| NEW YORK
NEW YORK Dec 16 A judge cut the fees of
financial adviser Capstone Advisory Group by about $1.57 million
on Monday for its work on the bankruptcy of GSC Group Inc,
saying it withheld information about a relationship with one of
The ruling, entered in U.S. Bankruptcy Court in Manhattan,
brings to a close a nearly year-long saga over how bankruptcy
professionals handled GSC's insolvency and eventual sale to
Black Diamond Capital Management.
Judge Shelley Chapman said Capstone should have disclosed
that Robert Manzo, the restructuring expert who helped sell and
liquidate GSC's assets, was working as a contractor rather than
a direct employee of Capstone.
However, Chapman said the relationship itself, and the
associated fee-sharing arrangements between Capstone and Manzo,
did not violate bankruptcy rules, a blow to Black Diamond, which
had accused Manzo of gross negligence.
Still, Capstone ran afoul of disclosure requirements under
bankruptcy law by failing to reveal the relationship, Chapman
said. The fee cut represents about a 25 percent reduction from
the $6 million or so Capstone had initially sought.
Chapman's decision also carried implications for Manzo, law
firm Kaye Scholer and Black Diamond itself, as well as the U.S.
Department of Justice, all of which Chapman deemed to have made
mistakes in handling the messy dispute over Manzo's status.
CONTRACTOR OR EMPLOYEE?
GSC, an investment management firm founded by former Goldman
Sachs Group Inc partner Alfred Eckert, declared
bankruptcy in August 2010, hampered by a liquidity squeeze and
declining asset values brought on by global recession. It sold
its assets to Black Diamond in 2011 for $235 million.
It tapped Kaye Scholer and Capstone as legal and financial
advisers, respectively. Manzo, the trustee in charge of
liquidating GSC assets after the sale, was listed by Capstone as
But in January 2013, the DOJ's bankruptcy watchdog, the U.S.
Trustee Program, cried foul, saying Manzo was actually an
independent contractor with whom Capstone had signed a
Bankruptcy laws prohibit most cases of fee-sharing out of
concern that firms might inflate their fees to make up for the
cost of sharing. Also, independent contractors are required to
make certain disclosures to avoid the appearance of conflicts of
Tracy Hope Davis, the U.S. Trustee at the time for the New
York area, called for the firms to be removed from the case for
failing to disclose the relationship, and to give back about $10
million in total fees.
It was a highly publicized case for the Trustee Program,
which had made curbing high professional fees a priority.
In February, the U.S. Trustee reached settlements with
Manzo, Kaye Scholer and Capstone, only to have Black Diamond
object that overly broad legal releases would prevent it from
bringing its own claims in the future.
A second settlement attempt fell apart in April over
confusion about whether the deal required Chapman's approval.
During one court hearing, Chapman told Davis the Trustee's
office had behaved like a "first-year law student," in a rare
public rebuke of a government official by a federal judge.
Davis has since relocated to the Trustee Program's San
Francisco office, a move some lawyers have speculated was
connected to the GSC saga. A spokeswoman for the Trustee
Program, however, said Davis' move was unrelated.
Cliff White, the director of the DOJ's Trustee Program, said
his office was "pleased" with Chapman's ruling. "These results
are highly uncommon in large Chapter 11 cases," White said in a
'DISCLOSE, DISCLOSE, DISCLOSE'
Earlier this year, Kaye Scholer and Manzo reached
settlements with Davis, Kaye Scholer agreeing to cut $1.5
million from its fees and review its disclosure policies, and
Manzo agreeing to resign from the case. Davis maintained claims
against Capstone, while Black Diamond asserted claims against
all three, sending the matter to trial in April.
Chapman's decision on Monday resolved the trial, though
parties can still appeal. Imposing fee cuts against Capstone,
Chapman said the company's attitude fell "somewhere on the
continuum between lackadaisical and arrogant."
"It is up to the court, and not the professionals, to decide
such disclosure issues," Chapman said in a 126-page ruling.
Capstone had maintained from the outset that there was
nothing untoward about its arrangement with Manzo. Chapman,
while faulting Capstone for failures of disclosure, agreed that
the arrangement was proper, saying Manzo functioned as a member
of the firm.
But that only reinforces the importance of disclosure, said
George Kuney, a professor at the University of Tennessee at
Knoxville's College of Law.
"You can get away with all kinds of things, even things that
seem like they might pose a threat to the system, if the
circumstances warrant them and you disclose them," Kuney said in
an interview with Reuters on Monday. "The same things, if not
disclosed, will get your fees cut."
The key in bankruptcy litigation, Kuney said, is "Disclose,
Chapman ripped Black Diamond for its request for additional
sanctions against the three parties, calling it "far more
unbecoming than anything done or not done by Mr. Manzo, the
Capstone professionals, or Kaye Scholer."
"Enough is enough," Chapman wrote, denying the requests.
Aaron Rubinstein, a Kaye Scholer partner who worked on the
GSC case, told Reuters the firm is satisfied with Chapman's
ruling, which protects it from future malpractice claims from
Rubinstein said that the ruling means his and other firms
will err on the side of full disclosure.
"This is just another form of guidance as to what side of
disclosure people should be on," Rubinstein said.