Opinion
No. 11-02-10476 SA
January 6, 2003
On December 19, 2002, the Court conducted the final evidentiary hearing on the Application of Counsel for Debtor in Possession for Allowance of Compensation and Reimbursement of Expenses (Application) (doc 41) and the objection thereto filed by the Debtor in Possession Randy C. Lykins (doc 45).
Gary B. Ottinger appeared on behalf of Michael K. Daniels; Mr. Lykins appeared in opposition to the Application. During his testimony Mr. Lykins stated that he had no objection to the costs incurred, and thus this decision concerns only the attorney fees (and the gross receipts tax) requested.
Background
Debtor filed his own chapter 11 petition on January 23, 2002 although it appears that he had some help from Mr. Larry Leshin, counsel for the companion chapter 11 case for the water utility company of which Mr. Lykins is a shareholder and officer (In re Independent Utility Company, No. 11-02-10475 MA). For example, the Debtor has occasionally stated that he has consulted with Mr. Leshin, and the receipt for the filing fee lists Mr. Leshin as the payor. In any event, on the recommendation of Mr. Leshin, Debtor sought the services of Applicant, who filed his employment application on February 14, 2002 (doc 9). Thereafter Applicant busied himself with preparing the schedules and statement of affairs and attending to other matters that typically occur in the beginning of a chapter 11 case. However, the working relationship between Applicant and Debtor quickly deteriorated, and Applicant filed to withdraw from the representation on March 5, 2002 (doc 17).
Debtor objected to the withdrawal (doc 21) but withdrew the objection orally at the preliminary hearing conducted on April 16, 2002 (minutes doc 37). The Court entered the order allowing the withdrawal on April 16, 2002 (doc 36); the Court also entered the order to employ Applicant on April 18, 2002 effective retroactively to the date of the filing of the employment application (doc 38). Shortly thereafter Mr. Daniels filed the Application and Mr. Lykins objected.
Discussion
Debtors written objections were that the motion to withdraw misstated the amount that Applicant had been paid, that Applicant did not work for the Debtor and omitted doing certain tasks, and that the premature and unexplained withdrawal of counsel had caused hardship for the Debtor.
During the course of the lengthy and contentious pretrial proceedings, and during the trial, Debtor made clear that the gist of the objection to the Application was that Applicant had not adequately heeded instructions from him and had not done a good enough job to be compensated.
The Courts view of the relationship between counsel and client is that the relationship is largely voluntary, and that either party ordinarily has the right to discharge or fire the other party as long as certain safeguards are observed so that the withdrawal by or the discharge of counsel does not unfairly prejudice the client or counsel. This case illustrates the importance of the continuing consensual nature of the attorney-client relationship; like a marriage in which it becomes obvious to the parties the morning after the wedding that they have made a big mistake, it would have been foolish not to let the parties go their separate ways as soon as possible.
The Court finds that the testimony of both Mr. Lykins and Mr. Daniels was credible. The Court is quite convinced that Mr. Lykins believed that Mr. Daniels was not doing what he was told to do and required to do, and that Mr. Daniels just as firmly believed he was doing exactly what Mr. Lykins requested and needed and what professional representation required of him, within the constraints he was operating under. In consequence, to be decided is whether and to what extent Applicant and Debtor fulfilled their respective contractual obligations to each other in the short course of the relationship. The Court also considers whether the services benefitted the estate.
Exhibit A is the "Chapter 13 [sic] Bankruptcy Retainer Agreement executed by both parties, which provides in relevant part as follows:
I [Michael K. Daniels] will charge you my hourly rate of $150 for the preparation of the petition, schedules and the statement of affairs, attendance at your Creditors [sic] Meeting (341 Meeting), preparation of your Chapter 11 plan and any other necessary pleadings, and litigation (if necessary) to confirm your plan. Additional charges may come if your case is converted to Chapter 7, if claims or confirmation litigation arises, or if amendments or plan modifications are necessary because you miss payments to your creditors, or if you furnish me with inaccurate or incomplete information. I hope these will not be necessary, based on our initial interview. My payments are subject to fee application and Bankruptcy Court approval. It is possible no Chapter 11 plan and Disclosure Statement will be necessary, if you can sell your assets quickly enough.
At the outset of the employment, Mr. Daniels busied himself with preparing the schedules and the statement of affairs, including moving to extend the deadline to file those items, which were in effect already overdue. The largest single block of time, 3.8 hours, was spent drafting schedules and the statement of affairs. Given the importance of a timely and accurate filing, and of the complexity of the assets, debts and affairs of a typical chapter 11 debtor, the time spent on this category of work was easily justified.
Failure to file the schedules and statement of affairs timely may result not only in the continuation of the first meeting of creditors, which in fact happened three times in this case, but also the dismissal of the case. The latter did not happen, apparently in part because Mr. Lykins used the draft schedules and statement prepared by Mr. Daniels to prepare the schedules and statement that were finally filed. Part of the problem that existed was Mr. Lykins failure to appreciate how filings, meeting deadlines and otherwise complying with the requirements of the Code and the rules (such as by appearing at creditor meetings) are at the heart of the speedy and complete administration of a bankruptcy case, such that failure to do those things not only delays administration of the case but often leads to dismissal or conversion. See, for example, the U.S. Trustees Motion to Dismiss or Convert, citing the Debtors failure to file schedules and the statement of affairs and to appear at a rescheduled § 341 meeting (docs 22-23).
Mr. Lykins argued that Mr. Daniels failed to value his interest in the water utility company and his equity in certain real estate as instructed. Mr. Daniels responded that the schedules were drafts and the values inserted were Mr. Daniels opinion of what the values were, based upon his calculations, his expertise in bankruptcy and his software requirements. The Court finds that Mr. Daniels explanations were credible. A company that is in its own chapter 11 reorganization/ liquidation and besieged by litigation with another interest holder certainly might be worth relatively little to each interest holder, and in fact there might be significant advantages for the shareholder (Mr. Lykins) if the value were in fact lower. Similarly the softwares protocol that automatically counted Paulette Moores lien of $59,000 against the value of the eight acres in Capitan, New Mexico ($16,000), correctly stated that the lien exceeded the fair market value of the lots. See Exhibit D (Mr. Lykins edited copies of draft schedules). There were other disputes about values, such as for automobiles, and about Mr. Lykins net income, but while Mr. Lykins information was correct, Mr. Daniels reasonably sought to confirm the values and numbers. Thus given the relatively small amount of communication that took place between Messrs Lykins and Daniels, treating the first draft of the schedules as an invitation to discuss the issues of value and net income was reasonable; in fact, working off one or more drafts is a common method of obtaining and confirming the information needed for an accurate filing. Mr. Lykins argued that he had already provided to Mr. Daniels the requested information, and had explicitly told Mr. Daniels what values to put into the schedules, and thus Mr. Daniels continuing inquiries constituted a violation of the contractual attorney-client relationship. But given the amount and detail of the information required, the potential ramifications of certain answers, and Mr. Daniels experience representing debtors and creditors which would have told him that, among other things, debtors as a group tend to underestimate their debts and overestimate the value of their assets, Mr. Daniels appropriately raised questions about the valuations, even after receiving the initial information from Mr. Lykins.
Exhibit B was a letter from Mr. Daniels asking a series of detailed questions. The parties debated the wording of some of the numerous requests for information contained in the letter, but on the whole, the questions asked were reasonably expressed inquiries into the myriad details that must go into schedules and statements of affairs.
The Court also finds that it is not necessary to inquire further into what documents were received by Mr. Lykins from Mr. Daniels, and when. Suffice it to say that, following the several hearings on discovery disputes, the documents which the parties sought to use at trial were admitted into evidence, and the parties were sufficiently prepared for trial.
Another dispute arose early in the short representation about whether Mr. Lykins was making the agreed upon monthly payments to Mr. Daniels. Mr. Daniels mistakenly wrote to Mr. Lykins that he was supposed to be paying $1500 every two weeks. Exhibits C and H (letters dated February 22 and March 5, 2002 respectively). Exhibit H also stated that Mr. Daniels was withdrawing from the representation unless he received timely payment and answers to his written questions, and in fact filed the motion to withdraw that day (March 5). During what was apparently a heated telephone conversation between the two about March 9, Mr. Daniels implicitly or explicitly conceded the billing error, although he did not put that concession in writing. He openly conceded the error during his testimony. This error in itself did not harm the estate; the fact that it generated such anger between the parties was a symptom rather than the cause of the bad personal relationship that already existed between the two.
Mr. Lykins objected to the withdrawal of Mr. Daniels as counsel for the estate, based on advice he got from Mr. Leshin to the effect that this was the only way for Mr. Lykins to get his money back, and it would buy Mr. Lykins more time to do the schedules himself. In addition, Mr. Lykins did not understand that a court order was necessary to allow the withdrawal. (None of these grounds were cited in the objection.) While the Court will not comment on the dubiousness of the advice from Mr. Leshin, who was not at the hearing to detail what he told Mr. Lykins, the effect of the objection was to cause Mr. Daniels to continue to represent the estate until the withdrawal order was entered following the preliminary hearing at which Mr. Lykins withdrew his objection. Mr. Daniels therefore should be paid for the work done during that period. One of the disputes between the parties was in essence a semantic one. At the outset of his testimony, Mr. Daniels characterized his representation of the Debtor/ estate as adequate. Mr. Lykins characterized the term adequate as the equivalent of mediocre or fair, as in midway on a scale between excellent or good at the top and poor or inadequate on the bottom, and argued that Mr. Daniels had admitted that his representation of the estate was not up to the standards of professionalism as later described by Mr. Daniels (to include competence, courtesy, truthfulness and reliability) during an exchange about ethics and professionalism. Mr. Daniels subsequently clarified that his use of the term adequate was intended to convey representation sufficient to get the job done well, and later testified that he had performed the representation to the best of his ability. The Court finds Mr. Daniels representation was professional and competent (to the extent he was able to perform in the circumstances), and that there was no malpractice or malfeasance.
To adequately inform itself of the facts of this dispute, the Court has examined the entire case file. The Court has also reviewed the trial exhibits and its notes of the testimony at trial. Based on that information, and on this judges experience on the bench for over four years and earlier as a bankruptcy lawyer for about twenty years, the Court can make several observations.
To begin with, chapter 11 expenses are usually considerable, even (or especially) those expenses incurred in just getting the case started. Mr. Lykins testified that he had available from his personal income a total of $3,000 per month for counsel fees for the two cases, and allocated $1,500 per month for each case. Overall, a fee of about $3,000, plus gross receipts tax and costs for a total of about $3200, for two months of work is quite inexpensive.
Given his experience (16 years practicing bankruptcy), his demonstrated efficiency and competence in the Code, the rules and how they work, and his ability to work as a problem solver instead of a litigator (all as observed by the Court over the last four years), Mr. Daniels rate of $150.00 per hour is quite reasonable. Attorneys practicing in this District with skills and abilities comparable to those of Mr. Daniels routinely charge $175.00 per hour and more. Mr. Daniels rate is a factor that the Court takes into account in determining whether and how much the work done ought to be compensated.
What the Debtor/ estate got for the money was draft schedules and statements (which ordinarily require a lot of work), attendance at two § 341 meetings together with letters to creditors after Mr. Lykins told Mr. Daniels he would not be appearing for the first rescheduled § 341 meeting, an objection to the United States Trustees motion to dismiss (docs 22-23 and doc 32 respectively), an objection to Capital ¼ Page 12 of 15 Concepts stay motion (docs 5 and 13 respectively) and an appearance at the preliminary hearing on that motion, arrangements to set aside the state court judgment entered post petition, dealing with administrative issues such as the employment of Darryl Cordle, the motion and order for employment and the fee application, and other miscellaneous items. The estate got its moneys worth.
Mr. Daniels testified that he prepared the bills in this case from contemporaneous time records that he kept in the ordinary course of his practice, that he reviewed every time entry, that he did all the legal work, that the cost itemization was prepared from contemporaneous time records, and that all the work and the costs were needed to prosecute the chapter 11. In the course of this dispute, at Mr. Lykins request, the Court examined in camera (privately) the underlying daily time sheets from which Mr. Daniels prepared his billings in this case. On those sheets, time for this case and other cases was recorded. The time records appear to have been created and maintained in a manner comparable to how other firms create and maintain billing records, with the exception that Mr. Daniels daily time sheets are not on preprinted forms and were not entered by him on a computer.
The Court has no reason to doubt the accuracy of the entries or that the work was actually done, and there was no evidence, including no testimony from other persons, that the work was not done, the reported conversations did not take place, Mr. Daniels did not appear at a 341 meeting, etc. Furthermore, there was no evidence or even a suggestion in the time records that Mr. Daniels was "double billing" two clients for the same time intervals or collectively charging an excessive number of hours in any given day.
For the most part, therefore, the Application should be approved as submitted. The exception is the first 1.3 hours billed by Mr. Daniels. On February 5, 2002, Mr. Daniels billed one hour for conferring with Mr. Lykins and three tenths of an hour for conferring with Mr. Leshin. No one has disputed that the time was incurred or that it was necessary and reasonable for the prosecution of the chapter 11 case. The problem is that the employment application was not filed until February 14, 2002. Although there continues to be an ongoing debate between the Court (that is, this judge) and several counsel in this District about whether such time should be compensated, it continues to be the position of this judge that time incurred prior to the filing of an employment application can be compensated only in exceptional circumstances. See In re Albrecht, 233 F.3d 1258, 1260 Cir. 2000). No such circumstances were shown to exist in this case; indeed, neither of the parties even addressed the issue at all. The Court is raising this matter on its own because of the importance of the policy; therefore the Debtors failure to raise this objection will not be considered a waiver of the objection. The Application will therefore be reduced by the sum of $206.33 (1.3 hours x $150 per hour = $195, + tax at 5.8125% = $11.33.)
Conclusion
Despite the conflict between Mr. Lykins and Mr. Daniels, there is no question that Mr. Daniels complied with the contract and that the estate and the Debtor received good value for the dollar. Thus, the Court will enter an order allowing the application in the amount of $3,146.66, which is 19.3 hours at the rate of $150 per hour = $2,895.00, plus costs of $78.81, plus New Mexico gross receipts tax of $172.85 (5.8125% of $2,973.81). This sum shall constitute an administrative expense of this chapter 11 case, subject to payment on confirmation to the extent not paid before confirmation. 11 U.S.C. § 1129(a)(9). Mr. Daniels will also be authorized to draw down any retainer to pay the remainder of the claim.