A major business bankruptcy case is typically a blizzard of paperwork, with lawyers adding documents into the case’s court file at a pace that runs up costs fueled by $2,000-plus-per-hour billing rates.
In the bankruptcy of Connecticut hospital operator Prospect Medical Holdings, a total of 3,107 documents had been filed in North Texas federal court as of Sept. 12 -- some of them dozens or hundreds of pages long. That’s a pace of almost 13 legal documents filed per day since the bankruptcy was announced on Jan. 11.
The running total for professional fees in the Prospect bankruptcy topped at least $60 million as of Sept.15, with the California-based company’s top lawyers claiming more than $20 million of that total for just over eight months of work.
But since Prospect blew past a self-imposed August 22 deadline to launch the sale of its Connecticut hospitals to a new owner, that blizzard of bankruptcy paperwork has slowed to the barest flurry. A mere two or three documents a day have been filed to the online “docket,” or legal record, in recent weeks, as negotiations over struggling Waterbury, Manchester Memorial and Rockville General hospitals drag on behind the scenes.
One exception to the docket slowdown: Bills.
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Payment “requests” from law firms, investment bankers and consultants continue to stream in relating to the Prospect bankruptcy. Those bills are paid out of the bankruptcy “estate,” or pool of money consisting of existing assets and the proceeds from asset sales.
Law firms and consultants top the list of professionals profiting off the health system’s bankruptcy, with restructuring firm Alvarez and Marsal making the most so far, at just over $20 million.
“We move our clients forward, to where they need to be,” Alvarez and Marsal asserts on its website. Other current bankrupt clients of the New York-based firm include Spirit Airlines, FTX Trading Ltd. and DNA testing company 23andMe.
Helping Prospect untangle its finances involved a 26-person team from Alvarez in July, with Managing Director Paul Rundell earning $226,800 for the month, billing for 168 hours at an hourly rate of $1,350. A hard-working associate named Mason Londo nearly matched Rundell’s total for the month, billing for 235.5 hours (nearly 60 hours a week) at a mere $675 an hour.
As for individuals taking home millions, lawyers are the high earners in the Prospect case.
Thomas Califano, Prospect's lead attorney and a partner at Chicago-based law firm Sidley Austin, bills the Prospect estate $2,120 an hour, and had earned just shy of $1.4 million on the case as of the end of July.
Califano, caught several times on courthouse live-streams snapping at his colleagues in a gravely Queens accent, worked on the Prospect case for 93.3 hours in July, and billed the estate $197,796 for the month, according to court documents.
“Meals” was by far the highest category of expenses for Alvarez & Marsal in August, with $7,985.25 billed for dining that month compared to $2,980.39 spent on airfare.
High bankruptcy costs worry judge
The mounting total for payments to professionals as Prospect’s sales efforts continue to lag have raised concerns for Judge Stacy Jernigan, the Texas judge assigned to the case.
“We’re seeing more and more where a plan is being proposed that doesn’t pay administrative expense claims,” Jernigan said at a hearing on Aug. 20, discussing bankruptcy cases where fees overwhelm the assets of the bankrupt company. “I know that’s one reason why people have fretted so much about Steward Health Care,” she added later in the hearing.
Jernigan has increasingly compared Prospect’s financial woes to the ongoing bankruptcy of Steward, a for-profit chain that ran 31 hospitals in eight states and filed for Chapter 11 on May 6, 2024. Two of the chain’s eight hospitals in Massachusetts have since closed.
Like with Prospect, lawyer and consultant fees in the Steward case have escalated to the point that parties in the case have spoken out.
As of Sept. 9, professional fees in the Steward case totaled more than $304 million, according to a document filed by the state of Massachusetts. Nearly $120 million has been billed by one major law firm, New York-based Weil, Gotshal & Manges.
Calling Weil’s fees “excessive and unreasonable,” Massachusetts criticized all the professionals involved in the bankruptcy for profiting off a situation that compromises its residents’ health and safety as former Steward hospitals close and cut back on services.
“Once the Debtors’ primary operating assets were sold, the Debtors’ experienced and highly compensated professionals should have focused their efforts on minimizing their own expense burden and on preserving the Debtors’ remaining resources in order to maximize value for creditors,” the state argued. “While high rates might be tolerated if truly exceptional results were achieved with great efficiency, that is not the case here.”
The total cost borne by the state in the Steward bankruptcy could top $700 million in Massachusetts, according to an analysis by the Massachusetts Taxpayers Foundation.
Steward filed a lawsuit in July seeking to claw back dividends from former top executives to help pay its bills in bankruptcy, a plan approved by the judge in the case.
Bankruptcy lawyer outlines expensive process
Large, interstate companies like Prospect and Steward who are filing for bankruptcy often hire top talent in the field which drives up costs, said Matthew Beatman, a bankruptcy expert and partner at Bridgeport firm Zeisler & Zeisler.
Chapter 11 cases are particularly complex because companies are seeking to both pay off debts and restructure, Beatman said. Attorneys need a high level of expertise in the bankruptcy code and familiarity with the demands of federal bankruptcy judges.
“You have sophisticated judges who want information. You have sophisticated creditors and other constituencies that are asking questions. You have the Department of Justice that asks questions,” Beatman said. “When you have those additional codes you have to go through, it creates an additional layer of expense.”
Although Prospect only operated 16 hospitals when it filed for bankruptcy (it has since closed two in Pennsylvania), it chose a law firm charging rates similar to those charged by the law firm hired by Steward, nearly twice its size. The top biller for Steward’s law firm, Weil, Gotshal & Manges, charges $2,575 an hour compared to $2,120 an hour for Califano in the Prospect case.
A bankrupt company’s estate is also billed for the professionals hired by the Unsecured Creditors Committee, a group that includes parties like employee unions and towns owed property taxes by the debtor. The law firm hired by the creditors had billed for $8.4 million as of the end of July.
Beatman said he's noticed more health-care companies filing for bankruptcy in recent decades, with five hospital chains filing in 2024, according to news site Becker’s. Unlike bankruptcies in manufacturing and other sectors, health-care cases typically attract more notice from lawmakers and regulators, he said.
“Health-care situations are somewhat unique in the sense that the state is going to really try to work with you, much more than in other cases, to try to make sure the right thing happens,” Beatman said.
Liese Klein is a reporter with CT Insider focusing on the business of health care. She has covered business in Connecticut for 15 years and previously worked at The Hartford Business Journal, New Haven Biz, Business New Haven, the New York Daily News, the Asahi Evening News in Tokyo and the Miami Herald.