By Michael Arndt and Aaron Bernstein Since filing for Chapter 11 bankruptcy protection in late 2002, United Airlines (UALAQ.OB) has lost $4.5 billion in net income. Now the aircraft engineers' union alleges that the carrier's lead law firm is overbilling for its services.The International Federation of Professional & Technical Engineers has filed objections with the bankruptcy judge about what it contends are out-of-control fees from Kirkland & Ellis -- a total of $54 million since the carrier sought bankruptcy protection 27 months ago.
One Kirkland lawyer billed United and its parent UAL Corp. for 3,500 hours last year at $540 an hour -- the equivalent of working 9.6 hours a day, 7 days a week, 365 days a year. "We question their rates and the amount of time," says union lawyer Mark Richard. Meanwhile, a senior partner at the Chicago-based law firm bills at $950 an hour, while some legal assistants rack up $230 an hour.
SPECIFICS NEEDED. Kirkland filed a rebuttal, saying the union "lacks any basis for its conclusion that K&E's fees and expenses are unreasonable." United sides with its lawyers. All fees must be approved by a bankruptcy-fee committee and the judge, an airline spokeswoman points out.
Judge Eugene Wedoff rejected the union's complaint as too general, concluding that just because the dollar amounts are large and the hours are long doesn't prove lawyers are padding their bills. He noted that, as an attorney, he had put in 14-hour days on cases. "Hourly rates in the abstract are not a basis for objection," Wedoff ruled.
But the judge also allowed the union to refile its claim with specific arguments -- something Richard says the union will do. To date, United's overall bankruptcy fees total $195 million, making it the seventh most-expensive bankruptcy proceeding on record and the most costly in the airline industry, says Lynn LoPucki, a law professor at the University of California at Los Angeles who has studied the cost of big bankruptcies.
By way of comparison, Global Crossing had about the same amount of assets as United when it declared bankruptcy in early 20002. The telecom outfit emerged two years later after spending $174 million in professional fees. At United, the meter is still running.
Bankruptcy's Ruinous Cost
It takes a lot of money to get through a bankruptcy. Indeed, many of the big companies that have sought Chapter 11 protection in the last few years have spent well in excess of $100 million apiece on fees to lawyers, consultants, and other firms offering professional services, according to Lynn LoPucki, a law professor at the University of California in Los Angeles. He says United's costs have been mounting more than other megabankruptcies. "You would not expect fees this high at all," he says.
LoPucki, who specializes in bankruptcy expenses, has put together a list of the most costly cases, based on public filings, news reports, and his own calculations. Here's his tabulation of the 10 costliest bankruptcy proceedings to date:
1. Enron: $780 million
2. WorldCom: $657 million
3. Pacific Gas & Electric: $462.5 million
4. LTV Corp.: $237 million
5. Mirant*: $211.5 million
6. Adelphia Communications*: $208 million
7. UAL*: $195.5 million
8. Federal-Mogul*: $177 million
9. Global Crossing: $174 million
10. Kmart: $135 million
* Still in Chapter 11 bankruptcy. Arndt is senior correspondent for BusinessWeek in Chicago. Bernstein is a senior writer in the Washington bureau.