Lawyers and other professionals unraveling the tangled business dealings of Metropolitan Mortgage & Securities Co. have collected $19.4 million in fees and expenses during the past 21/2 years, according to company records and court filings.
At least 28 law firms, outside accountants, tax consultants, public relations companies, insurance actuaries, turnaround specialists, expert witnesses, property appraisers and other companies were hired. It has been the largest and most expensive Eastern Washington bankruptcy. And the work isn’t done.
The attorneys and others bill in six-minute increments or charge fixed fees. In Spokane, most bankruptcy lawyers charge between $200 and $300 an hour – expensive work in a modest city, unless compared to the $400 an hour and up that bankruptcy lawyers charge in larger cities.
That still doesn’t soothe investors who held about $480 million in bonds and just last month received an initial repayment of 6 cents to 9 cents on the dollar.
Unfair as it may seem to investors who lost their life savings, it is the lawyers, outside professionals and remaining employees who are paid first on an as-you-go basis in bankruptcy.
The Metropolitan bankruptcy cost $17.3 million in fees. Professionals collected another $2.1 million overseeing Metropolitan’s activities as a trust.
Investors holding unsecured bonds are at the back of the line after taxing agencies, college tuition loans and collateralized lenders. It’s even worse for shareholders – they had their investments zeroed out.
Yet there’s been little court controversy about the bankruptcy cost.
The U.S. Trustee’s office objected to some fees last spring to no avail. U.S. Bankruptcy Judge Patricia Williams awarded lawyers their fee requests with an acknowledgement of the case’s complexity.
In the 32 months since Metropolitan filed for bankruptcy, lawyers have filed more than 12,600 court documents. There are also related lawsuits and regulatory actions that the company has pursued and defended against.
In 2003, as the company buckled under its failed new strategy as a high-risk commercial lender and federal scrutiny that blocked its ability to sell unsecured bonds, former executives considered briefly filing for a Chapter 11 bankruptcy reorganization in Delaware. Such a move may have doubled – perhaps tripled – the costs, said attorney Ford Elsaesser, who represented Metropolitan’s sister company, Summit Securities, in the case.
It was early in the case when the fees soared. The SEC used its broad subpoena powers to demand records and pick apart the firm’s finances. At the time, remaining executives attempted to salvage the company and hired an expensive turnaround management firm.
It didn’t work, and Metropolitan ultimately spent about $3.8 million complying with the SEC and about $2 million funding an independent examiner appointed by Williams to root out the cause of the company’s collapse, said trustee Maggie Lyons.
Together those fees accounted for nearly a third of the expenditures on professionals. Whether that work will ever help recover more money for creditors depends on the success of another expensive endeavor: hiring lawyers to pursue legal actions against former executives and most importantly, claims against former outside auditors, including an ongoing lawsuit against PriceWaterhouseCoopers and arbitration against Ernst & Young.
The independent examiner detailed the business dealings and failures of Metropolitan and laid the blame at the feet of C. Paul Sandifur Jr., the chairman and CEO. His report also spotlighted the actions of the outside auditors.
Legal success against those firms represents the best chance of bankruptcy creditors to recoup their investment.
Collecting money from former executives and their families offers little opportunity for recompense.
Sandifur lives in a modest home and reportedly has little money to recover, say those who have investigated his finances.
The SEC has sued him and several others for accounting fraud. The defense lawyers are being paid by a special insurance policy.
A major reason for the big legal bill was Metropolitan’s poor record-keeping and lax internal controls.
Together with a web of inter-company transactions among the various affiliates – which included two holding companies, three insurance firms, a brokerage, a venture capital business and others – the only way to comply with the avalanche of SEC document demands was to hire a firm such as Seattle-based Lane Powell, a large law firm with enough expertise to ensure the company would comply, said Elsaesser.
The firm has collected about $4.4 million in fees. More than $1.7 million just for its SEC compliance work.
Kevin O’Rourke, a bankruptcy attorney who represented creditors in the case, acknowledged that while expensive, keeping as much of the legal work as possible with regional firms was still cheaper than hiring bankruptcy legal experts from the East Coast or California.
None of the firms in the case over-billed, he said. “I’m comfortable with what I’ve seen.”
Today, the firm that once occupied the 18-story white high-rise now housing Wells Fargo is confined to a tidy office in Spokane Valley. The rent is $925 a month for the six remaining employees.
Subscribe to the Morning Review newsletter
Get the day’s top headlines delivered to your inbox every morning by subscribing to our newsletter.