Chiron, can you figure out how to get this article to Judge Walrath????? (sounds a lot like our case!)
Removal of Weil, Gotshal Sought in Leslie Fay Case
By LAURENCE ZUCKERMAN
Published: October 20, 1994
In a stinging rebuke of one of the country's richest and most prestigious law firms, a Federal official recommended yesterday that Weil, Gotshal & Manges be removed from the Leslie Fay bankruptcy case and be forced to forfeit part of the $5.3 million in fees it has billed to date.
In a motion filed in Federal Bankruptcy Court in Manhattan yesterday, Arthur J. Gonzalez, the United States Trustee responsible for supervising the bankruptcy of the Leslie Fay Companies, said Weil, Gotshal's relationship to members of the Leslie Fay board constituted an "actual conflict of interest." In addition, Mr. Gonzalez said, the firm had failed to disclose those relationships to the court.
Both are grounds for disqualification under current bankruptcy law, the motion said, adding that "the court should impose an economic sanction that will preserve the integrity of -- and the public's confidence in -- the bankruptcy system."
Mr. Gonzalez did not specify the amount of the penalty but he recommended that it represent both the fees charged by Weil, Gotshal for representing an audit committee at Leslie Fay and the costs of a report on the firm's behavior prepared by an independent examiner last year. A lawyer familiar with the case estimated that the combined amount was about $2 million.
The motion was submitted just prior to a deadline set by Bankruptcy Judge Tina L. Brozman, who is presiding over the Leslie Fay case. Weil, Gotshal must respond by Nov. 4. The judge will then likely rule on the motion at a hearing scheduled for Nov. 28.
The recommendation adds weight to the report by Charles A. Stillman, the court-appointed examiner. That report, completed earlier this year, found fault with the firm's conduct in the Leslie Fay case, recommending that it remain on the job but forfeit a part of its future fees as punishment.
Judge Brozman may accept the trustee's recommendation, reject it or choose an alternative. "It's very unusual to have a law firm disqualified in a case, but it's not unheard of," said Elizabeth Warren, a professor of bankruptcy law at the University of Pennsylvania Law School.
Regardless of how the judge rules, the recommendation is an acute embarrassment for Weil, Gotshal. The firm was the fourth-richest law firm in the country last year with gross revenue of $318 million and profits per partner of $745,000, according to The American Lawyer magazine. The firm dominates the bankruptcy bar and has made its reputation handling celebrated bankruptcy cases, including those of R. H. Macy & Company, Drexel Burnham Lambert, and Eastern Airlines. In recent years, the firm has been criticized by other bankruptcy lawyers for supposedly skirting the blurry edge of bankruptcy-court ethics.
The firm released a statement late yesterday saying that it would contest the motion, which it called "totally without merit." The firm "is committed above all to pursuing the interests of its clients while adhering to the highest standards of ethical conduct," the statement said.
Prof. Warren said that while a settlement might yet be negotiated between the law firm and the United States Trustee concerning the amount of fees Weil, Gotshal could be forced to forfeit, the question of disqualification could not really be compromised.
"In disqualification, it's either all or nothing," she said. "The trustee is now taking a position. He's going to have a hard time backing off that."
Indeed, in his motion, Mr. Gonzalez went far beyond the recommendations of Mr. Stillman, whose report came after some Leslie Fay creditors raised the issue of conflicts.
Mr. Gonzalez argued that Weil, Gotshal's representation of the board's audit committee that was investigating charges of fraud at Leslie Fay had resulted in an "actual harm" to the company because committee members were also senior executives at Odyssey Partners and Bear, Stearns & Company, two major Weil, Gotshal clients. That theoretically gave Weil, Gotshal an incentive to act contrary to the interests of Leslie Fay.
Since the issue of conflicts was raised about Weil, Gotshal, many original creditors have sold their interests in Leslie Fay to so-called vulture investors. The new group of creditors have shown little interest in pursuing sanctions against the firm, which is active in other cases involving the same new investors and their lawyers. Thus, the United States Trustee, a division of the Department of Justice charged with overseeing Federal bankruptcy courts, can probably count on little support from the creditors.
Prof. Warren argued that that should make no difference. "The United State Trustee has an independent obligation to make his or her own judgment," she said. "That's the job."
AI
