Bankruptcy Lawyers in Bonus Round

In a move that has sparked concern from some county leaders, a law firm that has already received $26 million for handling litigation related to Orange County’s 1994 financial collapse is seeking a bonus of $48 million.

If a federal court upholds the recommendation, it would bring the total legal fees paid to $74 million--or about 8.5% of the $865 million the county has collected in settlements with firms it accused of helping cause the bankruptcy.

But county officials expressed opposition to the proposed bonus, saying the attorneys from Hennigan, Mercer and Bennett have been generously compensated and that any additional payment would come out of money earmarked for public services.

“The bankruptcy continues to wrap its arms around the necks of the taxpayers,” said Supervisor Todd Spitzer.

Community activists were more pointed.

“That just seems greedy and excessive,” said Bruce Whitaker, leader of the Committees of Correspondence antitax group. “They’ve already received a pretty lucrative hourly rate, and now the concept of a bonus. . . . It is really quite laughable,” he said.

The attorneys are asking for the additional payment even though the official in charge of administering the county’s bankruptcy litigation, former state treasurer Thomas W. Hayes, turned down their request.

Hayes said he accepted increases in the lawyers’ hourly fees three times during the litigation effort--to as much as $450--and that additional payments are unnecessary.

The hefty bonus was suggested by retired Judge John G. Davies, who at the request of the law firm agreed to review how much compensation it should receive. Davies, who oversaw most of the bankruptcy settlements before stepping down last year, analyzed the bonus issue as a private citizen and not in any official capacity.

In his seven-page recommendation, Davies praises the attorneys, saying their services were “spectacular by any standard, particularly given the extraordinary and difficult circumstances under which they were achieved.”

Hennigan, Mercer and Bennett was selected in 1995 to lead the county’s effort to recoup money lost in the largest municipal bankruptcy in U.S. history. The county sued numerous Wall Street financial firms including Merrill Lynch & Co., which sold securities to Orange County’s ill-fated investment pool. The litigation ended in June when the last firm settled with the county.

The firm’s contract did not specify a compensation package. According to the contract, the firm’s compensation was dependent on a number of factors including hourly fees, the complexity of the cases and the result achieved.

J. Michael Hennigan, a law firm partner, said a $48-million bonus is reasonable, especially given that most contingency arrangements provide attorneys with a larger share of the total settlement than the roughly 10% his firm would receive.

“It is a huge number, but well deserved I think,” he said.

But Christopher D. Cameron, a bankruptcy law expert at Southwestern University college of Law in Los Angeles, termed the size of the bonus “extraordinary.”

“I’ve never heard of a bonus that was worth twice the hourly billing, which was already pretty generous,” he said.

Lawyers handling complex securities class action lawsuits in recent years have on average been awarded about 30% of the total amount recovered, said John C. Coffee, a Columbia University law professor specializing in cases involving financial wrongdoing.

However, most of those settlements are for far less than recovered by Orange County, typically $20 million, Coffee said. And cases involving gigantic settlements like the county’s have produced smaller payments.

One of the two federal judges handling the county’s bankruptcy case--John J. Ryan or Gary L. Taylor--will ultimately decide how much of a bonus, if any, the attorneys receive. A decision should be made within the next month.

John M.W. Moorlach, the county’s treasurer and tax collector, said he faults previous county leaders for signing an agreement with the law firm that didn’t more clearly state what the lawyers’ compensation would be.

He said he felt “sucker-punched” because he was not made aware that the firm could demand substantially more than their hourly fee.

Hennigan, Mercer and Bennett did a “great” job, he said, but their proposed bonus is too high.

“On a legal basis, perhaps they have the right,” he added. “But on a credibility basis, I’m a little disturbed.”