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United States District Court, S.D. New York

November 24, 2004.

WORLDCOM, INC., Defendant.

The opinion of the court was delivered by: JED RAKOFF, District Judge


Information has recently been brought to the Court's attention that the defendant, formerly known as WorldCom, Inc. and now known as MCI, Inc. (the "company"), has made payments and/or been invoiced for payments of more than $25 million for services and other expenses that were invoiced in violation of the orders of this Court. Prompt action is required to determine whether this information is accurate and, if so, to rectify the seeming violations of this Court's orders.

By way of background, on March 6, 2003 the Court issued an Order Establishing Budgetary Procedures For Professional Fees (the "Budgeting Order") that established a quarterly budgeting process applicable to every "professional person or firm (`Professional') retained in the chapter 11 cases or planning to seek fees payable by the company — including without limitation lawyers, accountants, investment bankers, restructuring consultants, and advisors or consultants of any other kind to be paid by the company, whether retained or appointed by the company, an official committee, the U.S. Trustee, or any other person or entity that intends to seek payment from the company in connection with such professional services." Budgeting Order at 4-5. The Budgeting Order supplemented earlier orders of the Court requiring approval by the Corporate Monitor of the hiring and compensation of internal personnel and the retention of outside professionals, investment bankers, and other firms whose compensation would be paid by the company.

  Under the Budgeting Order, the proposed activities of individual firms were reviewed by the Corporate Monitor to ascertain, among other things, the reasonableness of anticipated expenditures, the avoidance of unnecessary duplication, and the assurance that any proposed activities were consistent with the earlier orders of the Court. To accomplish these goals, the individual firms were required to submit proposed expenditures on a quarterly basis. Each such firm then received (unless the proposed expenditure was totally disapproved) a quarterly budget approval by the Corporate Monitor, which set a "cap" or maximum limitation on such firm's total authorized expenditures for that quarter, barring adjustment of any such budget by the Corporate Monitor after consultation with the affected firm concerning unanticipated conditions or unforeseen problems arising after the initial budget submission.

  Although the Budgeting Order withdrew the bankruptcy reference to the extent necessary to implement and enforce the terms and conditions of the Budgeting Order, see id. at 8, the review and budget process imposed by the Budgeting Order was entirely separate from, and additional to, any mandatory review of professional expenditures by the Bankruptcy Court in the company's insolvency proceedings. Moreover, unlike the review of fee applications by the Bankruptcy Court under the statutory provisions of the Bankruptcy Code (a review that would usually occur after the services had been performed and sometimes after substantial payments for the services rendered had already been made), the Budgeting Order established controls that operated in advance of expenditures being incurred and provided for review under the broader standards established by the orders of this Court. The budgeting process, combined with the subsequent review by the Bankruptcy Court, has already resulted in savings to the company's estate of tens of millions of dollars, and has helped avoid any abuses that might have impeded the restoration of stability and the protection of the broader public interests at stake in this case. Indeed, after the company emerged from bankruptcy and the situation stabilized, the Court was able to eliminate the requirement for quarterly budgets for expenses incurred after June 30, 2004.

  Recently, however, it has come to the Court's attention that various persons and firms that rendered prior services to the company or are otherwise making claims for payments that should have been subject to the Corporate Monitor's prior review and budgetary constraints are seeking approval of the Bankruptcy Court, through "final fee applications" or certain other motions, for expenditures that are either in excess of their outstanding approved budget authority or that were never budgeted or approved at all. Still other persons and firms may have already received payments from the company notwithstanding the absence of any budget or in excess of the amount of their approved budgets from the Corporate Monitor. Overpayments that have already occurred or for which there are pending invoices appear to exceed $25 million according to information very recently (and belatedly) provided to the Corporate Monitor by the company.

  Accordingly, effective immediately, the company and each of its employees is barred, upon pain of contempt, from making any further payment whatever for any services or fees within the scope of the Budgeting Order that were not previously approved by the Corporate Monitor. The Court also hereby authorizes the Corporate Monitor, if necessary, to institute actions to recoup from any person or firm that received payments from the company in violation of the Budgeting Order the full amount of the payments plus interest, fees, and penalties.

  The Court is hopeful, however, that neither recoupment actions, contempt proceedings, nor complete non-payment of existing bills will be necessary. The Court recognizes that many persons and firms involved in the case performed valuable work on behalf of the company and that in some cases the company itself may share responsibility for the disregard of the Budgeting Order.

  Consequently, the Court is willing to consider, even at this late date, reasonable requests for relief form the provisions of the Budgeting Order, nunc pro tunc, provided that any such request is made in a written submission filed with this Court, and also copied to the Corporate Monitor, by no later than 5 p.m. on December 6, 2004. Such filings should be in the form of affidavits from persons with knowledge setting forth at a minimum (i) the amounts invoiced to the company; (ii) the dates of each respective invoice; (iii) identification of the specific services rendered, with related dates and billing amounts; (iv) the justification for the necessity of such expenditures; and (v) an explanation for why the Court's Budgeting Order was not followed in any particular period or why approved budget authority was exceeded by any such firm or requesting person. Immediately upon receipt of such submission, the Corporate Monitor will review these applications and make recommendations to the Court as to whether approval for relief from the Budgeting Order should be made, in part, in whole, or not at all, with respect to each application. Any person or firm disagreeing with the Corporate Monitor's applicable recommendation will then be afforded a hearing before the Court.

  In addition, because it appears the company may have failed in its responsibilities to insure compliance with the Budgeting Order, the company must file with the Court by no later than 5 p.m. on December 6, 2004 affidavits from one or more persons with knowledge explaining such failures to comply with the Court's Budgeting Order and justifying, if they can, why sanctions should not be imposed on the company for any such failures. These affidavits should also specify any failures of internal controls that allowed any such unauthorized payments to occur.

  Finally, the Court is aware that various creditors have filed applications with the Bankruptcy Court seeking authorization for reimbursement of professional expenses or other costs incurred in the WorldCom insolvency proceedings under Section 503(b) of the Bankruptcy Code. Although the Court has not yet heard or determined this issue, it understands that the Corporate Monitor is of the view that all such expenses and costs also fall within the purview of the Budgeting Order. If that is correct, then in the event any such application were to be granted by the Bankruptcy Court, the firm or creditor requesting any such payment relating to services provided prior to June 30, 2004 would be required to seek approval from the Corporate Monitor under the Budgeting Order prior to receiving payment for any such services. To harmonize review of such applications, therefore, any firm or creditor requesting approval for any such reimbursement under Section 503(b) is hereby required to file copies of any such Section 503(b) application with the Corporate Monitor contemporaneously with any such filing with the Bankruptcy Court, and in no event later than 5 p.m. on December 6, 2004, and to provide such further information to the Corporate Monitor as he shall require to enable a prompt review of any such application and consideration of the necessity or desirability of any further orders of this Court with respect thereto. If any firm or creditor believes the Budgeting Order does not apply to its application, it may also apply in its December 6 submission for a prompt hearing before this Court.



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