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Judge Walsh Overrules Objection to Final Fee Application of Debtors’ Counsel

By Evan T. Miller

On June 20, 2013, Judge Peter J. Walsh of the United States Bankruptcy Court for the District of Delaware issued his Memorandum Opinion and Order Regarding the Objection of Michael T. Kennedy (“Kennedy”) to the Final Fee Application of Skadden, Arps, Slate, Meagher & Flom LLP (“Skadden”) (Doc. # 1993), overruling Kennedy’s pro se objection (the “Objection”) to Skadden’s Final Fee Application (the “Final Fee Application”) in In re Radnor Holdings Corp., et al. (Case No. 06-10894) (PJW).

On August 21, 2006 (the “Petition Date”), the Debtors commenced the Chapter 11 cases (the “Bankruptcy Cases“).  Prior to the Petition Date, the Debtors had marketed their assets but had been unable to consummate a sale or refinancing transaction outside the auspices of bankruptcy court protection.  Following the Petition Date, the Debtors’ assets were sold (the “Sale”) to Tennenbaum Capital Partners LLC (“Tennenbaum”), an entity with one of the Debtors’ four board seats.  After the sale, the Court confirmed the Debtors’ liquidating chapter 11 plan.  Subsequently, Skadden filed its Final Fee Application.

By way of background, shortly after the Petition Date, Skadden had applied (the “Retention Application”) to the Court for an order authorizing its retention as Debtors’ counsel, to which the United States Trustee (the “UST”) had objected based on concerns over Skadden’s involvement with Tennenbaum.   Skadden disclosed that during the year prior to the Petition Date, it had provided Tennenbaum with approximately five hours of tax advice, some of which addressed the structure of Tennenbaum’s potential investments in the Debtors.  The Court overruled the UST’s objection, finding that Tennenbaum was not a significant client of Skadden and that Skadden would not be influenced in its representation of the Debtors.

After Skadden filed its Final Fee Application in 2012, Kennedy, a former director and majority shareholder of the Debtor Radnor Holdings Corporation, filed the Objection, seeking, inter alia, disgorgement of Skadden’s professional fees.  In sum, the Objection alleged that: (1) among others, the Debtors, Skadden, and Tennenbaum manipulated both the Sale and retention processes in the Bankruptcy Cases to produce a windfall for Tennenbaum; (2) Tennenbaum ‘selected’ Skadden to represent the Debtors; (3) Kennedy was unaware of the depth of the “cozy relationship” that existed between Tennenbaum and Skadden, and had he known, he would not have let Skadden be retained; and (4) Skadden steered the Debtors towards using Lehman Bros. as an investment banker because Lehman would be partial to Tennenbaum.

The Court rejected Kennedy’s assertions for a multitude of reasons.  The Court found no evidence that Skadden “steered” the retention process, given that it did not participate in the Debtors’ board meeting where retention was considered and Tennenbaum specifically requested that other firms be interviewed.  The Court also noted that Kennedy was present during board calls when Skadden’s retention was discussed and in fact admitted in a pre-petition e-mail that he knew of Skadden’s prior Tennenbaum representations.

In terms of the “cozy relationship” between Tennenbaum and Skadden, the Court found it was quite the contrary.  As evidence that Skadden never agreed to shield Tennenbaum from litigation, the Court noted that Skadden secured from Tennenbaum a full waiver of any conflicts posed by Skadden’s representation of the Debtors.  Skadden subsequently filed an objection to the claims of Tennenbaum on the Debtors’ behalf, while the Creditors’ Committee filed its own adversary complaint asserting more than a dozen different counts.

As to Kennedy’s claims of Sale manipulation, the Court was equally skeptical.  The Court found that Tennenbaum did not dictate the pursuit of the Sale, and in fact was reluctant until Skadden solicited it to make an offer.  Regarding bid procedures, the Court found that Skadden negotiated strongly against Tennenbaum, hardly evidence of a non-adversarial relationship.

In short, the Court found that Skadden’s pre-retention disclosures were adequate and that Skadden did not engage in any sort of malpractice in connection with the Bankruptcy Cases.  The Objection was overruled and the Final Fee Application was approved.

A copy of the opinion can be found here.

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