Opinion
Case No. 03-47087-H4-7.
October 21, 2004
MEMORANDUM OF OPINION ON SECOND INTERIM APPLICATION FOR FEES BY THE TRUSTEE'S ATTORNEY (Docket item 169)
On September 13, 2004, the law firm of W. Steve Smith, P.C. filed its Second Interim Application for Compensation for Services Rendered and Reimbursement of Expenses Incurred by Attorneys for Trustee from May 11, 2004 Through September 7, 2004 (the "Second Application") (docket item 169). Notice of the Second Application was given on September 14, 2004 (docket item 170). No objections to the application were filed. A hearing on the Second Application was held on October 8, 2004. W. Steve Smith was the only person to appear at the hearing on this application. After considering the statements made at the hearing, reviewing the application, and reviewing the docket in this case, the court has determined to allow an interim award of $10,000.00 toward the attorneys' fees and expenses and to defer consideration of the balance of the request until a hearing on the final fee application in this case. The court will explain the reasons for its conclusion.
For a number of years before being appointed a Bankruptcy Judge, the undersigned had the privilege of serving as a Chapter 7 trustee in a large number of cases.
BACKGROUND
The Debtors, Sandra Hale and Richard Hale, filed for relief under Chapter 7 of the Bankruptcy Code on December 1, 2003. The meeting of creditors pursuant to § 341(a) of the Bankruptcy Code was scheduled for January 6, 2004 (docket item 4). Joseph M. Hill was appointed the Interim Trustee, but on December 18, 2003, he resigned because of a conflict (docket item 12) and W. Steve Smith was appointed Interim Trustee. Presumably, Mr. Smith conducted the meeting of creditors on January 6, 2004. The creditors did not elect a trustee at the meeting of creditors, so Mr. Smith became the case trustee (docket item 43) (hereinafter when Mr. Smith is acting as the trustee, he will be referred to as the "Trustee").
The Bankruptcy Code is 11 U.S.C. § 101 et seq. References to sections are references to the Bankruptcy Code unless otherwise specified.
On February 24, 2004, the Trustee filed an application to employ his law firm, W. Steve Smith, P.C. ("the Law Firm"), as attorney for the Trustee (docket item 70). Apparently the Law Firm consists of two attorneys, Mr. Smith and his wife, Blanche D. Smith. On March 5, 2004 an Order approving the employment of the Law Firm, effective as of January 23, 2004, was entered (docket item 83).
On May 14, 2004 the Law Firm filed its First Interim Application for Compensation for Services Rendered and Reimbursement of Expenses Incurred by Attorneys for Trustee From January 23, 2004 Through May 10, 2004 (the "First Application") (docket item 117). By order dated July 23, 2004 the First Application was granted (docket item 152). The court is reviewing the Second Application, but feels that some observations about the First Application are appropriate. The Trustee is compensated for services in that capacity upon a statutory formula. The Trustee keeps records on time spent performing his duties as the Trustee. The First Application states that the trustee spent 4.20 hours on Trustee services in the period covered by the application. No charge is shown for that time. Mr. Smith states that he spent 3.20 hours of attorney time for which he requested compensation at $395.00 per hour, and Mrs. Smith states that she spent 45.20 hours in attorney time for which she requested compensation at $295.00 per hour. In addition, for preparation of the fee application, Ms. Smith requested 1.50 hours at the same hourly rate and paralegal time of 1.10 hours at $85.00 per hour. The total requested 51.00 billable hours and total fees of $15,134.00. The Law Firm also requested expense reimbursement of $39.63. The First Application recites that at the time the application was made, there were no funds on hand with which to pay the requested fees and expenses. A review of the narrative portion of the First Application reflects that most of the time was spent reviewing various matters, taking pictures of the Debtors' assets, and finding persons to appraise the Debtors' assets. Those appear to be trustee services (for which the Trustee will be compensated at the end of the case in accordance with the statutory formula), not matters requiring the services of an attorney. Attorney services consisted of two applications to extend the deadline to object to exemptions, filing an objection to exemptions, and applications to employ appraisers. Thus, it appears that the Law Firm is charging as attorney services, matters which are the trustee's duties.
All interim allowances are subject to final review at the end of the case.
The court understands that this time keeping is required by the United States Trustee. The court applauds that requirement.
This has been an active case. Between the December 1, 2003 petition date and the October 8, 2004hearing date, there were 170 docket entries. Most of those entries relate to matters filed by creditors and responses by the Debtors to the creditor actions. The principal activity by the Trustee, as reflected on the docket, was an objection to the exemptions claimed by the Debtors. One creditor also objected to the exemptions claimed by the Debtors and apparently took an active part in those efforts. The docket indicates that the Debtors vigorously contested the objections to exemptions by various methods, including the filing of amended schedules.
The Trustee received word that the Debtors had sold some assets which the Trustee felt were not exempt, were removing personal property which the Trustee felt was not exempt from their house in preparation for moving, and had damaged the house. On June 6, 2004, the Trustee filed an adversary proceeding seeking an injunction against the Debtors and other parties (docket item 124). An emergency hearing was held and the injunction was issued.
On June 17, 2004, the court conducted a trial on the objections to exemptions (docket item 138). The trial was not concluded that day and was continued until June 22, 2004. The parties settled the matter during the recess and filed an Agreed Order on June 22, 2004 (docket item 148). The Agreed Order resolved the objections to exemptions and called for the Debtors to pay to the Trustee $68,000. Apparently the Debtors promptly paid that amount to the Trustee.
THE SECOND APPLICATION
The Second Application covers the period from May 11, 2004 through September 7, 2004. The Trustee shows 40.90 hours for trustee services for which no compensation is requested at this time. Mr. Smith requests 33.50 hours for attorney services at $395.00 per hour and Mrs. Smith 100.45 hours at $295.00 per hour. A paralegal is shown for 24.20 hours at $85.00 per hour. In addition, Mrs. Smith requests 4.60 hours for preparing the fee application at her $295.00 per hour rate (a total of $1,357.00 for preparing the fee application). The total request for attorney's fees is $46,279.25.
The Second Application states that some expenses were overlooked in the First Application and thus requests $39.63 in expenses related to the First Application period. It is interesting to note that the total amount and the breakdown are exactly the same as shown on page 13 of the First Application. No explanation of how these expenses were "overlooked" was provided.
The Second Application seeks reimbursement of expenses in the amount of $1,173.03. The largest item is for "Westlaw Research" in the amount of $1,186.88. The court is not accustomed to allowing charges for books or services used in legal research. Also, the court is not accustomed to allowing charges for office overhead items such as delivery charges, copies, postage, incoming faxes, and "Miscellaneous."
The Second Application notes that the expenses requested do not include the $11,055.07 received by the Law Firm pursuant to an order authorizing the payment of administrative expenses.
The total amount of fees and expenses requested by the Second Application is $48,052.28.
BENEFIT TO CREDITORS
A Chapter 7 trustee has the obligation to review a debtor's schedules (including the listing of property claimed as exempt), statement of financial affairs, and business transactions to insure that the debtor complies with the provisions of the Bankruptcy Code. The trustee is to collect assets and turn them into cash for the benefit of creditors. The trustee must conduct all of these activities in a way that will benefit the creditors; the trustee is not to conduct these activities in a way that benefits only the trustee, the trustee's attorney, and other participants in the bankruptcy process.
If the Second Application in this case is approved, the only beneficiaries of the Trustee's activities would be the Trustee's attorneys — in other words, the Trustee and his wife! Apparently the only funds thus far received by the Trustee in this case are the $68,000 received in the settlement with the Debtors and $10,000.00 received in a settlement with a bank concerning pictures. The Second Application states that, as of September 7, 2004, the Trustee had on hand $46,378.03. That statement indicates the $78,000.00 received by the Trustee has been used by the Trustee to pay his law firm the $15,173.36 awarded on the First Application and the administrative expenses previously approved by the court. The Second Application is for $48,052.28, which exceeds the funds the Trustee has on hand. Such a request calls into question whether the Trustee is properly carrying out his fiduciary duties to the creditors in this case.
In the discussions prior to the passage of the Bankruptcy Code in 1978, there was a strong movement to turn the administration of bankruptcy cases over to an administrative agency. If bankruptcy cases are administrated in a way which benefits only the actors in the system and does not provide any benefit to the creditors, the prospect of placing bankruptcy administration with an administrative agency will again be raised.
SERVICES PERFORMED
The Second Application is for services rendered by the attorneys for the Trustee. Paragraphs 12 through 22 restate the services rendered during the period of time covered by the First Application. As noted above, those activities appear principally to be duties which are required of the Trustee, rather than services by an attorney for the Trustee.
Paragraphs 23 through 30 describe services rendered during the time covered by the Second Application. The court will comment on each paragraph.
23. During the Second Application Period, Applicant engaged in settlement discussions regarding the Debtors' claimed exemptions. In this connection, Applicant researched case precedent presented by Debtors' counsel in support of Debtors' argument that jewelry Debtors' were seeking to exempt was "wearing apparel." Applicant undertook extensive research investigation as to this allegation, including tracing and analyzing the legislative history (including analysis of the Senate and House tapes) related to the applicable provisions of the Texas Property Code. Applicant determined that the Debtors' argument was incorrect and unsupported by both applicable case precedent and legislative history. Applicant also attended to Debtors' unilateral changes to the settlement terms Applicant thought were final. When settlement could not be reached, Applicant prepared for the exemption hearing, including coordinating witnesses, (including the Estate's personal property and jewelry appraisers), preparation of questions for such testimony, analysis of appraisal reports, preparation of argument, preparation of exhibits, etc. Additionally, by Court instruction, Applicant responded to Debtors' First Set of Interrogatories and Request for Production of Documents.
Comment: Except for settlement discussions, this paragraph describes attorney services.
24. In the interim, on Friday, June 4, 2004, late in the afternoon, counsel for the Bank and two other representatives of the Bank advised Applicant that the Hales were removing lots of "things" from the Property and were conducting a large sale (with price tags on everything) to the point that the house was basically emptied. Many expensive items, including those claimed as "fixtures" by the Bank (but disputed by Applicant) were removed and other items were sold to a friend of the Hales, Mr. Ron Holley, who was going to have much of the purchased items shipped to Hawaii. And, apparently, Mrs. Hale planned on moving to Naples, Florida and her husband would follow. Immediately, the Applicant contacted counsel for the Debtors to confirm these representations. Thereafter, Applicant had many telephone discussions with, and received various letters from opposing counsel advising that the Debtors found a "buyer" for their personal property and had, in fact, moved the property to a Bekins moving warehouse.Comment: The activities described in this paragraph are investigations required of the Trustee.
25. Based upon these facts, Applicant drafted and filed the Trustee's Application for Entry of Temporary Restraining Order and Preliminary/Permanent Injunction (which Applicant later amended and included a cause of action for damages) (the "Application") and prepared for and attended a hearing on same late that Friday evening which resulted in the Court's entry of its Agreed Temporary Restraining Order requiring the Hales and all person working in active concert with them to give full, complete and unfettered possession and control of any Personal Property at the Property at any time on or after June 1, 2004 (subject to the Court's footnote concerning property no longer in the possession or control of the Hales) (the "Order"). The order excluded only the Hale's personal clothing.Comment: This paragraph describes attorney services.
26. Once the Order was entered, Applicant attended to securing the Property and its contents, including employing security guards, hiring a locksmith, trying to obtain insurance on the contents of the Property, etc. Additionally, Applicant prepared and attended to the service of the Temporary Restraining Order on Mr. Holley.Comment: The first sentence describes services that should be performed by the Trustee. The second sentence describes attorney services that should be performed by an attorney.
27. Thereafter, Applicant traveled to the Property and assessed the damages, i.e. Applicant took pictures of the Property and the remaining contents (and the areas where contents were obviously removed), compiled documentary evidence, etc. Applicant then prepared for the hearing on the preliminary injunction, i.e. Applicant drafted Trustee's Witness List, Trustee's Exhibit List, coordinated witnesses, prepared for testimony, compiled exhibits (including the organization and comparison of the "before" and "after" pictures), drafted legal argument, etc. Additionally, applicant had to continuously communicate with Debtors' counsel due to their (and Mr. Holley's) continued attempts to convert property of the estate.Comment: The first sentence describes services that should be performed by the Trustee. The balance of the paragraph describes attorney services.
28. Meanwhile, Applicant also attended to the "fixture" claim being asserted by the Bank. Applicant compared the "before" and "after" pictures, researched the requirements for personal property to be considered a "fixture," traveled to the Property and viewed all the claimed "fixtures" with a Bank representative, etc. Applicant engaged in settlement discussions with the bank which ultimately resulted in a settlement where the Estate received $10,000 for the disputed "fixtures". And, due to the urgency of the matter related to the condition of the Property and the personal property, Applicant drafted the necessary pleadings for approval of such settlement on an emergency basis, which were, in fact, approved by this Court.Comment: This paragraph describes both attorney services and duties of the Trustee.
29. Applicant reviewed and analyzed the "accounting" provided by Debtors pursuant to the injunction — and analysis that was very time-consuming and demanded a comparison of the before and after pictures with the purported "accounting" as well as comparison to the appraisal reports. This analysis caused Applicant to draft and file the Trustee's Amended Objection to Exemptions. Thereafter, Applicant once again engaged in settlement discussions with the Debtors. Again, when such discussions did not lead to settlement, Applicant prepared for trial on the exemptions, including the drafting of testimony questions, preparation of exhibits, preparation of argument, coordination of witnesses, etc. Applicant attended such hearing and at the last minute, Applicant was able to successfully negotiate a settlement with the Debtors, which led to the Estate's receipt of $68,000.00 from the Debtors.Comment: The first sentence describes the Trustee is duties. The settlement negotiations are the Trustee's function. The balance of the paragraph describes attorney functions.
30. Thereafter, Applicant focused on coordinating the removal of the remaining items at the Property and placing them for auction with Hart Gallery. Due to these efforts, the Estate will receive over $12,000 for these auctioned items.Comment: This paragraph describes the Trustee's duties.
The court considers the preparation of a fee application the same as the preparation of a billing to a client and thus an office overhead item. The court is not accustomed to granting fees for time spent preparing fee applications; however, the court is not aware of the custom with respect to that matter in this district.
Attached to this Memorandum is an analysis of the time records attached to the Second Application.
HOURLY RATES
The court is aware that Congress has stated that attorneys in bankruptcy cases should be compensated at comparable rates for similar services to what they could receive in other types of law practice. There is generally nothing comparable in law practice to the representation of a Chapter 7 trustee in bankruptcy. In addition, the rates charged must bear a reasonable relationship to the value of the services performed.
There is nothing unusual or difficult about securing a restraining order or objecting to exemptions. This case involved some research because of defenses raised by the Debtors, but the issues were neither complicated nor difficult. The court feels that for these matters, as well as most matters in representing a Chapter 7 trustee, the maximum fee should be $200 per hour. Time actually spent in trial may call for some upward adjustment. Each case must be examined on its own merits and difficulty.
Time for paralegals was billed at $85.00 per hour. It is the court's understanding that paralegals are to be billed to recover the cost of the paralegal, but not at a "profit" for the law firm.
CONCLUSION
The undersigned judge is a visiting judge and not conversant with the customs and practices in this district. The Second Application is an interim application, which must be reviewed with all of the interim fee applications at the time the final fee application is presented to the court for consideration. At that time, the results of the Trustee's efforts in this case will be known and the benefit or lack of a benefit to the unsecured creditors will be known. For these reasons, the court will allow an interim payment to the Applicant in the amount of $10,000.00, subject to the matter being reviewed at the time of the final fee application.
RECOMMENDATION
In this case the Trustee was permitted to employ his own law firm to represent him as attorney for the Trustee. The rationale for such action is that the Trustee knows the case and does not have to impart that knowledge the lawyer, thus saving time and expense for the estate. In this case the reverse happened — the attorneys charged the estate for services labeled legal services that were, in fact, the Trustee's duties. In addition, Mrs. Smith billed for numerous "conferences with the Trustee," so no economies were effectuated.
The court therefore recommends that in future cases, the Trustee not be permitted to employ his own law firm and that the firm employed be admonished to perform only legal services for the Trustee.