Sears bankruptcy raises old questions about the cost of breaking

WILMINGTON, Del. (Reuters) – Sears has survived the Great Depression and World Wars. Whether the 126-year-old dealer stays afloat or runs out of business is now partly paying for the huge bill popping up by breaking down.

The Fate of Sears Holdings Corp ( SHLDQ.PK ) highlights a hard reality of US bankruptcy – it requires armies of expensive specialists in a system driven by a outcome, not costs.

On Monday, Sears will consider bids for his assets, including a $ 5 billion suggestion for chairman and controlling shareholder Eddie Lampert.

In order to secure its potential for bidding on liquidation of the chain, Lampert last week granted more than $ 600 million in additional commitments that Sears has incurred since filing for bankruptcy in October last year.

These so-called administrative requirements include taxes and payments to suppliers and professionals as advisor Sears.

"The fees in a case like this will be huge, you have people working around the clock," said David Wander, bankruptcy lawyer at Davidoff Hutcher & Citron. "A massive case requires a massive amount of legal talent."

Sears, who also owns the Kmart discount chain, picks up the table for six law firms, three investment banks, two financial advisers, and seven others that provide tax, real estate advice and other services, according to court cases.

Although the final tally will not be known until the case is finished, the fees are taking off quickly.

The law firm Weil, Gotshal & Manges, for example, billed Sears about $ 5 million the first two weeks after being filed for Chapter 11 bankruptcy protection on October 15, according to court documents.

Weil did not respond to a request for comment. Sears refused to comment.

Bankruptcy veterans said the fees reflect the reality of Chapter 11, which can inflate costs: only a handful of law firms can bring many experienced employees to justice at short notice. Business executives are happy to pay the top dollar when the company's survival is on the line.

The bankruptcy of the investment bank Lehman Brothers Holdings Inc in 2008 has been the most expensive case by far, surpassing $ 2 billion, and major flaws such as Enron Corp in 2001 usually run bills of hundreds of millions of dollars.

Since lawyers and other counselors are generally paid first, critics as academics often criticize their fees to reduce the amount left for creditors and employees.

The rising cost of Chapter 11 also reflects increasingly complex corporate structures, and the sometimes confused economic conditions that a struggling company can undertake to avoid failure.

For example, Sears struck a series of refinancing agreements with Lampert, which will now be examined by a special reorganization committee on the board.

The committee will have its own set of lawyers and advisors to avoid potential conflicts of interest, cost of costs.

In addition, Sears will also pay for professionals for an official unsecured vendor selection, which is typical.

At least 36 lawyers bill Sears $ 1000 or more an hour, according to court applications.

Of course, high hourly rates may be worth it. American Airlines and General Motors probably thrive due to bankruptcy, although retailers in particular tend to perish in Chapter 11.

Legal experts say that comparing costs in Chapter 11 cases is almost impossible due to the large number of variables in each case.

"I'm not sure we really know what a big chapter 11 case should cost, so it's hard to" control "taxes unless they're extreme," said Stephen Lubben, professor at Seton Hall Law School.

Toys "R" Us in their first three months piled up more $ 45 million in fees, according to court records. The dealer, who left the business after filing for bankruptcy in 2017, has paid 72 companies $ 375 million in December.

Judges have commissioned tax investigators to hunt for unnecessary costs in the huge fees. Weils for the first two weeks of Sears ran 330 pages, breaking down every lawyer's time to six minute intervals.

Lynn LoPucki, a professor at the UCLA School of Law, called tax administrators just window dressing on a broken system.

He said the judges should demand evidence from companies that they charge the same prices for customers in or out of bankruptcy.

"Most lawyers will tell you that bankruptcy is a very profitable practice," he said.