, plus expenses; and Chanin Capital Partners, which advised the unsecured creditors committee, agreed to reduce its fees by about $237,500.

O’Neill reportedly said that her discussions with other professionals involved in the Collins case were still incomplete.

Questions about the fees were raised initially by Third Avenue Management, the former chair of Collins’ unsecured creditors committee.

To determine the “reasonableness” of fees and expenses, the examiner sought to answer four questions. First, should the substantial problems at Collins’ plastics division and the “near impossibility” of the division meeting management’s business goals have been discovered earlier? And if so, did the delay result in losses for creditor recoveries?

The third question was whether key assumptions underlying management’s business plan, the nature of the problems in the plastics division, and the changes in the debtor’s view of future operating performance were adequately and timely disclosed to creditors.

And finally, once it became certain that reorganization wasn’t likely, did the professionals continue to work on activities that weren’t “reasonably necessary” under the circumstances?

The Deal said that O’Neill’s answers to the first two questions were “yes.” She found most of the constituent groups were “well aware” of the problems plaguing the plastics business because Collins could not formulate a “reliable business plan.” However, there was a delay between June 2006 and August 2006 in realizing that Collins’ achievable EBITDA was much less than had been projected.

“Given the delay, the fee examiner concludes that the decision to liquidate [Collins] reasonably could have occurred approximately two months earlier,” O’Neill reportedly wrote. “Therefore, [Collins’ case], and the attendant fees, were unnecessarily extended by approximately two months.”