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<b>Practice Notes:</b> Judge Denies Fees to Lawyers in Hip-Hop Bankruptcy

By Anthony Lin
May 28, 2008
A bankruptcy judge slammed a New York law firm for putting its own desire to be paid above the interests of its hip-hop publishing client in a Chapter 11 proceeding. In a stinging 38-page decision, Southern District of New York Bankruptcy Judge Arthur J. Gonzalez denied Windels Marx Lane & Mittendorf any compensation for its work on the bankruptcy of hip-hop media company Source Enterprises Inc. In re Source Enterprises Inc., 06-11707.

The New York firm had sought around $526,000 in fees for the five months from September 2006 to February 2007 that it acted as debtor's counsel to Source, publisher of The Source magazine. But Gonzalez said the 'manner in which Windels represented the Debtor and the firm's eventual singular concentration on fees, as opposed to its role as counsel, caused harm to the Debtor sufficient to support a denial of all fees sought.'

The judge said Windels Marx had a conflict of interest in representing Source in its bankruptcy proceeding because the law firm was itself a creditor and had a bill outstanding with the debtor company of as much as $200,000, even before the bankruptcy filing. Windels Marx partner Charles E. Simpson, who led the firm's bankruptcy representation, testified that his firm 'waived' that amount, but Gonzalez gave this claim little credence, noting that the firm did not write off the time until it was challenged on it in November 2007, and that even the firm's client was unaware the bill had been forgiven. Moreover, the judge pointed out, Windels Marx later sought payment of some of the supposedly waived legal fees from Source affiliates. Simpson did not return a call seeking comment.

Windels Marx had looked to Black Enterprise/Greenwich Street Corporate Growth Partners ' an investment group that took control of Source after instances of mismanagement came to light and then provided bankruptcy financing to pay the firm's bills, which the firm and the investment group had agreed to defer until the conclusion of the bankruptcy case. The judge pointed out that Windels Marx had disclosed none of these facts in its application to be retained as bankruptcy counsel.

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