Summary
finding that bankruptcy court correctly applied the Pro-Snax test to a fee application and that "it would have `erred in taking a lenient view of the standard.'"
Summary of this case from KAYE v. HUGHES LUCE, LLPOpinion
Bankruptcy Case No. 99-37255-SAF-7, CIVIL ACTION NO. 3:00-CV-1283-X
September 5, 2001
MEMORANDUM OPINION AND ORDER
This is an appeal of the U.S. Bankruptcy Court Order dated April 2, 2000, partially denying PriceWaterhouseCoopers' (PwC) application for fees and expenses. After reviewing the briefs and the record, the Court finds no reversible error or abuse of discretion in the bankruptcy court's fact findings and legal rulings. The Order is AFFIRMED.
I. FACTUAL BACKGROUND
Harbor Financial Group, Inc. ("Harbor" or "Debtor") was in the residential mortgage loan business. On October 14, 1999, Harbor and its affiliated debtors filed a petition for Chapter 11 bankruptcy protection. On October 14, 1999, Debtor also filed an Application to Employ PwC, its pre-petition financial and tax advisor. The bankruptcy court granted the application on an interim basis on October 28, 1999, and on a final basis on December 8, 1999. Two months after the original Chapter 11 petition, the Harbor unsecured creditors committee moved to convert the matter into a Chapter 7 bankruptcy, and this was granted on December 14, 1999. PwC soon filed its final application for $613,933.50 in fees and $63,777.91 in expenses for the period from October 14, 1999 to December 14, 1999, and a hearing was held on February 29, 2000. On April 2, 2000, the bankruptcy court partially granted the application in an order that PwC appealed on April 13, 2000.In its ruling, the bankruptcy court observed that Appellant: 1) failed to exercise adequate judgment in controlling costs; 2) failed to meet its burden of showing the reasonableness or benefit of the services rendered; 3) used more time than was reasonable in performing some of the billed services; 4) performed services beyond the scope of the Application to Employ; 5) submitted billing records with redundant entries, vague descriptions, and implausible half-hour work increments of work; 6) used out-of-state partners and auditors when large in-state offices sufficed for the engagement; and 7) submitted out-of-state expense reimbursement requests with little regard for cost control. Notwithstanding these broad and significant criticisms, the bankruptcy court still awarded PwC $207.928.00 in fees and $13,277.15 in expenses.
Order, 11, "PwC has excessively charged the estates for fees and expenses."
Appellant seeks reversal of the bankruptcy court's order, arguing that the court 1) abused its discretion by denying full fees for services that comported with 11 U.S.C. § 330; 2) erroneously treated the Chapter 11 fees as if the matter was under Chapter 7; 3) abused its discretion by denying fees for matters within the scope of PwC's retention; 4) erroneously denied compensation for work that clearly benefitted the estate; 5) erroneously denied most of the expense reimbursement; and 6) erroneously asserted jurisdiction over all payments to PwC.
II. ANALYSIS
In a bankruptcy appeal, findings of fact are reviewed for clear error, while legal conclusions are reviewed de novo. In re Young 995 F.2d 547, 548 (5th Cir. 1993). Awards of professional fees are reviewed for abuse of discretion, which arises when the bankruptcy judge 1) fails to apply the proper legal standard or follows improper procedures in determining the fee award, or 2) bases an award on findings of fact that are clearly erroneous. In re Hunt, 196 B.R. 356 (N.D.Tex. 1996)(Kendall, J.) For this appeal, the Court will exclude the portions of Appellee's brief that rely upon the Supplemental Designation but will review the remainder of the brief.Before weighing the competing claims, a few matters must be put to rest. First, the bankruptcy court did not summarily deny all of Appellant's fees and expenses; after a thorough, documented review of the record, it awarded roughly a third of the fees and a fifth of the expenses. Appellant's claims to the contrary are plainly wrong. Moreover, the bankruptcy court also provided several alternative bases for denying or reducing Appellant's fees: some fees were duplicative, subsumed within other fees or overhead, or reflected an unreasonable use of time. To the extent that Appellant did not contest these reasons or their underlying fact findings, the Court will affirm the bankruptcy court.
See, e.g. Appellant's Brief, at 16 ("The Bankruptcy Court erred and abused its discretion in denying PwC any compensation for work which clearly benefitted the estate."); id. at 19 ("The fact that a plan was not confirmed does not mean that the fees are written off. Nor is it clear there was no benefit to the estate.").
A. The Appropriate Standard for Awarding Fees
Appellant's core claim is that the bankruptcy court erroneously denied fees for services that were compensable under 11 U.S.C. § 330. Appellant contends that its services helped the secured and unsecured creditors decide that Chapter 7 liquidation was the best course of action, and therefore directly benefitted the bankruptcy estate. Appellee, however, responds that the reasonableness standard which PwC seeks is incorrect in the Fifth Circuit, and it argues that the bankruptcy court correctly applied a more stringent hindsight test in evaluating the fee request. Appellee contends that the Bankruptcy Court correctly used Chapter 7 liquidation as a baseline to determine that PwC's services produced no material benefit to the estate. Appellant replies that the operative standard lies in the plain language of § 330, which authorizes courts to award "reasonable compensation for actual, necessary services rendered by the . . . professional person." 11 U.S.C. § 330(1)(A)(1994) Furthermore, PwC contends that its pre-conversion services meet this threshold and urge the court that these services were "beneficial at the time at which the service was rendered . . ." 11 U.S.C. § 330(3)(C)(1994)
The Bankruptcy Court committed no reversible error when it denied a portion of PwC's fees for lack of material benefit to the bankruptcy estate. The Fifth Circuit considered § 330 in In re Pro-Snax, 151 F.3d 414 (5th Cir. 1998) and in reaching its decision, the court used a hindsight test to assess a professional fee application. Andrews Kurth, the debtor's counsel, sought compensation for services that it had provided both before and after the appointment of a Chapter 11 trustee. The court first concluded that the plain language of § 330 precluded awarding fees to attorneys for post-appointment services. The appellate panel then grappled with which test to apply to pre-appointment professional services. Debtor's counsel urged a reasonableness test, but the Petitioning Creditors argued that the court should look to whether the services "resulted in an identifiable, tangible, and material benefit to the bankruptcy estate." Id. at 426. The Fifth Circuit concluded that the latter test — which employed a hindsight standard — was the appropriate metric. The court also expressed its disinclination "to hold that any service performed at any time need only be reasonable to be compensable." Id.
Ratifying the district court's instruction for the bankruptcy court to consider Andrews Kurth's failed attempt to have the Chapter 11 plan approved, the Fifth Circuit wrote, "at the time the services are performed-the chances of success must outweigh the costs of pursuing the action." Id. Accordingly, the court denied fees after concluding that "AK should have known from the outset that the Debtor's prosecution of a Chapter 11 plan would fail . . ." Id.
Appellant cites a few cases that apply a more lenient reasonableness standard for awarding professional fees. Unfortunately for PwC, none of those citations from outside this circuit displaces Pro-Snax. Indeed, while In re Mednet employs a reasonableness test, the Ninth Circuit Bankruptcy Appeals Panel explicitly acknowledged that: "[t]he Fifth Circuit takes the opposite view." In re Mednet, 251 B.R. at 107. Despite Appellant's efforts to argue otherwise, the bankruptcy court correctly applied the Pro-Snax test to its fee application, and it would have "erred in taking a lenient view of the standard." In re Pro-Snax, 157 F.3d. at 426. Appellant's reliance upon a reasonableness test is misplaced, and the bankruptcy court applied the correct legal standard in evaluating PwC's application for fees.
In re Mednet, 251 B.R. 103 (9th Cir. BAP 2000), In re Ames Dep't Stores, Inc., 76 F.3d 66 (2nd Cir. 1996).
Appellant is furthered burdened by the fact that its Chapter 11 business plan was never adopted. While this itself does not preclude all fees, it does hurt Appellant's ability to show that at the time the business plan was being produced, the chances of its success outweighed the costs of putting it together. It is insufficient for Appellant to simply claim that the unsecured creditors eventually sought a Chapter 7 conversion, that the business plan is the type of information that people could use in such a decision, or that the plan chronologically preceded the Chapter 7 conversion. Appellant must also show that its services were not only useful, but actually and materially contributed to the decision to convert the proceeding.
The bankruptcy court also noted, and Appellant does not dispute, that the business plan was never with the court. The notable omission, from the record, of this 1,500+ hour project leads one to reasonably surmise that its importance might be overstated. Absent those obvious linkages, this Court is hard-pressed to deduce how the business plan materially entered into the decision or benefitted the bankruptcy estate. Although Appellant claims that it tried, unsuccessfully, to pitch the plan to the secured creditors, that attempt is not dispositive of the Pro-Snax analysis. Appellant ends up stating that the failure of the plan "apparently signaled the parties that conversion was a better alternative" — at best, faint praise for the value of its services. Nonetheless, the bankruptcy court graciously awarded $75,000.000 in fees for that effort, when it could reasonably have awarded less.
Id at 19.
Id.
The award of these fees flatly contradicts Appellant's disingenuous argument that the bankruptcy court denied fees for a business plan that it had specifically ordered.
Next, Appellant mischaracterizes actual events when it argues that the Court erroneously applied a Chapter 7 standard in awarding fees from a Chapter 11 proceeding. The bankruptcy court used Chapter 7 remedies as a baseline for determining whether PwC's efforts materially benefitted the bankruptcy estate. The bankruptcy court found that Appellant should have taken liquidation into account even as it allocated effort and personnel to the business plan, and it concluded that the ultimate, and negligible benefit of the plan was outweighed by its considerable cost in terms of fees and expenses. The bankruptcy judge found that the estate would have fared better had the secured creditors simply liquidated their assets, thus ending the accelerating spiral of administrative loans, professional fees, and expenses. In other words, "measurable," but limited, material benefit to the estate resulted from Appellant's engagement. Appellant's failure to exercise judgment in pursuing this plan is the bankruptcy court's core criticism against PwC's services.
See Appellant's Brief, at 19 ("The development of information is often critical and yields measurable benefit.").
The bankruptcy court also found that liquidation was a viable option from the beginning. Appellant appears to respond by arguing that the bankruptcy court could have, but failed to order the Chapter 7 conversion. PwC adds that the unsecured creditors needed time to assess their options with the aid of the business plan, and it continues that several unsecured creditors insisted on a Chapter 11 bankruptcy. Even accepting, arguendo, these claims, none, either alone or in combination, surmounts Appellant's burden of showing that its services materially benefitted the bankruptcy estate. The mere existence of a delay between the petition and the eventual conversion does not alter the standards by which courts review fee applications. It clearly seems that PwC overlooked or ignored the realities of the situation, and in doing so, it assumed the risk that some of its fees would be denied. The bankruptcy court did not abuse its discretion when it concluded that the material benefit standard precluded a full award of Appellant's fees.
1. Fees Denied as Redundant or Subsumed within Other Fees Awarded.
The bankruptcy court denied some fees that it found were already subsumed within other services, or included in overhead billing rates. Appellant does not directly address the underlying legal principle that courts are to disallow disbursements that are normally overhead expenses, and therefore a component of existing hourly professional rates. See In re Poseidon Pools of America, Inc., 180 B.R. 718, 781 (Bankr.E.D.N.Y. 1995). PwC chooses, instead, to contest this finding by arguing that the court erroneously equated "work performed on one task with work performed on another." Appellant also suggests that the bankruptcy court may have inappropriately reduced its fee award in response to the considerable pre-petition fees that Debtor paid PwC. This second argument overlooks the fact, mentioned above, that the bankruptcy court, in certain respects, generously construed the billing record to award fees that it was not obligated to award. A quick scan of the opinion shows the extent to which the bankruptcy court pored over the record to reach an equitable and legally supportable ruling, and these scant arguments and implications fail to substantiate claims of a clear error by the bankruptcy court.
Appellant's Brief,at 21.
2. Fees Denied as Using an Excessive Amount of Time.
Next, the Court found that the Appellant's staff, with its considerable education, experience, and client-specific knowledge, could have finished the tasks billed in much less time. The bankruptcy court voiced its suspicion of some statements that quoted almost all billable time in half-hour increments, finding that this reflected poorly upon PwC's scrutiny of its billing records. Although Appellant disagrees with the bankruptcy court's ultimate award of 300 hours for the business plan, it provides no persuasive evidence of clear error by the bankruptcy court. Absent a stronger showing by the Appellant, this Court hesitates to disturb the finding that some of Appellant's fee requests were unreasonable under the circumstances.
3. Fees Denied as Services Beyond the Scope of Retention.
The other major ground cited by the bankruptcy court for denying fees is that some fees fell beyond the scope of retention. PwC argues that the court abused its discretion because these services were authorized by the Application to Employ. PwC claims that the order was sufficiently broad to encompass all the following: performance of operational issues, managing the Debtor's daily operations, negotiating with creditors, participating in management retention decisions, and addressing compensation, employee retention, and insurance matters. Appellant argues that the Application calls for it to "aid the debtors with respect to the execution of their rights, powers, and duties as debtors in possession under the Bankruptcy Code . . . and perform other services requested by the Bankruptcy Court, the Debtors, or their attorneys." It claims, therefore, that given this broad language that the bankruptcy court abused its discretion by denying fees.
Appellant's Brief, at 14.
Appellants Designation Tab 1 at 4.
A review of the bankruptcy court's opinion, however, shows its rulings to be correct. The court acknowledged that the debtors had "lost a significant portion of its management staff," and could not "perform its operational functions." Nonetheless, the court found that it "did not authorize PwC to become the debtor." On that basis, it awarded $5,000 in consulting fees on employee retention, which it found necessary, while disallowing fees for the other services.
Memorandum Opinion, at 17.
I d.
Appellant fatally fails to answer the bankruptcy court's finding that it never authorized PwC to become the debtor. The language of the Application to Employ, upon review, describes a wide range of tasks which PwC may perform upon the request of the Debtor. Nowhere is there an affirmative delegation of Debtor status upon PwC. Thus, although Appellant may have provided service in areas covered by its original retention, it did so in a capacity that was never sanctioned. Put simply, certain tasks that might be compensable if performed at the Debtor's request may not be compensable when performed in the Debtor's shoes. While it may have been preferable to have somebody (rather than nobody) assisting in daily operations and negotiations with creditors, PwC, in that role, was still subject to the Pro-Snax standard of material benefit.
Appellant's Designation Tab 1, at 5. ("The Debtors may . . .request that PwC undertake specific matters beyond the scope of the responsibilities set forth above."; "the Debtors seek authority herein toemploy PwC for such matters . . .") (emphasis added).
Appellant was retained on the basis of its expertise in tax and finance matters; its contribution as substitute management may have been substantially outweighed by its billing rate for such stand-in services. The Court concurs with the bankruptcy court's finding that PwC was not authorized to act as the Debtor, or alternatively, that services provided from this perspective did not materially benefit the bankruptcy estate. PwC's authorization to advise Debtor on wide tax and finance issues did not empower it to play "lemonade stand," notwithstanding Debtor's difficulties retaining key personnel, and no clear error exists in the denial of certain fees as beyond the scope of the retention.
B. Real and Necessary Expenses
Appellant next contends that the bankruptcy court erroneously denied reimbursement for most of its expenses. The court, however, did not entirely bar Appellant's claims for reimbursement — in fact, it reimbursed all travel expenses for Appellant's in-state employees. The court, however, also found that PWC incurred considerable travel expenses for out-of-state staff, with minimal benefit to the bankruptcy estate.
Memorandum Opinion, at 20 ("Except for travel to and from Dallas and Houston by Dallas and Houston personnel, the court finds all travel expenses unnecessary").
The bankruptcy court denied travel expenses for out-of-state staff as redundant, extraneous, or pertaining to services outside the scope of the retention. PwC merely responds with the legal conclusion that "the travel expenses were actual and necessary." The applicant bears the burden of establishing its entitlement to reimbursement of its expenses, See In re Gillett Holdings, Inc., 137 B.R. 462, 471 (Bankr.D.Colo. 1992) and an expense is necessary only if it was incurred because it was required to properly achieve the task for which the applicant was hired. See, e.g. id To the extent that out-of-state expenses relate to services beyond the ambit of PwC's retention, therefore, those expenses are not "necessary." Finally, PwC completely fails to show how telephone conferences, e-mail and fax transmittals could not have been effective. That ground alone is sufficient for this Court to find no clear error in the bankruptcy court's treatment of Appellant's expenses.
Appellant's Brief, p. 25.
C. Erroneous Assertion of Jurisdiction over Payments to PwC.
The final issue raised in Appellant's Brief addresses the bankruptcy court's assertion of jurisdiction over all payments to PwC. PwC argues that this might preclude it from recovering fees owed it by the Bank Group. Appellee's response, however, shows that this concern has either not materialized, or is superfluous. The bankruptcy trustee explicitly states that it would not oppose PwC's request for fees from Bank Group. Accordingly, that ground for appeal is dismissed as moot.
III. CONCLUSION
Appellant fails to state a compelling case for reversing the bankruptcy court's order. Appellant relies upon a reasonableness standard that is less stringent than the test used in this circuit, and it leaves crucial, and fatal findings either uncontested or nominally contested. The burden of showing entitlement to fees and expenses has always rested upon PwC, and its failure to demonstrate the material benefit provided by its services, or to make more than a cursory attack on the alternative bases for disallowing the fees preclude this Court from finding that the bankruptcy court abused its discretion or ruled in clear error. Appellant's argument for vacating the expense reimbursement is similarly infirm. For these reasons the bankruptcy court's order is AFFIRMED.
SO ORDERED