Judge: Borders Pay Adviser Didn’t Violate Fee Rules

A bankruptcy judge ruled that Mercer Inc., a consulting firm employed to advise Borders Group Inc. on employee compensation, didn’t violate fee rules by passing along its own attorney bills to the now-failed bookseller’s Chapter 11 estate.

Judge Martin Glenn of the U.S. Bankruptcy Court in Manhattan’s ruling issued this week rebuffs an argument to the contrary from the U.S. trustee, the arm of the Justice Department that oversees bankruptcy cases.

The trustee had said that Mercer couldn’t include a $16,496 charge for “Administrative—Legal” among more than $100,000 in bills submitted to Borders because the law firm Mercer used, Freeborn & Peters LLP, was not approved to work on behalf of the retailer.

“Such legal services should be regarded simply as Mercer’s ‘overhead,’ trustee Tracy Hope Davis said in court papers. All attorneys, advisers and other professionals that do work on behalf of a company in bankruptcy must gain court approval to do so.

But Glenn rejected the trustee’s argument, saying Freeborn & Peters worked on behalf of Mercer, not Borders, and that including a fee for legal expenses was acceptable as long as that is Mercer’s practice when it does work for clients outside of bankruptcy court.

The judge said Mercer disclosed that it would charge Borders for such bills.

“Requiring Mercer, a non-attorney professional, to absorb the cost of representation itself is fundamentally unfair…especially in light of the engagement agreement which specifically provided for reimbursement of such fees,” Glenn wrote, partially quoting a previous ruling.

Glenn rejected only a small portion of Mercer legal-related fees, less than $600 worth. That amount is connected to work was done specifically for Borders rather than in advisement of Mercer.

Glenn’s written opinion on paying the attorneys of nonlegal professionals in a bankruptcy case is the latest decision to weigh in on the topic that has divided Manhattan judges.

Last year, Judge Burton Lifland found the reimbursement of legal expenses for Blockbuster Inc.’s financial adviser was “not appropriate.” But earlier this year, Judge Shelley Chapman said the reimbursement of a professional’s legal bills in Sbarro Inc.’s case was allowed when the cost related directly to work done for the adviser, such as to defend the adviser in lawsuits arising from the bankruptcy case.

Mercer had advised Borders on the $8.3 million bonus program the retailer sought to establish for its employees and executives. The work went largely unused because the bookstore chain moved to liquidate rather than crafting a turnaround with the help of its current staff.