When U.S. Bankruptcy Judge Martin V. B. Bostetter entered his packed Alexandria courtoom a few weeks ago, almost 100 pin-striped attorneys rose in respect. All were there for the same reason: another in a long series of hearings on the bankruptcy of 357 EPIC real estate partnerships.
Although few of the lawyers did more than take notes, it was an expensive day. One participant estimated that each was charging an average of $150 an hour to be in court, which meant that the hearing was costing in the neighborhood of $15,000 per hour.
"The costs are outrageous even without one hundred lawyers sitting in a room," said this attorney, a Washington corporate litigator, who has seen similar sums of money drained on other massive bankruptcies. "This case has the elements of medieval jousting. It is a bad way to decide things, but I don't know of any other way."
EPIC's centerpiece, the Falls Church-based Equity Programs Investment Corp., was in the mass-market tax-shelter business, drawing hundreds of investors into dozens of investment partnerships to buy thousands of single-family houses with more than $1 billion in borrowed money. As many as four dozen affiliated firms helped turn EPIC into a money machine for its owners.
But when the EPIC real estate empire and its affiliate, Community Savings & Loan, collapsed last fall, they were transformed into a different type of money machine -- one that has fed the scores of lawyers, accountants, real estate consultants, brokerage houses, appraisal companies, even copying services, that have been sorting through the tangled EPIC remains.
Keeping the EPIC operation afloat since last September has cost $17 million, estimated Daniel M. Lewis, an attorney representing the state of Maryland, which took control of Community and EPIC last fall. The cost of making sure rents are collected, houses are maintained and the salaries of EPIC employes are paid will largely be paid from Community's assets and the rents still being collected.
The Palmieri Co., a prominent asset-management firm, is receiving $140,000 a month to figure out how to sell off 20,000 EPIC houses. Teams of accountants from the Big Eight firms of Coopers & Lybrand and Price Waterhouse -- at comparable fees, sources say -- have been combing through the EPIC books and records.
And then there are the lawyers.
"Epic" is an understatement for the amount of litigation produced by EPIC's collapse. Lawyers for the partnerships, their creditors and other parties have been haggling for the last eight months over a plan to liquidate the 20,000 EPIC houses and pay off the partnerships' debts.
But EPIC's collapse also generated at least nine other lawsuits, mostly against former EPIC executives for fraud and misrepresentation. The biggest claim is a $100 million suit by the state of Maryland charging the EPIC principals with using Community funds to expand the EPIC operation -- in large measure for personal gain. Additionally, four of the companies that insured the EPIC mortgages have filed suit to rescind their coverage, alleging that they were misled about EPIC's finances.
The high stakes have generated correspondingly hefty legal fees. The Washington firm of Verner, Liipfert, Bernhard, McPherson & Hand, which is representing the partnerships in bankruptcy, was paid roughly $275,000 for its first 2 1/2 months worth of work on the case. And Verner, Liipfert has just submitted a second bill for approval by bankruptcy judge Bostetter, this one asking for $260,000 for another two months of work on the case, according to Norman Oliver, an official at the U.S. Trustee's office in Virginia who is monitoring the administration of the case. Two partners have been working full-time on this case, as well as a number of other attorneys and paralegals.
Arnold & Porter, the big D.C. firm representing Maryland in the case, is billing the state about $250,000 a month, although the fees vary, according to Lewis, a partner in the firm. Lewis said these fees include not only services for the bankruptcy itself, but also considerable work Arnold & Porter has done on the state's civil suit against the EPIC principals, on the proposed sale of Community to Mellon Bank of Pittsburgh, and on other legal matters at Community.
These two firms are only the tip of the legal iceberg, however. Dozens of other law firms are involved in the myriad litigation, although their fees need not be approved by the courts and hence are not disclosed. Here are the big guns:
*Finley, Kumble, Wagner, Heine, Underberg, Manley & Casey, one of the largest firms in the country, represents the National Bank of Washington, the trustee for about 50 savings institutions holding EPIC mortgage-backed securities.
*Ballard, Spahr, Andrews & Ingersoll represents the First National Bank of Maryland, trustee for another 50 mortgage security holders.
*Cadwalader, Wickersham & Taft is counsel for the court-appointed committee representing the interests of 6,000 investors around the country who bought shares in the EPIC partnerships.
*Baker & Botts is one of several firms involved in defending the EPIC companies and former executives.
*Wilmer, Cutler and Pickering and Melrod, Redman & Gartlan represent a group of major EPIC creditors. Their lawyers, William J. Perlstein and Daniel Sullivan, are the main architects of the EPIC reorganization plan now under consideration by the bankruptcy court.
Are the EPIC fees excessive? The attorneys themselves insist not, arguing that they have put in extremely long hours toward sorting out EPIC's affairs, not only preparing briefs but also simply trying to piece together the often mysterious EPIC transactions.
"This is the most complex piece of litigation that I've ever been on in 15 years, and I think that every lawyer on the case will tell you that," said Robert J. Plotkin, a partner at Finley, Kumble, Wagner. Roger M. Whelan, a former bankrupcty judge handling the case for Verner, Liipfert, simply added, "Without the lawyers, you don't have a reorganization."
The lawyers point out that the fees, although large in absolute terms, are on a par with those in other bankruptcies of EPIC's proportion. Drawing parallels with the bankruptcies of such companies as Manville Corp. or Continental Airlines, they say the EPIC litigation is proceeding far more quickly and efficiently than others of comparable size. A plan for reorganizing EPIC already has been drawn up and will come before the bankruptcy court next month for final approval.
"Typically a case like this would go on for years, but everything is telescoped into six to seven months," Plotkin said. "Everyone is working around the clock on this. I would think that one of the fallouts from this is people getting sick, getting divorced."
Another byproduct of the case is the sheer crush of documents. Mike Sheppard, the bankruptcy clerk for the Eastern District of Virginia, pointed to the myriad of boxes and file cabinets full of papers filed in the bankruptcy case. For each of the 357 EPIC partnerships, he said, roughly 70 pages worth of information was filed. On top of that, there have been more than 650 separate motions and arguments, some of which are several hundred pages long.
Nine boxes full of pleadings are stuffed in one room, and the number is growing. But Sheppard said he had to lease another 400 square feet of office space to store 17 boxes full of documents that were sealed by the judge after creditors argued that their public disclosure might cause a depositor run on savings and loans owning EPIC loans.
The request for documents was so great that the clerk's office, which normally provides copying services itself, made arrangements with two local companies to make available to lawyers copies of the hundreds of pages of pleadings filed in the case.
"We feel challenged," said Sheppard, who also is handling the paperwork for another massive Virginia bankruptcy, that of A. H. Robins Co. "We could use some other words maybe, but that's our view."
Meanwhile, the law firms are drowning in the paperwork themselves, as Plotkin illustrates.
In February alone, he reported, Finley, Kumble, Wagner spent $29,000 on copying documents, many of which have had to be sent out to the 50-odd thrift institutions represented by NBW and his firm. Plotkin, the lead lawyer of a team of 30 working on the case, says the firm has hired about a dozen clerks, messengers and other temporary help to cope with the explosion of paperwork in the last six months. Plotkin himself has two secretaries working full time on EPIC and has hired a full-time messenger to carry legal briefs around town.
Perhaps the most demanding task was the inspection of each of the mortgage documents for the roughly 15,000 properties underlying the mortgage-backed securities. Teams of paralegals from Finley, Kumble, Wagner and Ballard, Spahr spent at least a month combing through each of these 100-page loan files at the two trustee banks, recording important information and putting together a complete picture of the EPIC portfolio, lawyers said.
"We had three or four people virtually locked in the vault for several weeks," Plotkin said. "When you compare it to other big bankruptcies, it is just not that unusual. You get costs like these," added another lawyer who has been heavily involved in the case. "The differences are that this is more fast-paced and you need to get information to people fast."
Since the summer, he acknowledged, "Life has been absurd."