Opinion
Case No. 07-46926-R.
March 28, 2008
Opinion and Order Granting in Part Fee Application of Counsel for the Interim Trustee
This matter is before the Court on an application for approval of fees filed by the attorney for the interim trustee. Objections were filed by the U.S. Trustee and the elected, permanent trustee. For the reasons stated herein, the Court concludes that the applicant's requested hourly rate of $350 per hour should be reduced to a market rate of $250 per hour and that because the fee application discloses excessive time for the services performed, the application must be reduced by 33%.
I.
On April 9, 2007, Dean Masciulli filed for chapter 7 relief. K. Jin Lim was appointed the interim trustee. On May 4, 2007, the Court entered an order authorizing the employment of Kenneth Schneider of Schneider Miller, P.C., as counsel for the interim trustee.
On June 1, 2007, the U.S. Trustee issued a notice to creditors advising that one or more creditors had requested that the U.S. Trustee conduct a trustee election pursuant to 11 U.S.C. § 702(a).
On June 28, 2007, Creditor National City Bank filed a motion for approval of the elected trustee, Mark Shapiro, as the permanent trustee. Lim filed an objection on July 16, 2007. Following a hearing on July 30, 2007, the Court granted NCB's motion and Shapiro became the successor trustee.
On August 30, 2007, Schneider filed his first interim application for compensation seeking fees of $41,914 and expenses of $1,545 for the period April 25, 2007, through August 24, 2007.
On September 19, 2007, the U.S. Trustee filed an objection to Schneider's fee application. The U.S. Trustee argued that the time spent researching and preparing for hearings related to the trustee election did not benefit the estate. Further, the U.S. Trustee asserted that the fee application lacked detail and included entries for time spent related to extensions of time to file objections to discharge, however, no motion seeking an extension was ever filed. Shapiro filed a concurrence to the objection. Schneider filed a response on October 9, 2007.
The Court conducted a hearing on October 15, 2007. In addition to the objections previously raised, the U.S. Trustee objected to the number of telephone conversations between Lim and Schneider and the lumping of time entries. The U.S. Trustee also argued that the time spent on the employment of counsel, the objection to exemptions, and the application for authority to sell property was excessive considering the documents that were filed. The U.S. Trustee sought a total reduction in fees of $9,815.
Shapiro asserted that the interim trustee should have objected to the debtor's discharge, noting that the debtor's 2006 tax return listed $550,000 spent on asset planning and protection.
He also objected to the time spent related to a tax refund of $85,000, arguing that the 3.2 hours charged by Schneider did not resolve the issue of whether the refund was property of the estate or whether the debtor's non-debtor spouse was entitled to this refund.
Shapiro also objected to time spent on state and federal litigation. He argued that a receiver had been appointed in a pre-petition lawsuit involving the debtor and his building company. The receiver was responsible for completing construction of properties and preparing them for sale. Shapiro contended that when a property is prepared for sale, an email is sent from the receiver to the trustee and the trustee is merely asked to consent to the sale. Shapiro argued that the trustee's involvement beyond this is not required. Shapiro further asserted that the appointment of the receiver would ordinarily reduce the duties of the trustee and trustee's counsel. Shapiro further objected to the 9.1 hours expended in this category relating to the objection to NCB's motion for relief from stay. Shapiro argued that the interim trustee's objections were motivated solely by an attempt to block the trustee election.
Next, Shapiro objected to the time related to the trustee election. Shapiro argued that the fees were not necessary to the administration of the estate and did not benefit the estate.
Shapiro objected to the 31 hours spent on sales of property of the estate. Shapiro noted that this time primarily related to the sales of two properties that were never closed. Shapiro asserted that with respect to the debtor's 50% interest in the Clam River, Inc., property, the interim trustee's involvement was minimal. Shapiro stated that the interim trustee obtained an appraisal and negotiated an offer from the debtor's brother-in-law, which the trustee ultimately declined.
With respect to the second proposed sale relating to the debtor's 25% interest in two LLCs, Shapiro objected to the proposed sale terms. Shapiro noted that the sale terms provided for a sale price of $250,000, with $100,000 payable upon closing and $75,000 payable each year for the next two years. There was no purchase agreement executed, there was no promissory note for the installment payments, there was no security for the unpaid balance, and there was no interest on the installment payments. Shapiro argued that the motion to approve the sale did not demonstrate that the sale price was consistent with the value of the property. Shapiro noted that concurrent with this sale, the buyer was also purchasing a 50% interest in the same LLC from one of the other owners. The terms of that sale were a sale price of $620,000 payable in full at closing. Shapiro argued that this establishes that the sale price on the 25% interest should have been $310,000, with different payment terms. Shapiro stated that he had negotiated a $30,000 increase in the sale price, a security interest and 6% interest on the unpaid balance.
Shapiro also objected to Schneider's rate of $350 per hour. Shapiro noted that his hourly rate is only $265. Further, Shapiro argued that the benefits conferred did not justify such a high hourly rate.
Schneider responded that much in these oral objections was outside the filed objections. The Court therefore adjourned the matter to afford Schneider an opportunity to respond to the specific objections.
Schneider filed an amended response on October 19, 2007. In his response, Schneider argued that the successor trustee and U.S. Trustee had failed to cite any examples of billing entries that were lacking in detail, and therefore that objection should be overruled.
With respect to the time entries relating to the tax refund, Schneider contends that the time entries relate to a demand from the debtor's wife for surrender of the tax refund and research by an associate of Schneider's on the issue of the non-debtor wife's interest in the refund. Schneider argues that the total of 4.5 hours expended in this category is not excessive.
In response to Shapiro's objection to time spent on matters relating to litigation in other courts, Schneider argues that his work involved more than merely signing off on sales handled by the receivers. Schneider contends that he also recovered and reviewed voluminous files concerning the debtor's partner and NCB. This was done, Schneider contends, in an effort to ascertain and protect the estate's interest in the debtor's companies. Schneider further argues that the 9.1 hours spent in relation to NCB's lift stay motion was necessary because NCB was seeking to resume its litigation against the debtor for the purpose of the determination of its claim. Schneider further asserts that when the interim trustee refused to consent to the relief, NCB moved for the election of a new trustee. Schneider contends that Shapiro's eventual consent to the lifting of the stay demonstrates favoritism to the creditor who selected him to replace the interim trustee.
Schneider argues that he should not be penalized for his failure to object to the discharge or to obtain an extension of time to object. Schneider asserts that following a two-day 2004 examination, no grounds existed to either file an objection to discharge or file for an extension. Schneider further notes that of the five adversary proceedings filed against the debtor, only one contains a count under § 727. Further, the complaint filed by NCB, whose counsel should be intimately familiar with the financial dealings of the debtor and his various entities, is based only on § 523.
Schneider contends that all of the work done on sales of property was necessary and beneficial to the estate. Schneider argues that Shapiro's objections go to Schneider's business judgment and are not a basis for reducing fees.
In response to Shapiro's assertion that Schneider's hourly rate of $350 is too high, Schneider responds that he has charged an hourly rate of $350 in bankruptcy cases since January of 2006, and his rate has never before been challenged. Further, Schneider contends that he charges a rate between $250-$350 per hour for non-bankruptcy work. Schneider asserts that he charges a higher rate for bankruptcy work because the risk of non-payment is greater. Schneider contends that his rate was reasonable in this case given the acrimony involved between the debtor and the other owners of the business entities and the complexity of the debtor's financial affairs.
With regard to the trustee election, Schneider urges the Court to reject a per se rule whereby fees incurred in the unsuccessful opposition to a trustee election should never be compensated. Schneider contends that his services in this area provided a benefit to the estate.
On October 26, 2007, Shapiro filed a reply to Schneider's amended response reiterating his objections.
II.
The Bankruptcy Code requires the trustee to ". . . collect and reduce to money the property of the estate . . . and close such estate as expeditiously as is compatible with the best interest of parties in interest[.]" 11 U.S.C. § 704(1). When necessary, and with the court's approval, the trustee ". . . may employ one or more attorneys . . . or other professional persons . . . to represent or assist the trustee in carrying out the trustee's duties under this title." 11 U.S.C. § 327(a). See Ferrette Slater v. United States Trustee (In re Garcia), 335 B.R. 717, 723 (B.A.P. 9th Cir. 2005).
After notice and a hearing, the court may award an attorney employed under section 327:
(A) reasonable compensation for actual, necessary services rendered by the trustee, examiner, professional person, or attorney and by any paraprofessional person employed by any such person; and
(B) reimbursement for actual, necessary expenses.
11 U.S.C. § 330(a)(1)(A), (B).
Section 330(a)(3)(C) provides that in determining the amount of reasonable compensation to be awarded, the court is required to consider "whether the services were necessary to the administration of, or beneficial at the time at which the service was rendered. . . ." 11 U.S.C. § 330(a)(3)(C).
Section 330(a)(4)(A) then provides that a court must disallow compensation of a professional's fees for "services that were not reasonably likely to benefit the debtor's estate" or "necessary to the administration of the case." 11 U.S.C. § 330(a)(4)(A)(ii)(I), (II).
Thus, the pertinent question is not whether the services performed by the professional conferred an actual benefit upon the estate; but whether, when viewed under the circumstances in existence at the time, the services were reasonably calculated to benefit the estate. American Metallurgical Prods. Co. v. Kirkpatrick Lockhart, LLP (In re American Metallurgical Prods. Co.), 228 B.R. 146, 156 (Bankr. W.D. Pa. 1998) (conditioning the propriety of compensation on whether the services performed were reasonable at the time of rendition; not under the conditions as they existed at the time the fee application is reviewed). See also In re Kennedy Mfg., 331 B.R. 744, 748 (Bankr. N.D. Ohio 2005).
The burden of proof as to entitlement to and reasonableness of a fee request is upon the moving party. In re Kieffer, 306 B.R. 197, 206 (Bankr. N.D. Ohio 2004); In re New Boston Coke Corp., 299 B.R. 432 (Bankr. E.D. Mich. 2003). "The Court will not indulge in extensive labor and guesswork to justify a fee for an attorney who has not done so himself." In re Woodward East Project, Inc., 195 B.R. 372, 375 (Bankr. E.D. Mich. 1996) (internal quotation citation omitted). To the extent that the fee applicant fails to meet its burden, § 330(a)(2) authorizes the court to "award compensation that is less than the amount of compensation that is requested." Kennedy Mfg., 331 B.R. at 747; See also New Boston Coke Corp., 299 B.R. at 438.
III. A. The Applicant's Hourly Rates
Bankruptcy attorneys are generally entitled to an hourly fee in line with the prevailing market rates in the community. New Boston Coke Corp., 299 B.R. at 446 (quoting ACT Mfg, Inc., 281 B.R. 468, 486 (Bankr. D. Mass. 2002) ("[T]he Court should apply the rate customarily charged for similar services in the locality. . . ."). See also In re Computer Learning Centers, 285 B.R. 191, 227 (Bankr. E.D. Va. 2002) (The court may determine the prevailing market rate in the community and thus evaluate the reasonableness of the attorney's hourly rates.). "Courts should consider the following factors in determining reasonable hourly rate: the attorney's customary rate; comparable rates of comparable attorneys in the local area; quality of legal services provided; the skill of attorney; and the novelty or difficulty of issues present in case." In re Sharp, 367 B.R. 582, 584 (Bankr. E.D. Mich. 2007) (citing In re Atwell, 148 B.R. 483, 488-89 (Bankr. W.D. Ky. 1993)).
Schneider's fee application reflected an hourly rate of $350 for himself and $310 for Timothy Miller. Schneider stated that his customary hourly rate for non-bankruptcy work is $250-$350. The Court has conducted a review of the hourly rates for comparable attorneys in the metro-Detroit area. The average rate of a sample of 15 such attorneys was $250, with a high of $325 and a low of $185. This is consistent with the Court's experience in reviewing fee applications. The Court concludes that in the circumstances of this case and considering the services provided and the experience of trustee's counsel, a reasonable and market hourly rate in a case like this for counsel for the trustee is $250. There was nothing particularly complex in the few issues that counsel for the interim trustee briefly addressed before the permanent trustee was appointed, and this hourly rate is consistent with the hourly rate charged by other attorneys for trustees with similar experience.
B. Trustee Election
The U.S. Trustee appoints an interim trustee promptly after the order for relief is entered. 11 U.S.C. § 701(a)(1). Ordinarily, the interim trustee becomes the permanent trustee. However, creditors may elect a different trustee as the permanent trustee at the meeting of creditors held under 11 U.S.C. § 341. 11 U.S.C. § 702(b). See also In re Qmect, Inc., 2007 WL 219942, *1 (Bankr. N.D. Cal. 2007).
At the May 17, 2007, meeting of creditors, NCB exercised its right to elect a trustee under § 702. The meeting of creditors was adjourned to June 21, 2007. At the adjourned meeting of creditors, the interim trustee disputed NCB's right to seek an election for an alternative chapter 7 trustee.
On June 28, 2007, NCB filed a motion for the appointment of the elected trustee as the permanent trustee. On July 16, 2007, K. Jin Lim filed an objection. Lim's objection was based on her belief that NCB was not eligible to elect a new trustee because NCB's claim was not liquidated and fixed, and the claim was fully secured. The trustee also asserted that NCB's claim did not qualify as 20% of all creditors' claims because the majority of creditors listed on the debtor's schedules had debt amounts listed as unknown. Following a July 30, 2007, hearing, the Court granted NCB's motion and Mark Shapiro was elected as the permanent trustee.
Schneider has requested approximately $3,500 in fees related to the interim trustee's objection to the election. Shapiro argues that such charges were not necessary to the administration of the estate. Shapiro further contends that the only ones who could have benefitted from the opposition to the election were the interim trustee and Schneider.
Preliminarily, an issue exists whether the interim trustee has standing to object to the election of a chapter 7 trustee. The Court agrees with the weight of authority which holds that an interim trustee has the requisite standing. In re Amherst Technologies, LLC, 335 B.R. 502, 511 (Bankr. D.N.H. 2006) ([V]irtually all of the reported decisions have found that an interim trustee has standing to object to the qualification of a creditor under section 702.); cf. In re Sandhurst Securities, Inc., 96 B.R. 451, 456-57 (Bankr. S.D.N.Y. 1989) (unsuccessful trustee candidate has no standing to object).
However, any objection made by the interim trustee must be premised solely upon the interests of creditors and the goal that the election process be valid and honest under § 702 of the Bankruptcy Code. In re Michelex Ltd., 195 B.R. 993, 1010 (Bankr. W.D. Mich. 1996).
The Court concludes that the interim trustee's objections were premised upon the interests of creditors and the goal that the election process be valid. The interim trustee based her objections on the qualifications of NCB under § 702(a) and (c) to vote. Further, based upon the information available to the interim trustee at the time of her objection, the interim trustee had a valid basis to object. Accordingly, the trustee's objection to fees related to the trustee election is denied.
C. Objections Related to Excessive Time for Services Performed
As noted above, the compensability of a professional's fees under § 330(a) is not directly tied to the benefit of the services or otherwise to adding value to the debtor's estate. Rather, a court is to afford a degree of deference to the professional's decision so long as objectively reasonable at the time. The pertinent question is not whether the services performed by the professional conferred an actual benefit upon the estate; but whether, when viewed under the circumstances in existence at the time, the services were reasonably calculated to benefit the estate. American Metallurgical Prods., 228 B.R. at 156 (conditioning the propriety of compensation on whether the services performed were reasonable at the time of rendition; not under the conditions as they existed at the time the fee application is reviewed). See also Kennedy Mfg., 331 B.R. at 747-748.
Under this standard, the Court concludes that it is appropriate to award fees for the services performed.
However, the Court has reviewed the entries attached to the fee application and concludes that many of them are excessive and that the record fully justifies the parties' objections on this point. By way of example only, the application discloses 31.8 hours of service on sales; 21.1 hours on discovery; 16 hours on non-bankruptcy litigation; 14.5 hours on ascertaining the debtor's financial affairs; and 14 hours on the election dispute. The progress made on those and the other issues simply should not have taken these amounts of time as disclosed in the fee application. In its discretion, because of the extent of the excessive hours disclosed, the Court further concludes that a substantial percentage reduction is required in order to arrive at a reasonable fee for the services performed. The Court concludes that it is appropriate to reduce the fees requested by 33%.
The remaining objections are overruled.
D. Calculating the Fee Award
The fee application discloses a total of 116.45 hours of service for Schneider and Miller. At $250 per hour, the rate approved herein, these fees are $29,112.50. In addition, fees of an associate were disclosed in the amount of $1,662.50, for a total of $30,775.00 in fees at the approved hourly rates. Upon a 33% reduction, as concluded above, the allowed fees are $20,619.25. Expenses of $1,545.00 are allowed in full.
Accordingly, it is ordered that Schneider Miller, P.C., is allowed fees of $20,619.25, plus expenses of $1,545.00, for a total of $22,164.25.