Summary
noting the duty of the Court to independently examine requested fees, even in the absence of objection
Summary of this case from In re TrevettOpinion
Case No. 97-00144.
January 14, 1999.
D. Blair Clark, RINGERT CLARK, CHARTERED, Boise, Idaho, for the Debtor.
Randall A. Peterman, ELAM BURKE, Boise, Idaho, for U.S. Bank.
Office of the U.S. Trustee, Boise, Idaho.
Bradley B. Poole, Boise, Idaho, for himself.
Troy Peltzer, Boise, Idaho, for himself.
MEMORANDUM OF DECISION
One of the unappealing duties of the Court is resolving professional compensation disputes. But, despite the fact that reviewing and ruling on fee matters is often uncomfortable for the Court, and the parties (including, perhaps surprisingly, objectors), and particularly for the professionals under scrutiny, it still must be done.
In this case, the Court concludes that compensation must be allowed in an amount less than what the Debtor's former attorney and accountant request. Additionally, it is determined that such professionals must disgorge all that they were improperly paid by the Debtor during the case.
BACKGROUND
On January 21, 1997, the Debtor filed its petition for relief under chapter 11. An application for approval of employment of the Debtor's attorney, Bradley B. Poole, was submitted at the same time. On February 16, 1997, Mr. Poole's Rule 2016(b) disclosure of compensation was submitted to the Court. It revealed that Mr. Poole had received $3,000.00 from the Debtor, of which $800.00 was the filing fee for the petition, and that the $2,200.00 balance was held as a retainer.
Unless otherwise indicated, all references to "code," "title," "chapter" and "section" are to the Bankruptcy Code, 11 U.S.C. § 101-1330, and all references to "rule" are to the Federal Rules of Bankruptcy Procedure.
Several days later, an application to employ the Debtor's accountant, Troy Peltzer, was filed. The application and related papers did not reflect any retainer for Mr. Peltzer. Both applications were approved effective as of the date of filing of the petition.
Local Bankruptcy Rule 2014.1(c) provides that employment approval relates back to the date of service of the application. The Orders entered here by Judge Hagan further moved the effective date back to the petition date.
On July 23, 1998, a joint application was filed seeking approval of compensation for Messrs. Poole and Peltzer. The application requested compensation for Mr. Poole's services in the total amount of $5,138.55, composed of $5,049.50 in fees and $86.05 in costs. Mr. Poole billed his time at $125.00 per hour, and his paralegal's at $45.00 per hour. Counsel's services, according to the application, were provided from January 16, 1997 (a date prior to the petition filing) to October 2, 1997. Mr. Poole's employment was terminated on November 26, 1997, and D. Blair Clark was hired and substituted as counsel of record.
Mr. Peltzer's total request is in the amount of $15,776.90, composed of $15,443.75 in fees and $333.15 in costs. Mr. Peltzer charges $50.00 per hour. Ms. Stella Peltzer is separately billed at $35.00 per hour and, absent any better characterization in the record, is treated by the Court as a paraprofessional. Services were rendered from January 2, 1997, through July 6, 1998. Mr. Peltzer's employment terminated in October 1998 when W.L. Grigg became the accountant for the Debtor.
As can be seen from these ending dates, both professionals ceased working at points in time prior to their replacement.
Both U.S. Bank, the primary creditor in this case, and the Debtor (through its new counsel) objected to the joint application. The matter was taken under advisement following a hearing at which argument (but no evidence) was presented by the proponents and opponents. Subsequently, the case was converted to a chapter 7 liquidation on the Bank's motion.
Additional facts will be addressed in the context of the specific issues and rulings which follow.
DISCUSSION
Several well-established rules govern the Court's review of fee applications. The Court has a duty to review the applications for compliance with the Code, Rules and precedent, even in the absence of objection. In re Auto Parts Club, 211 B.R. 29, 33 (9th Cir. BAP 1997); In re Schwandt, 95 I.B.C.R. 268, 269 (Bankr.D.Idaho 1995).
In this case, timely objections were, in fact, made regarding the lack of value of the services rendered, the lack of requisite detail in time entries, the unauthorized payments of both professionals and other creditors during the chapter 11, and issues regarding Mr. Poole's conduct of the case.
Applicants bear the burden of proving entitlement to the fees and costs they request. In re Ferreira, 95 I.B.C.R. 282, 283 (Bankr.D.Idaho 1995); Schwandt, 95 I.B.C.R. at 268 (both citing Pfeiffer v. Couch (In re Xebec), 147 B.R. 518, 524 (9th Cir. BAP 1992)). Payment of professionals is proper only after the Court has allowed compensation under § 330 or § 331 following notice and hearing. In re Ida-Man, 91 I.B.C.R. 199 (Bankr.D.Idaho 1991); In re Jay D. Fitch Inc. Agency, Inc., 91 I.B.C.R. 20 (Bankr.D.Idaho 1991); In re Hawkins, 89 I.B.C.R. 266 (Bankr.D.Idaho 1989).
Violation of Code, Rule or precedent governing professional compensation in bankruptcy cases supports sanction up to and including total disallowance of compensation and disgorgement of fees previously received, even if received under prior Court order. Law Offices of Nicholas A. Franke v. Tiffany (In re Lewis), 113 F.3d 1040, 1045 (9th Cir. 1997); Neben Starrett, Inc. v. Chartwell Financial Corp. (In re Park-Helena), 63 F.3d 877, 882 (9th Cir. 1995); see also Hale v. United States Trustee (In re Basham/In re Byrne), 208 B.R. 926, 931 (9th Cir. BAP 1997) (citing Turner v. Davis, Gillenwater Lynch (In re Investment Bankers, Inc.), 4 F.3d 1556, 1565 (10th Cir. 1993) cert. denied 510 U.S. 1114, 114 S.Ct. 1061, 127 L.Ed.2d 381 (1994))("[O]nce the bankruptcy court determines that an attorney has violated § 329 and 2016, the bankruptcy court has the authority to order the attorney to disgorge all of his fees.").
And the fact that this reorganization has been converted to a liquidation case creates another issue. Any compensation found allowable to these applicants can be paid only to the extent that sufficient funds are ultimately available to satisfy the class of administrative expenses in the superseded case, which are subordinate in distribution to administrative expenses incurred in the liquidation under § 726(b). See Ferreira, 95 I.B.C.R. at 283; In re Matz, 197 B.R. 635, 640 (N.D.Ill. 1996) (professionals are deemed to be on notice of possible § 726(b) disgorgement in administratively insolvent converted cases).
In part, § 726(b) provides:
[I]n a case that has been converted to this chapter under section . . . 1112 . . . of this title, a claim allowed under section 503(b) of this title incurred under this chapter after such conversion has priority over a claim allowed under section 503(b) of this title incurred under any other chapter of this title. . . .
I. Disgorgement
Mr. Poole admitted at hearing that he was paid $4,905.00 during the case, with $2,200.00 of this amount being a unilateral draw of his disclosed retainer and the other $2,705.00 coming from the Debtor. Mr. Poole wishes this compensation to be approved after the fact.
These payments occurred during the chapter 11 and before any filing of, much less ruling upon, an application under § 330. The draw was not authorized by the Court. There was no Rule 2016(b) disclosure, other than the initial disclosure of the prepetition retainer received. Even the application now at issue fails to disclose the payments; they were admitted on the record at hearing.
Mr. Peltzer admitted at the hearing that he, too, was paid during the case, and he stated that only $1,057.00 of his $15,776.90 bill remains outstanding. No applications for approval of any of these payments were ever filed, and no Rule 2016(b) disclosures ever made. The circumstances surrounding the unauthorized payments appear essentially identical to Mr. Poole's with the obvious exception that Mr. Peltzer was not an attorney.
Both applicants have been somewhat less than candid about what was paid, when, and from what source. The pleadings disclose no payments. However, in a November 1997 order entered by Judge Hagan in regard to cash collateral use, an exhibit of Mr. Clark's alleges numerous unauthorized payments by the Debtor, including $2,705.00 to Mr. Poole and $9,223.06 to Mr. Peltzer. Both professionals acknowledged, at the fee hearing, the accuracy of these allegations as to the amounts they received. It appears, from Mr. Peltzer's comments, that the balance of his payments during the chapter 11 came from the Debtor's principal, who was also paying him for separate chapter 13 accounting work.
By the Court's calculations, Mr. Peltzer has actually received $14,719.90 for his work performed in the chapter 11 case. Mr. Peltzer verified that he has been paid $9,223.06 by the Debtor. The difference would apparently be the result of receipt of third-party payments.
$15,776.90 request less $1,057.00 remaining to be paid equals $14,719.90 paid.
$14,719.90 less $9,223.06 equals $5,496.84.
The retainer which Mr. Poole held was not, under the law, available at his unilateral discretion for application to unpaid fees and costs. Ida-Man, 91 I.B.C.R. at 199; Fitch, 91 I.B.C.R. at 21; Hawkins, 89 I.B.C.R. at 268-69. Nor were either of these professionals free to seek and obtain payment directly from the Debtor during the case. Id. Rather, they were required to, first, obtain approval upon notice and hearing of fees and costs in a specific amount and, second, to obtain approval for the payment of some or all of that amount from retainers, Debtor's funds, or otherwise. Id.
Nevertheless, without disclosure and without application, notice, hearing or Court approval, Messrs. Poole and Peltzer were paid by drawing on the retainer or obtaining payment directly from the Debtor. This is, standing alone, sufficient for the Court to deny all compensation requests and order full and complete disgorgement of all sums received. Lewis, 113 F.3d at 1045; Park-Helena, 63 F.3d at 885; Basham, 208 B.R. at 931.
In this case, however, there is yet another fact which necessitates disgorgement. The case has been converted to liquidation. All chapter 11 administrative expenses are, under § 726(b), subordinate in payment to chapter 7 administrative expenses. There is no way to determine, from the present record, that there will be sufficient funds available to fully pay all the allowed, but subordinated, reorganization expenses.
The Court choses not to deny these professionals' compensation altogether; rather, the reasonable and necessary portion of their requests will be determined and allowed, infra. However, for the foregoing reasons, Messrs. Poole and Peltzer must disgorge all pre-approval payments from the Debtor, including the $4,905.00 to Mr. Poole and the $9,223.06 to Mr. Peltzer. Such amounts shall be delivered to the Trustee for administration.
The present record is inadequate to support the conclusion that the other sums paid to Mr. Peltzer were, or derived from, property of the estate. These "third-party payments" are not clearly property of the estate which should be returned to and administered by the Trustee, and the Court does not, today, require disgorgement of them. However, the Court reserves the right to further consider this issue upon a more completely developed record.
II. Allowance
The question next turns to what allowances shall be made to Messrs. Poole and Peltzer upon their applications, amounts which, together with all other allowed chapter 11 administrative expenses, will be paid in a second position behind liquidation expenses should there be adequate funds to do so.
As a general proposition, to be compensable under §§ 330 and 331, services must be necessary and reasonable. For services to be necessary, they must "result in a benefit to the bankruptcy estate." In re Western Quay Assoc. Ltd. Partnership, 94 I.B.C.R. 193, 194 (Bankr.D.Idaho 1994); Xebec, 147 B.R. at 523-24.
With regard to reasonableness, § 330(a)(3) provides:
In determining the amount of reasonable compensation to be awarded, the court shall consider the nature, the extent, and the value of such services, taking into account all relevant factors, including —
(A) the time spent on such services;
(B) the rates charged for such services;
(C) whether the services were necessary to the administration of, or beneficial at the time at which the service was rendered toward the completion of, a case under this title;
(D) whether the services were performed within a reasonable amount of time commensurate with the complexity, importance, and nature of the problem, issue, or task addressed; and
(E) whether the compensation is reasonable, based on the customary compensation charged by comparably skilled practitioners in cases other than cases under this title.
Calculation of a "lodestar" amount by multiplying the number of hours reasonably and necessarily expended by an appropriate hourly rate, frames the analysis. Xebec, 147 B.R. at 524 (citing In re Yermakov, 718 F.2d 1465, 1471 (9th Cir. 1983) and Blanchard v. Bergeron, 489 U.S. 87, 94, 109 S.Ct. 939, 944-45, 103 L.Ed.2d 67 (1989)); Western Quay, 94 I.B.C.R. at 194.
1. Prebankruptcy services
Services provided before the effective date of approval of employment are not compensable. Ferreira, 95 I.B.C.R. at 283; see, e.g., In re Leed Corp., 97.3 I.B.C.R. 95, 96 (Bankr.D.Idaho 1997) (preapproval phone and delivery charges are not compensable). This issue usually arises in regard to any post-filing, pre-approval services. Id. However, employment here was approved effective as of the filing of the bankruptcy petition on January 21, 1998.
Still, the invoices and other detail attached to the application make it clear that both professionals ask for approval of services actually rendered prior to the filing of the initial petition. Not only do these services predate approval of employment, thus mandating denial, they are actually prebankruptcy claims against the estate. Consequently, 2.5 hours of Mr. Poole's request and 6.5 hours of Mr. Peltzer's request, all reflecting itemized services rendered prior to filing according to the exhibits to the application, are neither approved nor allowed.
Ordinarily, prebankruptcy claims of professionals who perform services for the debtor (a) must be disclosed at the time of applying to the Court for § 327 approval of employment, see Rule 2016, and (b) should be paid prior to filing, or immediately waived upon filing, in order to avoid the problem of disqualification for lack of disinterestedness. See §§ 327(a), 101(14). Note, however, that such pre-filing payment or waiver will not obviate the need for full disclosure.
2. Mr. Peltzer's Application
Mr. Peltzer requests compensation based on hourly rates for himself of $50.00 and for his staff of $35.00. These rates are found to be reasonable.
Are all the services, and the time spent thereon, reasonable and necessary? Frankly, it is hard to tell. The detail in Mr. Peltzer's request is sparse; most time entries are terse insofar as the specifics of his services are concerned. Nevertheless, for the most part, the services appear to be typical of those performed by accountants in chapter 11 cases.
The record also reflects that monthly financial reports were generated for virtually all of the chapter 11 period, though not necessarily on a timely basis. They contained significant detail. This provides some evidence that the work was in fact performed. Additionally, the applicants represented at hearing, without contradiction, that the Debtor's historical financial documentation and accounting systems were in dismal shape, and that Mr. Peltzer was required to spend considerable time to deal with, and in some regards remedy, this situation. Even the objectors admitted that a great deal of work was done by the accountant, and it appears that his work product was used by the Debtor's successor counsel and by the Bank in furtherance of their own efforts.
True, the application reflects that some time was expended in provision of basic bookkeeping services. The Court has previously held that such services are allowable at a lower rate than professional accounting services, since they usually can and should be handled in-house by less expensive personnel of the Debtor. In re Leed Corp., 97.3 I.B.C.R. 95, 97 (Bankr.D.Idaho 1997).
However, under the circumstances of this case as reflected by the entire record, the Court finds an adjustment is not warranted. It is not at all clear that this clerical work could here have been accomplished without the involvement of Mr. Peltzer, given the state of the Debtor's accounting systems and the manner in which the business was managed and run. It is hard to tell, simply from the invoices, which services might be segregated in a Leed-style analysis. The Court is also mindful of the fact that § 330(a)(3)(C) requires an analysis of the need for the services as of the time they were rendered, and not with an evaluation of arguably better approaches with the benefit of hindsight.
The Court's review of the application found, though, that Mr. Peltzer expended some time and effort in preparing a tax return for the Debtor's principal. This is an improper charge against the corporate Debtor's estate. Keate v. Miller (In re Kohl), 95 F.3d 713, 715 (8th Cir. 1996). The invoices suggest that only $100.00 was charged for this return. Nevertheless, based on the record, $100.00 will be disallowed. This is the equivalent of two hours of Mr. Peltzer's time, which will be subtracted along with the 6.5 hours of prebankruptcy services.
The small amount reflects, perhaps, that the return was derivative of the effort required to prepare the corporate returns for this subchapter S Debtor.
In sum, Mr. Peltzer will be allowed 290.75 hours (299.25 hours requested less 8.5 hours), at a rate of $50.00 per hour ($14,537.50), 13.75 staff hours at $35.00 per hour ($481.25), and his claimed expenses of $333.15 for a total allowance of $15,351.90.
3. Mr. Poole's Application
Mr. Poole admittedly performed some services that benefitted the estate. He prepared the bankruptcy petition, schedules, and represented the Debtor at the first meeting of creditors and in the original cash collateral matters.
However, under his watch, the case foundered. No plan was proposed, nor disclosure statement made. The principal of the corporation was absent for an extended period, and it appears no one was in charge of the operations of the Debtor, or responsible to counsel, much less the Court, for the conduct of the business or the progress of the case.
The cash collateral requirements of the Code were ignored. Mr. Poole early on tolerated his client's refusal to open a cash collateral account. Later, an agreed May 1997 cash collateral order was violated. As discussed above, the Code was violated by Mr. Poole's withdrawing funds from his retainer without Court approval and by obtaining direct, unauthorized payment from the Debtor of additional fees. He failed to properly advise either the Debtor or Mr. Peltzer on the limitations on payment without prior Court approval. He allowed corporate funds to be used to pay a third lawyer, Rod Buttars, $3,500.00 for representing the principal of the Debtor corporation. Thousands of dollars were paid to holders of prepetition unsecured claims, again, without Code authority or Court approval.
Such reference to Mr. Buttars' role is included in the times entries attached to the application.
The case did not again move toward resolution until new counsel substituted for Mr. Poole in November 1997, though in retrospect the prospects by that point were exceedingly dim, if not doused.
These myriad issues impact on the reasonableness and value of the services rendered. It is not necessary to specify in each and every instance just how far short of the mark counsel's performance fell. The record amply demonstrates that in many regards, including those noted above, the performance of Mr. Poole failed to meet the standard of skilled representation of a chapter 11 debtor.
Mr. Poole requests an hourly rate of $125.00 for himself and $45.00 for his paraprofessional staff. While such hourly rates are reasonable for chapter 11 counsel generally, the services here were not undertaken or performed with an adequate level of skill or diligence. The Court concludes that a rate of $90.00 per hour more accurately reflects the proper value of the services rendered and their benefit to the estate. Ferreira, 95 I.B.C.R. at 283-84. The burden, as noted above, is on the applicants to justify their requested compensation under the facts and the law, and no greater amount has been justified.
This is supported by the Court's familiarity with rates in this District for chapter 11 practice. See, e.g., In re Spillane, 884 F.2d 642, 647 (1st Cir. 1989) (no abuse of discretion to reduce hourly rate for lodestar purposes based on the judge's own knowledge of attorney fees in the district).
As mentioned at the outset of this opinion, no evidence was presented by any party, applicant or objector, at the hearing. However, Mr. Peltzer and Mr. Poole were afforded an opportunity to make statements and representations to the Court in support of their requests.
As also required by precedent, the Court has undertaken a review of the time entries in Mr. Poole's application and concludes, after that line-by-line review, that certain requests must be summarily disallowed.
On February 24, 1997, Mr. Poole charged 1.5 hours for "Services regarding bankruptcy." On March 10, he charges .5 hours to "Draft correspondence." On February 25 and 26, he charges 1.5 hours for "Telephone conference with Rod Buttars" and for "Telephone conference with Rod Buttars (attorney for Halladay in litigation)." These types of entries are simply inadequate to provide a basis for allowance as being within the parameters of § 330(a). See In re Jensen-Farley Pictures, Inc., 47 B.R. 557, 582 (Bankr.D.Utah 1985) (time records "should reveal sufficient data to enable the Court to make an informed judgment about the specific tasks and hours allotted"). The application therefore be reduced by the 3.5 hours represented on these entries.
Lest it be sensed that an overly critical standard has been employed, it should be observed that almost all of Mr. Poole's time entries suffer from this lack of required detail (e.g., numerous entries state nothing more than "telephone conference with Peltzer" or "conference with client"). Yet the Court has not taken the position, as it would be justified to take under precedent, of disallowing all such services for inadequate description. See Jensen, 47 B.R. at 582 (lack of specificity in the time records supports reduction in compensable hours or denial of compensation). The Court, rather, has concluded that some quantum of appropriate services is established by the record as a whole, and that the reduction in rate and elimination of those specific entries identified above serve to reach an appropriate lodestar.
Mr. Poole sought allowance for 38.92 hours at $125.00 per hour ($4,865.00); he will be allowed 32.92 hours at $90.00 per hour ($2,962.80). He is also allowed compensation for paralegal services of 4.1 hours at $45.00 per hour ($184.50). Mr. Poole has also requested reimbursement for actual and necessary expenses in the amount of $86.05. No objections were raised to this request, and it appears to the Court that these expenses are actual, necessary and reasonable and they will therefore be allowed. The total, $3,233.55, will be the basis of his pro rata distribution of allowed chapter 11 administrative claims.
IV. Distribution of Allowed Claims
The above allowances of compensation under § 330(a) are entitled to treatment as administrative expenses by § 503(b)(2). Administrative expenses are given first priority in distribution by § 507(a)(1), however when a case converts from chapter 11 to chapter 7, as this case has, the chapter 7 administrative expenses have priority over the chapter 11 administrative expenses under § 726(b). If inadequate funds are available to pay this class in full, § 726(b) mandates that a pro rata payment will occur.
Though it should be self-evident, the Court notes for clarity that, as to Messrs. Poole and Peltzer, this proration will be based on what the Court here finds is "allowable" under § 330, and is not based on the total amount they charged, were paid, or will disgorge.
When distribution of the chapter 11 administrative expenses are later considered in this chapter 7 case, the Trustee shall account for the fact that Mr. Peltzer's allowed claim of $15,351.90 must be reduced by the amount of third-party payments ($5,496.84) he has already received toward that allowed claim. The unpaid allowed claim, therefore, is $9,855.06, which shall be the basis of his pro rata share of the distribution under § 726(b). Unlike Mr. Peltzer, it does not appear from the current state of the record that Mr. Poole has received any direct payment from third parties. The basis for his allowed claim will be the full amount of his allowed claim, $3,233.35.
The Court appreciates that Mr. Peltzer will probably, in effect, receive a higher ultimate percentage of his allowable chapter 11 compensation should the estate prove administratively insolvent, since the third-party payments previously received are not subject to proration.
$15,351.90 allowed claim less $5,496.84 in third-party payments equals $9,855.06.
SUMMARY
I. Disgorgement
Since both Mr. Poole and Mr. Peltzer have already accepted compensation directly from the Debtor without disclosing such payments and without Court approval, thereby violating and circumventing the Code's limitations on payment of professionals in bankruptcy cases, and, further, since such payments do not account for the distribution priorities in insolvent converted cases, both Mr. Poole and Mr. Peltzer must disgorge all fees and costs heretofore collected from the Debtor, either from retainer or directly.
Mr. Poole shall pay the Trustee forthwith the amount of $4,905.00 and Mr. Peltzer shall pay the Trustee forthwith the amount of $9,223.06.
II. Allowances
Mr. Peltzer is awarded compensation, at his requested rates, for all but 8.5 hours of his time, and he is allowed all compensation requested for staff services. He is also allowed $333.15 in reimbursable expenses. His total compensation and expense reimbursement allowed under § 330 is $15,351.90, of which amount he has been paid $5,496.84 by parties other than the Debtor, leaving $9,855.90 allowable and awaiting payment herein.
Mr. Poole is awarded compensation, at a rate of $90.00 per hour, for 32.92 hours of his services. He will be awarded compensation for paraprofessional services at a rate of $45.00 per hour for 4.1 hours. He will also be allowed $86.05 in reimbursable expenses, for a total allowance of $3,233.35.
III. Payment
In accordance with § 726(b), the awards of $9,855.06 to Mr. Peltzer and $3,233.35 to Mr. Poole are (i) subordinate to all allowed chapter 7 administrative expenses and (ii) must be paid pro rata with all other allowed chapter 11 administrative expenses.
The foregoing constitutes the Court's findings of fact and conclusions of law. Fed.R.Bankr.P. 7052(b).