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July 22, 2021 – The U.S. Trustee assigned to the Debtors' cases has objected to the Debtors' proposed Restructuring Support Agreement (the “RSA”) arguing that its provisions relating to fees to be paid to various law firms representing abuse victims are "prospective, not subject to review, lack transparency, and do not meet either statutory or case law standards" [Docket No. 5685].
On July 1st, the Debtors filed a motion requesting authority to enter into the RSA with James L. Patton, Jr., the future claimants’ representative (the “FCR”), the Coalition, the Tort Claimants’ Committee (the "TCC"), the Ad Hoc Committee of Local Councils, and “certain state court counsel,” including a number of the firms that formed the Coalition. It is the "Coalition," comprised of 10 law firms that represent abuse victims, that is drawing scrutiny from the U.S. Trustee who argues that the RSA's proposed fees and expenses fail to meet a "substantial contribution" standard imposed by the Bankruptcy Code in respect of fees and expenses that aspire to be treated as administrative expenses in bankruptcy (and in doing so move up the distribution pecking order). Those fees include a monthly fee of $950k to be split amongst Coalition professionals and a $10.5mn lump sum to be paid when the Debtors' Plan goes effective.
The objection provides: "The U.S. Trustee objected to the RSA Motion because of the following deficient reasons:
- Fails to comport with the legal or evidentiary standards of section 503(b)(3) and (4);
- Lacks transparency with respect to treatment and allocation of either the $950K future monthly payments or the Effective Date lump sum distribution of $10.5mn;
- Precludes review or oversight of the professional fees and expenses of the Coalition Professionals; and
- Fails to explain whether plaintiff claimants who are survivors of abuse could have their recoveries reduced by having to make up any shortfall in payment to Coalition members."
The objection continues: “… The record here lacks any evidence to satisfy the section 503(b)(3) and (4) substantial contribution standard that would permit reimbursement of the Coalition Professionals’ fees and expenses. Nor is there evidence that would satisfy the disclosure and transparency requirements of a professional fee application. If the RSA Motion is approved, the Coalition Professionals would receive up to $950,000 per month between now and the Effective Date, and another $10.5 million lump sum distribution on the Effective Date. The payments are not subject to any review or oversight. They are not allocated among the various Coalition Professionals. The Coalition has not provided any time records, expense detail, or other documentation explaining or justifying the payments. The RSA Motion does not explain whether the Coalition’s members—the individual abuse claimants—could have their recoveries reduced by future payment of any shortfall to the Coalition Professionals. The RSA Motion contains only conclusory statements describing the Coalition Professionals’ entitlement to these payments and no actual evidence of a substantial contribution for either the lump sum payment or the future monthly payments.
Paragraph 4 of the proposed order approving the RSA is clear that this lack of transparency, disclosure, and review is deliberate: 'The Debtors shall reimburse the fees and expenses of the Coalition as and to the extent set forth in the RSA and the Term Sheet. None of the fees and expenses shall be subject to further approval of the Court, and no recipient thereof shall be required to file any interim or final fee application with the Court as a condition precedent to the Debtors’ obligation to pay such fees and expenses. Notwithstanding the foregoing, if a dispute arises with respect to the reasonableness of such fees and expenses, the Court shall have the jurisdiction and authority to determine the reasonableness of such fees and expenses'.”
A hearing on the objection is scheduled for July 29, 2021.
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