Opinion
02 Civ. 4963 (JSR), Case No. 02-13533 (AJG) (Jointly Administered)
March 6, 2003
ORDER ESTABLISHING BUDGETING PROCEDURES FOR PROFESSIONAL FEES
From the outset of the case entitled Securities and Exchange Commission v. WorldCom, Inc., and even before the onset of the parallel Chapter 11 bankruptcy proceeding entitled In re WorldCom, Inc., et al., the parties and the Court were agreed that every effort should be made to protect the assets of WorldCom, Inc. and its direct and indirect subsidiaries (collectively, the "company") against improvident expenditures that might diminish the funds otherwise available to satisfy any fine imposed pursuant to this litigation or that might, more generally, further injure the numerous parties allegedly victimized by the misconduct set forth in the S.E.C. complaint, including not only creditors, but also shareholders, employees, retirees, and others. Such injuries could result, for example, from a failure by the company to stabilize its operation or to implement measures necessary to prevent any repetition of the kinds of misconduct alleged in the complaint. Beyond the protection of assets, the Court was also concerned that the company's response to the allegations (to the extent not disputed) include provision for improving internal controls, installing new training and education programs, strengthening corporate governance structures, removing individuals involved in inappropriate conduct, and in general taking broad prophylactic measures to prevent future abuses, as well as strictly adhering to the terms of all Orders issued by the Court.
To these ends, the Court, at the behest of the parties, appointed a Corporate Monitor with broad access to information concerning the company's operations and proposed plans and armed, among other ways, with the power to inform the Court of potential acts that might undercut the Court's ability to fashion the most appropriate permanent relief in this case. Particularly prominent among the powers granted the Corporate Monitor was the power to disapprove, where appropriate, corporate expenditures in the nature of compensation, broadly defined, for either internal personnel or external advisors of the company, subject to review by this Court.
While the Corporate Monitor has carried out these and other functions with great diligence and success, it is increasingly obvious that the fees and expenditures being incurred by various parties, committees, examiners, and the like in connection with the parallel bankruptcy proceedings are of a sufficient magnitude to warrant the attention of the Corporate Monitor and this Court. This attention is necessary because the Bankruptcy Court, despite its extraordinary and distinguished efforts in the parallel Chapter 11 proceedings, is effectively called upon to review the compensation of numerous firms and individuals proposed to be reimbursed by the company only after the services to which such expenditures relate have been performed, and in some cases only after millions or tens of millions of dollars in fees have been charged to the company.
Moreover, a debtor in the position of the company may not be able to effectively challenge such expenditures; and although creditors committees, bondholder committees and the like, as well as their respective counsel, financial advisors, accounting providers and such, have a seeming interest in preserving the company's assets, experience in similar cases suggests that the various professionals involved may not vigorously challenge each other's compensation or may simply not have an adequate overview of the overall case so as to be able to identify work being done by other professionals that is duplicative of their own. Given the size of the case and the number of professionals involved, there is therefore a risk that total expenditures on professional fees could substantially diminish the assets or earnings power of the company notwithstanding the best intentions of each separate participant.
In view of these concerns, the District Court, together with Judge Gonzalez of the Bankruptcy Court, convened a conference on February 12, 2003 of all the primary parties affected by the aforesaid concerns, all of whom agreed that it would be appropriate to put in place a budgeting process, supervised by the Corporate Monitor, in order to address these concerns. Thereafter, these parties submitted a draft proposal, much of the substance of which is embodied in this Order, and were also given an opportunity to comment on the penultimate draft of this Order.
Upon consideration of the foregoing, it is hereby ordered that:
1. Each professional person or firm ("Professional") retained in the chapter 11 cases or planning to seek fees payable by the company — including without limitation lawyers, accountants, investment bankers, restructuring consultants, and advisors or consultants of any other kind to be paid by the company, whether retained or appointed by the company, an official committee, the U.S. Trustee, or any other person or entity that intends to seek payment from the company in connection with such professional services — shall submit to the Corporate Monitor, on the schedule set forth below, a budget ("Budget") representing a proposed maximum limit on expenditures for all reasonably foreseeable work during the ensuing calendar quarter; except that there shall be excluded from this requirement (a) any professional retained pursuant to the Order of the Bankruptcy Court dated September 4, 2002 whose foreseeable total compensation for the duration of the bankruptcy is unlikely to exceed total expenditures of $250,000, and (b) the firms of Lazard LLC and Houlihan Lokey Howard Zukin to the extent of services included within the terms of such firms' existing retention agreements other than optional services such as merger-and-acquisition services.
2. Each Budget shall set forth in reasonable detail the Professional's best estimate of fees and expenses likely to be incurred, and a description of all major tasks and activities that the Professional anticipates undertaking, during the applicable quarterly period; but nothing there presented shall be deemed a waiver of the attorney-client privilege or any other applicable privilege. In proposing any Budget, the Professional shall take due care to propose only such expenditures as shall be necessary to achieve actual and necessary work related to Debtors or the Official Creditors' Committee, as applicable, and shall not propose expenditures that are unnecessarily duplicative of other services already provided to the company or which are not necessary for the company to exit from bankruptcy or to satisfy some other essential purpose.
3. The first of such Budgets shall be submitted to the Corporate Monitor by each Professional not later than March 15, 2003. Thereafter, each Professional shall submit a Budget for each succeeding calendar quarter not later than the first business day of the month preceding the commencement of said quarter.
4. The Corporate Monitor shall have full discretion to approve, modify or reject any such Budget as the Corporate Monitor shall deem appropriate after reviewing the proposed level of work and discussing the proposed Budget as necessary with the relevant Professionals and with the company.
5. Each Budget thereupon approved by the Corporate Monitor for any Professional shall be a "cap" or maximum limitation on any claim for payment of that Professional's fees and expenses that may thereafter be submitted to the company or the Bankruptcy Court for the relevant period. However, such approval shall not restrict or limit in any way the right of any party to dispute any item prior to payment or in any way restrict or limit the right of the Bankruptcy Court to reduce, limit, or disapprove any such expense in accordance with its standards, when, as required, application is made to the Bankruptcy Court to approve payment of such expenses.
6. In the event any Professional does not accept the Budget established by the Corporate Monitor for any period, such Professional shall be entitled to seek relief from this Court, with the standard of review being whether the Corporate Monitor's determination was reasonable in light of all applicable factual circumstances. During the pendency of any such challenge, however, said Professional shall not seek fees in excess of the Budget set by the Corporate Monitor. In the event the challenge is resolved in favor of the Professional, then such Professional may request payment of the challenged fees.
7. To the extent during any calendar quarter that a Professional exceeds or believes that it will exceed the amount of its then current Budget because of factors that were unforseen at the time such Budget was approved, such Professional shall promptly submit a request to the Corporate Monitor for modification. If the Corporate Monitor determines that all or a portion of the amount and purpose of any such expenditure above the existing Budget is reasonable, the Budget shall be modified accordingly and no further action shall be necessary. Where the Professional and the Corporate Monitor cannot agree on any such amendment to the applicable Budget, the Professional shall be entitled to seek relief from this Court, with the standard of review being whether the Corporate Monitor's determination was reasonable in light of all applicable factual circumstances.
8. The reference of In re WorldCom, Inc. to the Bankruptcy Court is hereby withdrawn to the extent, if any, necessary to enter, enforce, and implement this Order.
SO ORDERED.