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In GSC Group Bankruptcy, U.S. Trustee Alleges Kaye Scholer of Inflating Fees

On Friday, the U.S. Trustee in the bankruptcy case of GSC Group Inc, filed papers alleging that law firm Kaye Scholer and financial adviser Capstone had inflated their fees and should return more than $10 million they earned through bankruptcy of GSC Group.

The U.S. Trustee said in the filing that during the bankruptcy proceedings, the trustee who was listed in court filings as a Capstone employee, and was in charge of liquidating certain GSC assets, was in fact an independent contractor with whom Capstone had a fee-sharing arrangement.

The U.S. Trustee alleged that the firms who advised the bankruptcy concealed this vital fact from the courts and that the parties “perpetrated a fraud on this court by willfully concealing and affirmatively misrepresenting the true nature of Capstone’s employment and financial relationship” with the trustee Robert Manzo.

On their part, Steven Mandelsberg, an attorney for Capstone said, “Capstone looks forward to the opportunity to respond to” the allegations, while Sandi Sonnenfield, a spokeswoman for Kaye Scholer said the allegations “are without merit and we will establish that in responding to the motion.”

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Fee sharing agreements, as held by Manzo, are usually barred by bankruptcy rules out of the concern of fees getting inflated to absorb the costs of sharing. Manzo earned about $4 million in the case, which was consisted the lion’s share of Capstone’s bills in the matter.

The U.S. Trustee has alleged that lawyers at Kaye Schloer created a conflict of interest by failing to inform the court of Manzo’s contractor status and keeping silent about the matter, when they saw Capstone repeatedly referring to Manzo as their employee.

The U.S. Trustee further said, “It is reasonable to conclude that Kaye Scholer would be hard pressed to take issue with Capstone’s bills in these cases,” also noting that the Kaye Scholer attorney, who worked in the GSC matter was a personal friend of Manzo.

The U.S. Trustee has asked the court to deny the requests for success fees by the firms and also wants them to return the $10 million they have already received as fees in the matter.

The case is In re GSC Group Inc et al., U.S. Bankruptcy Court, Southern District of New York, No. 10-14653.

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