SOURCE: WALL STREET JOURNAL
ISSUE DATE: July 18, 2012, 4:02 PM
By Katy Stech
It’s no secret that the corporate bankruptcy process is expensive.
But government leaders of the Northern Mariana Islands found out that even the expense of getting thrown out of bankruptcy court has an eye-widening price tag.
Administrators who run the state pension fund for public workers of the Northern Mariana Islands—a fund that made a 44-day attempt at Chapter 11 bankruptcy protection to avoid running out of money in 2014—ran up a $750,937.82 legal bill before a bankruptcy judge could rule that the government-esque entity didn’t qualify for protection under the U.S. Bankruptcy Code.
Government leaders who are in charge of the Pacific Ocean territory and who also opposed the pension fund administrator’s request for bankruptcy protection in a long-running power struggle between the two are now protesting the bill from the Brown Rudnick law firm, whose Boston-based attorneys put the fund into bankruptcy on April 17.
Specifically, the government’s attorneys want an 85% discount from Brown Rudnick, a figure it arrived at based on the 15% chance that the fund would actually be eligible for protection. (It didn’t explain in its court-filed request how it arrived at that estimate.)
Government officials said that the Brown Rudnick attorneys shouldn’t have run up the clock on legal work when they knew the case had such a high risk of getting dismissed.
“Brown Rudnick spent hundreds of hours on matters related to removal, adversary proceedings, drafting letters, and other services that were neither necessary nor beneficial to the estate at the time they were rendered,” government officials said in court papers.
Bankruptcy’s high costs have made court protection unaffordable for some struggling corporations—an irony that’s not lost on Bankruptcy Beat or the distressed industry overall. Bankruptcy leaders have called for legislative reform to make the process cheaper, while the U.S. Department of Justice has vigilantly patrolled court dockets for overcharges.
In papers filed with the U.S. Bankruptcy Court in the Northern Mariana Islands, the fund’s lead attorney, Jeremy B. Coffey, said Brown Rudnick would respond to the objections next week but wouldn’t have any comment before that. In the courtroom, Coffey described the fund’s plea for the Chapter 11 protection as “a fight for [the fund’s] survival.”
Filing for bankruptcy could have enabled the fund’s administrators to cut pension payments that would have otherwise been banned by the government. Outside of bankruptcy, the island’s government could take over the fund and let it continue to drain money until it runs out.
The $268 million fund risks running out of money within two years.
“The solutions [the government is] talking about now include allowing the fund just to burn out over the next two years and whoever is alive as a fund beneficiary—they can fend for themselves” after that, Coffey said during the hearing that determined the fund’s fate.
Even Judge Robert J. Faris of the U.S. Bankruptcy Court in Honolulu empathized with the fund over the consequences that his decision to dismiss would have on more than 7,000 people who can draw retirement money from it.
“I don’t think that’s a victory for anybody,” Faris said. “I think that’s a disaster. I think the way the fund has been treated is shameful.”
The fund’s financial hardship traces in part to the $325 million that the government failed to pay into the fund.
Write to Katy Stech at email@example.com.