Who's Benefiting From Subprime Meltdown?

Bankers are not the only white-collar collateral damage of the subprime mess and credit-market turmoil: Lawyers are feeling some pain, too. Witness Cadwalader, Wickersham & Taft's layoff of 35 lawyers, with the expectation of more pink slips to come.

But every economic downturn has a silver lining—at least for big law firms with deep benches in financial restructuring. Bad economic news means Chapter 11 filings, which in turn mean millions of dollars in legal fees paid out of the administrative expenses for these cases.

The Recorder, a daily legal trade in California, had a dandy story this morning (subscription required) about the $12 million "cash cow" that New Century Financial Corp.'s pending Chapter 11 case has been for the Los Angeles firm of O'Melveny & Myers.

New Century, a mortgage lender deep into the subprime market, sought Chapter 11 protection in April, and O'Melveny has billed more that $12.5 million in the six months for which it has filed fee applications, according to The Recorder.

Given pending investigations by the Justice Department and Securities and Exchange Commission, the firm's white collar defense crew, led by former Los Angeles U.S. Attorney Alejandoro Mayorkas was especially busy in September. It billed nearly $100,000 for his work alone—$705 an hour (but only half that rate for travel time)—and $800,000 altogether for the white-collar group.

Lest anyone be outraged, hold your horses: O'Melveny's fees are pretty much par for the course in these mega-cases.

"These aren't particularly large or appalling fees," says Lynn LoPucki, a bankruptcy professor at the University of California at Los Angeles Law School, who maintains a running research database on bankruptcy cases.

By the by, LoPucki's site shows that the lion's share of bankruptcies by financial institutions this year have landed in the Delaware court, a favored venue for these case. LoPucki, a longtime critic of fees in bankruptcy cases, has conducted a study showing that fees in these cases have risen 12 percent per year for 10 years running. More good news on bad karma for the lawyers!

For anyone interested in exactly how lawyers really do make their money, bankruptcy cases are a wonderful thing, because the lawyers must submit their fee applications to the court for approval, and those applications are public documents. Let's take a look, shall we?

O'Melveny's most recent soup-to-nuts detailing of its fees captures its work for the month of November 2007. In that month, the O'Melveny lawyers billed New Century a total of 6,509.5 hours, amounting to $1,857,291.50 in fees.

A 30-page document filed by O'Melveny on January 8 to U.S. Bankruptcy Judge Kevin Carney in Wilmington. breaks it all down. Ben Logan III, one of two lead partners on the case, spent 105.4 hours in November, at $795 an hour, or $83,793.00 in fees.

(By the way, why not just charge $800 an hour? Then again, the same rounding question goes through my head when I see a Pravda bag listed at $1,290. Go figure.)

Logan's counterpart, Suzanne Upland, logged 130.1 hours at $725 an hour for a total of $94,322.50. And Mayorkas logged 58 hours for $40,890 in fees.

But what were these lawyers actually doing? The brief, in its own way, tries to explain that, and the lion's share of fees for November, it seems, were given over to New Century's "cooperation with the investigation being conducted by the court-appointed examiner."

All told, O'Melveny spent 4,585.6 hours in this cooperation, for a total of $988,530.00 in fees.

And this, my friends, is where the story gets wild, especially if you are a lawyer billing by the hour. After all that "cooperation," it turns out that New Century and the examiner, appointed by the United States bankruptcy trustee to investigate issues arising from a restatement of assets by New Century, are fighting with one another.

Remember that in bankruptcy, all the lawyers get paid: The examiner, Michael Missal of the law firm K&L Gates, along with his team of lawyers, billed more than $1.6 million to the bankruptcy estate in August, according to The Recorder.

But the folks from O'Melveny are now fighting before Judge Carney, claiming the examiner's report should remain under seal, a motion that Judge Carney seems inclined to reject, according to the Associated Press.

And so, we should expect O'Melveny's next "Application for Compensation" to be dominated by this courtroom fight, rather than "cooperation," with the examiner. This is how the lawyers make their money, in bad times as well as good....

by Karen Donovan