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Chapter 11 Case No. 09-10785 (KJC) (Jointly Administered)

FEE AUDITORS FINAL REPORT REGARDING INTERIM FEE APPLICATION OF PEPPER HAMILTON LLP FOR THE FIFTH INTERIM PERIOD This is the final report of Warren H. Smith & Associates, P.C., acting in its capacity as fee auditor in the above-captioned bankruptcy proceedings, regarding the Fee Application of Pepper Hamilton LLP for the Fifth Interim Period (the Application). BACKGROUND 1. Pepper Hamilton LLP (Pepper Hamilton) was retained as counsel to the official

committee of unsecured creditors. In the Application, Pepper Hamilton seeks approval of fees totaling $21,234.50 and expenses totaling $1,277.22 for its services from March 1, 2010, through May 31, 2009 (the Application Period). 2. In conducting this audit and reaching the conclusions and recommendations

contained herein, we reviewed in detail the Application in its entirety, including each of the time and expense entries included in the exhibits to the Application, for compliance with Local Rule 2016-2 of the Local Rules of the United States Bankruptcy Court for the District of Delaware, Amended Effective February 1, 2010, and the United States Trustee Guidelines for Reviewing Applications for Compensation and Reimbursement of Expenses Filed Under 11 U.S.C. 330, Issued January 30, 1996 (the Guidelines), as well as for consistency with precedent established in the United States
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Bankruptcy Court for the District of Delaware, the United States District Court for the District of Delaware, and the Third Circuit Court of Appeals. We served on Pepper Hamilton an initial report based on our review, and received a response from Pepper Hamilton, portions of which response are quoted herein. DISCUSSION 3. We note that Pepper Hamilton seeks approval of $5,462.50 in fees for efforts to

secure its own compensation and an additional $6,470.50 to secure its retention as counsel to pursue avoidance actions. These amounts total $11,933.00, compared to just $9,301.50 in fees requested for substantive work performed during the Application Period. We asked Pepper Hamilton explain why it was reasonable and necessary to spend so much time on these activities. Pepper Hamilton provided the following response: (Paragraph 3 of Initial Report) - - As in prior applications, the proportion of time (and fees) related to fee applications is greater because Pepper Hamilton is, for many issues, acting solely as local counsel. As a result, the percentage related to preparation of fee applications, etc., is greater not because more time is spent on such applications, but because less time is spent on other substantive matters. It is our practice, in this case and generally, to have a lower-billing paralegal prepare drafts of the applications and attorneys review and revise as necessary. If you'll refer to the itemized statements of the monthly applications, you can see that we followed this practice in this case, and I'm sure you'll agree that the time spent on same was reasonable. As for the $6,470.50 to secure PH's retention to pursue avoidance actions, extra time was needed because this application was not a traditional retention application. Unusual and specialized issues, such as securing standing, reporting (confidentially) a contingent fee arrangement, evaluating the financial viability of avoidance actions (including the incentive to pursue same vs. fees attendant to prosecution of the avoidance actions) and advising the committee regarding same, required additional detail and analysis not usually needed for traditional fee applications. We appreciate this response and agree that the time relating to retention for an expanded role should be treated separately from the fee-application efforts. We note that we are recommending a

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reduction regarding a portion of the retention-related fees in paragraph 4, below, and we do not believe that the remainder of the retention-related fees are unreasonable. Once the retention-related fees are accounted for, we are left with $5,462.50 in fees for Pepper Hamiltons efforts to secure its own compensation. Reviewing the activity descriptions, we do not see any clearly unreasonable expenditures of time but nonetheless remain concerned by the proportion of fees attributable to these activities in the aggregate. Accordingly, we will not recommend any reduction at this time, but we may re-evaluate this issue in the context of the final fee application. 4. We note several time entries reflecting $3,174.50 in fees for conflict checks and other

activities that appear to be administrative business-origination activities, usually characterized as overhead: 03/07/09 J. Carignan 0.10 395.00 39.50 Confer with team re engagement letter, conflict search and retention application. Receive and review conflict reports in connection with adversary proceedings. Revise engagement letter re preference issues. Continue reviewing conflict reports for Pacific Energy potential defendants. Confer with J. Carignan re engagement ketter issues. Arrange for spreadsheet to be created which reflects conflict report results. Confer with D. Stratton re engagement letter. Confer with co-counsel re engagement letter. Confer with co-counsel re engagement letter and F. Lawall re same. Review conflict reports re potential preference defendants. Finalize spreadsheets summarizing


J. Matour




03/08/09 03/08/09

J. Carignan J. Matour

0.70 0.60

395.00 225.00

276.50 135.00

03/08/09 03/08/09 03/09/09 03/09/09 03/11/09 03/12/09 03/16/09

J. Matour J. Matour J. Carignan J. Carignan J. Carignan J. Matour J. Matour

0.20 0.50 0.10 0.40 0.30 7.20 0.90

225.00 225.00 395.00 395.00 395.00 225.00 225.00

45.00 112.50 39.50 158.00 118.50 1,620.00 202.50

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J. Matour




conflict results and forward to F. Lawall and J. Carignan. Follow up with J. Carignan re summary of conflict reports.

We asked Pepper Hamilton to explain why these activities should be considered compensable. Pepper Hamilton provided the following response: As is our usual practice, the majority of time reviewing conflicts reports and formatting engagement letters was incurred by the paralegal staffed on this case, Judy Matour. I and other attorneys became involved only to review and revise drafts, check conflict search results to ensure that PH clients were not adversely affected (given the adversarial nature of the avoidance actions) and to confer with the committee members regarding conflicts and the terms of PH's representation of the committee w/r/t the avoidance actions. While we appreciate Pepper Hamiltons efforts to minimize the fees in question, it does not change the fact that, ordinarily, time spent performing the initial conflict check required as a condition of a firms employment is not compensable. See In re ACT Manufacturing, Inc., 281 B.R. 468, 490 (Bankr. D. Mass. 2002); In re Sterling Chemicals Holdings, Inc., 293 B.R. 701, 704 (Bankr. S.D. Tex. 2003). Moreover, unlike the drafting of an affidavit of disinterestedness or the drafting of a motion (compensable activities reflected in the March 8 time entry for J. Carignan), the drafting of an engagement letter is not a requirement imposed by the Bankruptcy Code. It is instead an independent business development activity whose costs should be borne by the firm itself. Accordingly, we recommend a reduction of $3,174.50 in fees.

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CONCLUSION 5. Thus, we recommend approval of fees in the amount of $18,060.00 ($21,234.50

minus $3,174.50) and expenses in the amount of $1,277.22 for Pepper Hamiltons services for the Application Period. Respectfully submitted, WARREN H. SMITH & ASSOCIATES, P.C.

By: Warren H. Smith Texas State Bar No. 18757050 325 N. St. Paul Street, Suite 1250 Republic Center Dallas, Texas 75201 214-698-3868 214-722-0081 (fax) whsmith@whsmithlaw.com FEE AUDITOR

CERTIFICATE OF SERVICE I hereby certify that a true and correct copy of the foregoing document has been served via First-Class United States mail to the attached service list on this 22nd day of December 2010.

Warren H. Smith

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SERVICE LIST Notice Parties The Applicant Vadim J. Rubinstein Loeb & Loeb LLP 345 Park Avenue New York, NY 10154-1895 United States Trustee Office of the United States Trustee 844 N. King Street, Room 2207 Lock Box 35 Wilmington, DE 19801 Counsel to the Debtors Laura Davis Jones, Esq. Ira D. Kharasch, Esq. Scotta E. McFarland, Esq. Robert M. Saunders, Esq. James E. ONeill, Esq. Kathleen P. Makowski, Esq. Pachulski Stang Ziehl & LLP 919 North Market Street, 17th Floor P.O. Box 8705 Wilmington DE 19899-8705 Counsel to the Debtors Ian S. Fredericks, Esq. Skadden Arps, Slate, Meagher & Flom LLP One Rodney Square P.O. Box 636 Wilmington, DE 19899 Special Counsel to the Debtors Penelope Parmes, Esq. Rutan & Tucker, LLP 611 Anton Boulevard 14th Floor Costa Mesa, CA 92626 Canadian Counsel to the Debtors Jensen Lunny MacInnes Law Corp. H.C. Ritchie Clark, Q.C. P.O. Box 12077 Suite 2550 555 West Hastings Street Vancouver, BC V6B 4N5 Engineering Consultant to the Debtors Mark A. Clemans Millstream Energy, LLC 4918 Menlo Park Drive Sugarland, TX 77479 Special Oil and Gas Transactional Counsel to the Debtors Anthony C. Marino, Esq. Schully, Roberts, Slattery & Marino PLC Energy Centre 1100 Poydras Street, Suite 1800, New Orleans, LA 70163 Financial Advisor to the Debtors Curtis A. McClam Deloitte Financial Advisory Services LLP 350 South Grand Ave, Ste. 200 Los Angeles, CA 90071 Financial Advisor to the Debtors John Rutherford Lazard Freres & Co. LLC 30 Rockefeller Plaza, 61st Floor New York, NY 10020

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Co-Counsel to the Official Committee of Unsecured Creditors David B. Stratton, Esq. James C. Carignan, Esq. Pepper Hamilton LLP Hercules Plaza, Suite 1500 1313 Market Street Wilmington, DE 19899 Co-Counsel to the Official Committee of Unsecured Creditors Filiberto Agusti, Esq. Steven Reed, Esq. Joshua Taylor, Esq. Steptoe & Johnson LLP 1330 Connecticut Avenue NW Washington, DC 20036

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