If you despair over the economics of the U.S. budget, you will find them refreshingly rational compared to the ongoing saga of the Prosser bankruptcy case. Now heading into its fifth year, the case involves the now-dwindled estate of Jeffrey Prosser, former owner and CEO of Innovative Telephone.
In the last year or so much of the debate has been over the disposition of the Prossers’ mansion in Florida, where he and his wife, Dawn, have lived rent-, mortgage-, and tax-free for several years.
The U.S. Bankruptcy Court has long since ruled that the assets of the estate should be liquidated and turned over to the creditors, primarily the Rural Telephone Finance Cooperative (RTFC), a specialized nonprofit bank in northern Virginia.
Prosser and his lawyers have filed a blizzard of legal actions, seeking to overturn Bankruptcy Court decisions and, generally, to delay the process.
RTFC had lent more than half a billion dollars to the Prosser enterprises, and though now it is running Innovative Telephone and other ex-Prosser properties, it has recouped only a tiny fraction of the monies lent to Prosser.
Additionally, RTFC has had to fund a small army of lawyers and accountants in the ongoing battles. Some of the fees go to lawyers representing RTFC, but most go to attorneys for the two court-appointed trustees who are handling the unwinding of the estate.
Typical of the economics of the situation were these recent developments:
The shrinking net value of the Palm Beach mansion
Earlier in the trial, the value of the Prosser mansion in Palm Beach was described in the $9-10 million range; however, most recently the house was sold (tentatively) by Chapter 7 Trustee James P. Carroll, for $7.95 million.
Prosser’s lawyers caused more delays and the would-be purchaser went through a rigorous home inspection process and finding water damage lowered his bid to $6.18 million. At a subsequent auction, that figure was raised to $6.9 million, which was the high bid.
Meanwhile, there has been a $5 million mortgage on the place, held by Bank of America, for years. As time passed, and neither mortgage payments nor tax bills were paid, the mortgage and associated costs has grown to $5.77 million as of March 1, 2011; and the tax lien to about $580,000. The two combine to about $6.35 million.
This means that the remaining value to the creditors of the one-time $10 million mansion, was, at mid-month, no more than about $535,000. And it loses value, Carroll says, at the rate of $40,000 a month.
The two trustees and the Bank of America have filed a joint petition with the court to approve the sale for the $6.9 million and have encouraged to the judge to act on the motion quickly, because the purchase offer expires April 30.
There will be one of the regular monthly hearings on the case in Pittsburgh on Tuesday, and the trustees and the bank are, presumably, hoping for the approval of their motion at that time.
A largely futile effort to reduce legal fees
Earlier in the case, in an effort to reduce the legal fees and expenses involved, presiding Bankruptcy Judge, Judith Fitzgerald appointed a fee auditor to look into the fees charged in a single three-month period (the last quarter of 2008) by one of the law firms working for Stan Springel, the Chapter 11 court-appointed trustee; that is Vinson & Elkins of Houston, Texas. Performing the audit was Texas-based auditing firm Warren H. Smith & Associates.
During the three-months V&E charged a total of $2.63 million for fees, and costs (largely travel) of $161,500. The Smith organization, working within the court’s framework of acceptable fees, found that V&E had overcharged the trustee by nearly $32,000 in fees and expenses, or a little over 1% of the total. Smith also reported another reduction, but the wording was such that one cannot tell if Smith had anything to do with it; it follows:
“This amount [the total billing for the period] reflects a total of $93,681.75 in reductions by one-half of non-working travel time originally calculated at normal hourly rates and a total of $15,727 in [presumably other] reductions adjusted from the gross amount ($2,734,409) sought in V&E’s monthly fee applications for the Application Period.”
To recapitulate: Smith’s work clearly caused a reduction of $31,000, and may have helped save another $109,000 or so, for a total of about $140,000. Smith’s organization worked on this matter for 10 months and submitted bills, as of March 31, 2011, of $131,349.35.
Bankruptcy court auditing, in turns out, relates to such matters as maximum allowable hotel rates (lawyers should not charge more than $250 a night for lodging) and the appropriateness of lawyer’s time spent on certain tasks.
It does not review the hourly rates of the lawyers, which can reach $300 an hour or more in this case. It is a little like Congress focusing hard on the multi-millions in Congressional earmarks and ignoring the multi-billions in the Bush tax cuts for the rich.
In one such auditing action, Smith objected to the $389 spent one night by one lawyer at the Ritz Carlton in St. Thomas, and the law firm agreed to reduce its expense request by $139.
As one reads the case documents on the court’s electronic system (PACER), incidentally, one never see the kind of big picture accounting that the Source has engaged in above; it probably would be too painful, and so does not see the light of day.