Since Merry-Go-Round Enterprises Inc. was forced into bankruptcy-law protection 21 months ago, the national apparel chain has been billed nearly $11.5 million by the very experts hired to rescue it from further financial calamity, court documents show.
And authorities say the tab isn't out of line.
It's the ultimate paradox of Chapter 11 bankruptcy proceedings: Merry-Go-Round doesn't have enough money to operate and pay its bills regularly, yet it is forced to spend vast sums to get out of trouble by hiring a battery of attorneys, accountants, investment bankers, consultants and others.
"Fees are not what's killing Merry-Go-Round," said Stephen Selbst, who has kept watch over spending as attorney for the equity committee representing stockholders. "The problem is that Merry-Go-Round can't find and buy and put on the shelves clothes that appeal to adolescents and young adults.
"This is not a case where the professionals have spent the company into oblivion."
But it is a case in which some serious concerns have been raised about the mounting tally.
Creditors and other stakeholders have formed an ad hoc fee committee, and the U.S. trustee overseeing the case has won court approval, with Merry-Go-Round's backing, to impose a monthly fee cap through Jan. 31 on the retailer's principal financial advisers: Price Waterhouse L.L.P, Ernst & Young L.L.P. and Rothschild Inc.
"There was a general sentiment that something needed to be done," said Janice B. Grubin, an attorney representing the equity committee.
Additional questions may be raised today when Merry-Go-Round holds its annual stockholders meeting at 10 a.m. at its Joppa headquarters.
Already, the heightened scrutiny has paid off -- modestly. Ernst & Young assented to a $70,000 cut in its $700,318 fee for the May-August billing period last year. And accountants KPMG Peat Marwick L.L.P. agreed to reduce their $197,379.20 fee by $30,000 over the same four months.
But hostilities erupted over a bill by Price Waterhouse, which charged Merry-Go-Round $408,811.70 in fees and $27,611.92 in expenses from May through August last year. When negotiations fell apart in face-to-face meetings, stakeholders went to court.
"From the start of its involvement in these cases, Price Waterhouse has tried to micro-manage [Merry-Go-Round], and has overstaffed, overbilled and refused to exercise the reasonable billing judgment expected and required of each professional in a Chapter 11 case," the equity committee asserted in a May court filing. "Its failure to self-police and the resultant exorbitant fees and expenses it has incurred must be stopped the debtors are not some 'cash cow' to be milked unremittingly."
Price Waterhouse ultimately agreed to reduce its fee by $45,000. That left the accounting firm with about $1.37 million in charges to Merry-Go-Round from May 1994 through April 1995, according to records.
The tally represents a cost of protecting the interests of the client. But protecting those interests is the duty of virtually every firm employed in Merry-Go-Round's reorganization, whether the client is the shareholder, the unsecured creditor or the company itself. Paid by Merry-Go-Round, attorneys, consultants and others have filed sundry legal motions, crunched numbers, studied ways to cut costs and analyzed inventory, real estate and leases.
Price Waterhouse's bill also has included the cost of some fine dining.
On Oct. 18, 1994, Price Waterhouse partner Dominic DiNapoli ate dinner at Mo's Crab & Pasta Factory on Albemarle Street with three of his colleagues: Price Waterhouse managers Satish Kaul, James Hallock and Jack Pomarole, records show. The tab: $210.22. They voluntarily reduced the charge to Merry-Go-Round $130.22, but it appears from court documents that the dinner ended up costing more than $2,500 because each man charged for his time -- 2.2 hours -- at $390 per hour for Mr. DiNapoli, $290 per hour for Mr. Kaul, $295 per hour for Mr. Hallock and $306 per hour for Mr. Pomarole.
The following evening, the four men ate dinner at Raphael's Cucina on South High Street with Jennifer Crites, another Price Waterhouse manager, according to court documents. The tab: $126.94, of which they voluntarily reduced the charge to Merry-Go-Round by $51.94. Court documents appear to show that each participant charged for 1.6 hours -- which added more than $2,400 to the bill.
On both occasions, according to their itemized accounts, the diners discussed Merry-Go-Round.
Mr. DiNapoli, who has billed the retailer $127,140 for his services from May 1994 through April 1995, did not respond to four attempts to reach him for comment.
Mr. Kaul and Mr. Pomarole declined to comment. Mr. Hallock could not be reached.
But Price Waterhouse isn't alone -- or even at the top of the list -- in charging hundreds of thousands of dollars to Merry-Go-Round in fees and expenses.
For example, records show that from January 1994 through April 1995:
Swidler & Berlin, a law firm representing the company, has billed $2.6 million; Ernst & Young, the financial adviser, has charged $2 million; and the accountant KPMG Peat Marwick has billed $1.1 million.
Bankruptcy is not only a costly affair, analysts say. It's a sensitive matter because fees and expenses raise questions about the magnitude of money needed for hired guns in major Chapter 11 cases.
"It's easy to spend somebody else's money," said Peter Chapman, a minor creditor and president of Bankruptcy Creditors' Service Inc.
Inflated fees or padded expenses sometimes come easy in bankruptcies, too.
"Everybody does their best to try to eliminate it, but they slip through," Mr. Chapman said. "This is the real world."
The question of fees flares up in most major Chapter 11 bankruptcy cases, and some experts suggest that the problem isn't the professional who piles up billable hours but a system that allows such a practice to occur, that fails to tie fees to the success of professionals in lifting a company out of bankruptcy.
To the outsider looking in, it can merely look like a lot of money changing hands.
"In a case like Merry-Go-Round, where the business is fundamentally weak and where the bankruptcy is a long, drawn-out process, fees will mount, and it's more difficult to see an increase in the value of the estate in the process," said Henry Jackson, who worked on the bankruptcy proceedings of R. H. Macy & Co. as a principal at Peter J. Solomon Co., a New York investment banking firm.
There are, however, some guiding principles for dispensing professional fees.
"You don't use a Cadillac if a Ford will do," said Irving A. Breitowitz, associate professor at the University of Maryland School of Law. On a more basic level, he said, "If they can turn the company around, their fees are an investment to build up the company again. It's not supposed to be throwing money down a hole."
But at Merry-Go-Round it is a difficult task to justify $11.5 million in fees while the company has slashed more than 4,000 jobs, closed more than 460 stores and lost all but $5.7 million in shareholder equity.
Merry-Go-Round's new chief executive, Richard P. Crystal, was unavailable for comment, but spokesman Michael Kempner said, This is a national company with operations across the country with a large group of very sophisticated creditors, which makes this a fairly complicated Chapter 11. So, in light of that fact, while you always hope to keep fees low, the fees so far in this case have been consistent with other cases of this size and scope. Unfortunately, the way that bankruptcies are resolved, not just in Merry-Go-Round's case, the fact is that in cases this large, fees are often high."
Which begs the question -- How can a financially strapped company afford the help?
It's the paradox of bankruptcy. "A company in bankruptcy doesn't mean you don't have money," Mr. Kempner said, "it means you don't have enough money."