Professional Fees in Nortel Networks Bankruptcy are Massive, With a High Burn Rate Continuing

By: Donald L. Swanson

Some not-surprising facts about professional fees in the Nortel Networks bankruptcy are:

–The total amount is massive; and

–The burn-rate continues without abatement.

Keep in mind that:

–The primary question in the Nortel Networks bankruptcy is this:

How should a $7.3 billion sale proceeds fund be distributed?

–Professional fees in the Nortel Networks bankruptcy are entitled to 100% payment before any general creditor ever sees a dime.

–Mediation efforts have been extensive . . . but largely ineffectual.

MASSIVE FEES AMOUNTS — As of April 30, 2016

A Law360 publication says that professional fees “paid” from that $7.3 billion fund (as of approximately April 30, 2016) total “at least $1.89 billion.”  Of such amount:

–35% ($671 million) is paid in the U.S.

–38% ($712 million) is paid in the UK

–27% ($507 million) is paid in the Middle East and Africa

Note:  Interim fee payments are 80% of allowed fees, because 20% of allowed fees are held back until the case ends.  So, for $1.89 billion fees paid, $2.36 billion are allowed.

$2.36 billion fees on a $7.3 billion fund is 32.33%.  That’s a hefty percentage of a very-large sum, as of April 30, 2016, with a long ways yet to go in the case.

THE BURN RATE IN 2016

The cash burn rate for professional fees, since April 30, 2016, is exceedingly high.   Many professional firms are being paid out of the $7.3 sales fund, and they are charging lots of money!  Here are some examples.

–Example:  “Consultant”

Consider, for example, the “Sixty-Eighth Monthly Application” for allowance of fees of a Nortel “Consultant” filed on January 19, 2017 (Doc. 17726).  This professional firm began working for Nortel on July 9, 2010, and has total allowed fees of $25.2 million thus far.

Monthly fee amounts approved for this firm during the 2016 calendar year (and being paid from the $7.3 billion fund) are as follows:

1/31/16 — $742,544

2/29/16 — $698,678

3/31/16 — $742,485

4/30/16 — $809,480

5/31/16 — $793,727

6/30/16 — $906,977

7/31/16 — $988,840

8/31/16 — $733,252

9/30/16 — $636,787

10/31/16 — $933,144

11/30/16 — $842,402

12/31/16 — $944,413

Such fees are billed at the rate of $590.00 per hour.  In their 12/31/16 Application, nine individuals worked a total of 1,600.7 billable hours that month to account for the $944,413 total.

[Editorial Comment:  The Delaware Bankruptcy Court issues an Order on May 12, 2015, determining how the $7.3 fund should be allocated among creditors (after payment of professional fees).  This Order is promptly appealed to the Third Circuit Court of Appeals.  One would assume that fee burn rates would diminish after such ruling and appeal.  This assumption, obviously, does not apply to the fees itemized above or below.]

–Example: “Consulting Expert”

Also consider, for example, the “Eighty-First Monthly Application” for allowance of fees of a Nortel “Consulting Expert” filed on December 30, 2016 (Doc. 17646).  This professional firm began working for Nortel on March 4, 2010, and has total allowed fees of $20.2 million thus far.  This firm has been charging a flat $250,000 per month for the entire time of its engagement.

In its December 30, 2016, Application, this professional firm identifies (at page 5 of 14) two professionals working a total of 202 hours from November 1 through November 30 of 2016.  That’s an effective rate of $1,237.62 per hour.

—Example: “Attorneys”

Also consider, for example, the “Ninety-Fifth Interim Application” for allowance of fees of a Nortel “Attorneys” firm filed on December 20, 2016 (Doc. 17604) (a photo of a chart from this Application appears above).  This professional firm began working for Nortel on February 4, 2009, and has total allowed fees of $299 million.

Monthly fee amounts approved for this firm for the 2016 calendar year (and being paid from the $7.3 billion fund) are as follows:

1/31/16 — $   730,815

2/29/16 — $   827,881

3/31/16 — $1,058,755

4/30/16 — $   723,962

5/31/16 — $   575,132

6/30/16 — $1,033,934

7/31/16 — $1,039,830

8/31/16 — $1,207,890

9/30/16 — $1,866,199

10/31/16 — $2,640,166

11/30/16 — $2,244,891

In the 11/30/16 Application, there are fifty two different professionals logging time that month, including partners, counsel, associates, temp. attorneys, paralegals and law clerks.

CONCLUSION

Professional fees approved and paid to date in the Nortel Networks bankruptcy are massive, and the burn rate continues without abatement.  In fact, it looks like the fee burn rate is ticking upward.