Opinion
MEMORANDUM DECISION REGARDING TRUSTEE'S FINAL ACCOUNT; FEE APPLICATION OF TRUSTEE'S ACCOUNTANT; AND FEE APPLICATION OF TRUSTEE'S COUNSEL
ARTHUR S. WEISSBRODT, Bankruptcy Judge.
Before the Court is the final account of chapter 7 trustee Carol Wu ("Trustee") as well as requests for approval of the first and final fee applications of Trustee's accountant, Kokjer, Pierotti, Maiocco & Duck, LLP ("Accountant"), and Trustee's counsel, Goldberg, Stinnett, Davis & Linchey ("Counsel"). Debtor, Dr. Amr Mohsen ("Debtor"), acting pro se, and Debtor's former chapter 11 counsel, David Levin, Esq. ("Attorney Levin") both object to the fee applications of Accountant and Counsel. Attorney Levin further objects to Trustee's fee application.
This Memorandum Decision constitutes the Court's findings of fact and conclusions of law, pursuant to Rule 7052 of the Federal Rules of Bankruptcy Procedure.
Factual Background
The following factual summary provides an overview of this bankruptcy case to provide context for the pending fee applications. Additional facts pertaining to the various objections to the fee applications are set forth below as necessary to the discussion of a specific objection.
Debtor, who has a PhD. in electrical engineering and applied science, is the founder, former chairman and CEO of Aptix Corporation ("Aptix"), a high-tech company. In the late 1990s, Aptix sued a rival company for patent infringement in federal district court. After the district court found that Debtor had engaged in the falsification and fabrication of evidence, a judgment of more than four million dollars was entered against Aptix.
In March 2003, the United States Attorney charged Debtor with various criminal offenses, including perjury and falsification of evidence, arising out of the Aptix patent litigation. In March 2004, Debtor was incarcerated pending trial on those charges and remains incarcerated through the present day due to Debtor's January 2007 conviction.
In April 2004, just after Debtor entered prison, Aptix filed a voluntary chapter 11 bankruptcy petition. Aptix's assets were sold, and the case converted to chapter 7. In March 2006, the Aptix bankruptcy was closed. Due to foreclosure proceedings against Debtor's home in Los Gatos, California, on February 8, 2005, Debtor also filed this individual chapter 11 case. Washington Mutual Bank and Silicon Valley Bank, the holders of the 1st and 2nd deeds of trust on Debtor's home, quickly sought relief from stay to continue foreclose proceedings against Debtor's residence. Debtor opposed relief. On June 29, 2005, following an evidentiary hearing, the Hon. James R. Grube granted Silicon Valley Bank relief from stay effective October 1, 2005, which provided Debtor with ninety days to sell his home.
In July and August 2005, Debtor filed two adversary proceedings. In the first, Debtor sought damages from Polytex Corporation ("Polytex") related to the return of three oriental rugs. The second action sought recovery of insurance proceeds from State Farm Fire and Casualty Company ("State Farm") related to fire damage that Debtor's residence had sustained sometime before Debtor filed for bankruptcy relief.
After Debtor failed to locate a buyer within the time that the bankruptcy court had allotted, Debtor lost his home to foreclosure. With the estate's main asset gone, the United States Trustee ("UST") moved to convert Debtor's case from chapter 11 to chapter 7, and Debtor filed a competing motion to dismiss the case. In December 2005, following a combined hearing on both motions, Judge Grube ordered the case converted to chapter 7 and denied Debtor's motion to dismiss. Trustee was appointed on December 22, 2005. The court approved appointment of Counsel on January 12, 2006 and of Accountant on January 26, 2006. Since conversion to chapter 7, Debtor has represented himself
Almost immediately, Trustee and Counsel began to investigate what assets existed that might be recoverable for the estate. In January 2006, Trustee sought and obtained permission to conduct Rule 2004 examinations of Attorney Levin and Debtor's son, Ehab Mohsen, who was acting as Debtor's attorney-in-fact. On March 20, 2006, Trustee filed an adversary proceeding to object to Debtor's discharge, which will be discussed in more detail below. On May 31, 2006, Trustee filed a motion to disqualify Attorney Levin as Debtor's counsel based on an asserted conflict of interest and to require Attorney Levin to disgorge any fees received from Debtor's estate. Following Judge Grube's retirement, the Hon. Roger L. Efremsky heard and denied the motion to disqualify but directed Attorney Levin to disgorge $4,480 in fees received in connection with representing a company that Debtor owned, which claimed an interest in certain funds held by Debtor's estate. In September 2006, Trustee filed a second adversary proceeding that sought a judicial declaration that assets of three entities that Debtor controlled constituted property of Debtor's estate.
In Spring 2007, after completing an investigation into the merits of the two adversary proceedings that Debtor had filed during the chapter 11 case, Trustee moved to abandon the suit against Polytex and to compromise the suit against State Farm. The motion to abandon was unopposed and granted. Judge Efremsky approved the compromise with State Farm over Debtor's opposition. On appeal, the bankruptcy appellate panel upheld the court's approval of the compromise.
In Fall 2010, this case was re-assigned to the Hon. Stephen L. Johnson, but Judge Johnson recused himself due to previous involvement with Mohsen's criminal matters while Judge Johnson was an Assistant United States Attorney. As a result, in Spring 2011, this case was re-assigned to this Court. The case remains open, and Debtor has not yet received a discharge.
I. TRUSTEE'S FINAL ACCOUNT AND REQUEST FOR COMPENSATION
Under § 326 of the Bankruptcy Code, the Court may allow a trustee reasonable compensation for services rendered, not to exceed a statutory maximum calculated based on a percentage of the trustee's distributions to parties in interest. 11 U.S.C. § 326(a). Trustee seeks reimbursement of $67.95 in expenses, plus approval of $12,669.09 in fees, which is the statutory maximum based on total distributions of $188,381.82. Trustee's application covers services performed between December 22, 2005 and September 30, 2011.
Attorney Levin objects to awarding the Trustee any compensation because Trustee's statutory fee is based entirely on distributions to Trustee's professionals. Relying on a district court decision in In re Testaverde, 317 B.R. 51 (E.D.N.Y. 2004), Attorney Levin argues that distributions to professionals do not qualify as distributions to "parties in interest" for the purpose of calculating Trustee's commission under § 326(a). Trustee responds that courts have universally rejected or ignored the Testaverde decision and, by way of example, points to In re Kohl, 421 B.R. 115 (Bankr. S.D.N.Y. 2009)(Glenn, J.); In re Vona, 333 B.R. 191 (Bankr. E.D.N.Y. 2005)(Bernstein, J.); and In re Nardelli, 327 B.R. 488 (Bankr. M.D. Fla. 2005)(Jennemann, J.). Trustee further asserts that the local practice in courts throughout the Northern District of California, including this Court, is to allow trustees to include distributions to professionals for purposes of calculating a trustee's commission. Trustee urges this court not to alter local practice based on non-binding authority from the Eastern District of New York.
In Testaverde, a district court affirmed a bankruptcy judge's decision to exclude payments to the trustee's legal counsel from the amount of distributions used to calculate the maximum commission that the trustee could receive. The district court reasoned that Congress had changed the language in § 326 to limit the type of distributions on which trustees' compensation is based. Previously, § 326 had included distributions to "any persons" for purposes of calculating trustee compensation, but the statute now provides that compensation is based on the distributions to "parties in interest." The Testaverde court concluded that a trustee's professionals are not "parties in interest" because they do not have pecuniary interests that are directly affected by the bankruptcy case. Testaverde, 317 B.R. at 55-56.
Subsequently, the bankruptcy court in Kohl, following the analysis of the Vona court, reached the opposite conclusion. As the Kohl court explained:
The court in Vona looked to the language of the statute surrounding the term "parties in interest" and the interplay of sections of the Bankruptcy Code to demonstrate that the attorney's fees and other administrative claims should be included when calculating a trustee's commission. By including the word "including" in the statute, the court reasoned that Congress intended a broad interpretation of the statute and not one cabined to the dictionary definition of "parties in interest." The court noted that section 726 of the Code requires a trustee to make distributions from the estate in priority order, including distributions to the trustee's professionals. Under this logic, a trustee's professionals clearly have an interest in the distributions from an estate, as they are second in line to be paid from the liquidation of the estate. Thus, for purposes of section 326 they should be considered parties in interest and distributions to these entities should be included when calculating the trustee's commission.
Kohl, 421 B.R. at 130 (internal citations omitted).
The Court has reviewed the district court decision in Testaverde as well as the cases cited by Trustee and finds the analysis in Vona and Kohl to be more persuasive. There is no reasoned basis for distinguishing between distributions to pay other administrative expenses, which are included as part of Trustee's commission calculation, and distributions to pay the trustee's professional fees, which under Testaverde, are not. Trustee's professionals have a pecuniary interest in the bankruptcy estate to the same extent as any other administrative claimant. Accordingly, Attorney Levin's objection to Trustee's fee application is overruled.
II. ACCOUNTANT'S FEE APPLICATION
Accountant seeks an award of $36,562.00 in fees and $115.62 in expenses for services performed during the period from January 19, 2006 through June 2, 2011. Both Debtor and Attorney Levin object to Accountant's request.
First, Debtor asks the Court to limit Accountant's fees to $2,642 - the amount incurred for preparing the bankruptcy estate's tax returns. Debtor argues that the January 26, 2006 order approving Accountant's employment ("Employment Order") specifically limited Accountant's work to tax return preparation. The plain language of the Employment Order, however, makes it clear that it relates to more than tax return preparation. The Employment Order states that Accountant is authorized to perform "accounting services on a general basis, and specifically for services to be rendered to advise the Trustee regarding the preparation of the bankruptcy estate's tax returns." See Employment Order at page 2, line 1, Docket No. 169]. In light of the specific reference to tax returns, the additional reference to "accounting services on a general basis" is clearly intended to include something more than tax return preparation. The Court finds that the Employment Order does not limit Accountant's authorized tasks to the filing of post-conversion tax returns for the bankruptcy estate. Debtor's objection on this basis is overruled.
Second, Debtor asserts that if the Accountant's services include preparing Debtor's tax returns for pre-bankruptcy tax years 2001-2004, those services should be denied as unnecessary because Debtor previously had a different accountant prepare the income tax returns for those years. The declaration of Richard Pierotti ("Pierotti Declaration"), one of Accountant's principals, attests that Accountant did not request fees for tax return preparation related to pre-bankruptcy tax years. Debtor's objection on this basis is overruled as moot. Pierotti Supp. Decl. dated Nov. 10, 2011 at ¶ 4.
Next, both Attorney Levin and Debtor object to $15,208.50 in fees that Accountant requests for a forensic accounting related to certain entities and accounts that Debtor owned or controlled pre-petition. By way of background, Debtor's bankruptcy schedules, as amended in June 2005, show that Debtor owned or controlled several distinct entities. Debtor was the founder and majority shareholder of Aptix and was the managing member of Advanced Investment Management, LLC ("AIM LLC"), a Delaware Limited Liability Company that Debtor formed in May 2001. Debtor also owned and controlled Advanced Information Management, Inc. ("AIM Inc."), a technology company formed under Egyptian law that did business in Egypt from 2001 to 2005. Hereafter, AIM LLC and AIM Inc. collectively will be referred to as" the AIM Entities." Additionally, Debtor held title to certain family assets through a revocable family trust, known as Star Trust, that Debtor established in 1982. Star Trust was revoked in early 2005, shortly after Debtor filed this bankruptcy case. Also, between 2001-2004, Debtor maintained over a dozen Morgan Stanley brokerage accounts. The accounts were held in the names of Debtor, Star Trust, AIM LLC, Debtor's children and Debtor's sister.
As set forth in the Pierotti Declaration, Debtor failed to maintain adequate books and records for ATM LLC as well as the Star Trust. Moreover, a substantial number of transfers occurred between brokerage accounts of the AIM LLC, Debtor and Debtor's family. As a result, Trustee could not determine whether the AIM Entities or Star Trust held assets that could be recovered for the benefit of Debtor's creditors. Trustee asked Accountant to look into the pre-petition financial transactions among these entities.
Debtor objects to the fees related to Accountant's investigation because, Debtor asserts, Accountant was never authorized to perform work for the AIM Entities or Star Trust. Contrary to Debtor's assertions, however, the evidence indicates that the forensic accounting was not performed for the benefit of the AIM Entities or Star Trust. Rather, the forensic accounting services were performed on behalf of Trustee and were necessary to determine if assets existed that could be recovered for the benefit of Debtor's creditors. This basis for Debtor's objection is overruled.
Attorney Levin argues that the fees incurred for the forensic accounting were not necessary to the administration of the bankruptcy estate because, before any forensic work was required, Trustee, in a separate adversary proceeding, obtained a default judgment finding that the AIM Entities were Debtor's alter ego and that the AIM Entities' assets were part of Debtor's estate. Even if the work was necessary, Attorney Levin asserts that Accountant should have scaled back the investigation because the recovery for the estate was only $90,407 and spending $15,208 to investigate was unreasonable.
Under Bankruptcy Code § 330, an applicant's services are compensable if those services were "necessary... or beneficial at the time at which the service was rendered, " and an applicant's services are not compensable to the extent that applicant's services were not "reasonably likely to benefit the debtor's estate." 11 U.S.C. § 330(a)(3)(A), (C) and (a)(4)(A)(ii)(I). To meet this standard, an applicant need only demonstrate that the services provided were "reasonably likely" to benefit the estate at the time the services were rendered. In re Mednet, 251 B.R. 103, 108 (9th Cir. B.A.P. 2000).
Attorney Levin's assertion that a June 13, 2007 default judgment in Trustee's favor rendered the forensic accounting unnecessary is not convincing. Accountant incurred the fees related to the forensic accounting between January 31, 2006 and January 21, 2007. See Time Summaries attached to Accountant's Application for Compensation, Docket No. 320. The default judgment did not exist until several months after the forensic accounting was complete.
Additionally, the fees related to the forensic report survive a cost/benefit analysis. Attorney Levin acknowledges that the forensic review resulted in Trustee obtaining a default judgment against the AIM Entities worth approximately $90,000 to Debtor's estate - $22,400 related to AIM Inc.'s claim in the Aptix bankruptcy and $68,407 related to AIM LLC's investment interest in Get2chip.com, a company that subsequently merged with Cadence Design Systems ("Cadence"). The Court does not find that spending $15,208 to uncover $90,407 in assets - a cost of approximately 16% of the recovery - is unreasonable. Moreover, under Mednet, the relevant question is whether the services were reasonably likely to benefit to the bankruptcy estate at the time that the services were rendered. Id. As Counsel and Accountant explained in declarations, Debtor's pre-petition wealth, Debtor's history of deceit and the absence of adequate records raised significant concerns as to whether substantial assets might be hidden. See Pierotti Supp. Deck dated Nov. 10, 2011 at ¶ 6; Davis Deck dated Apr. 23, 2012 at ¶ 3. Trustee was entitled to test the validity of those concerns. The amount of assets at issue could not be known until the forensic accounting was completed. Pierotti Supp. Decl. dated Nov. 10, 2011 at ¶ 6. Looking forward, the forensic accounting was reasonably likely to benefit the estate.
A review of Accountant's specific time entries further confirms that Accountant's fees related to the forensic accounting were both reasonable and necessary. Between January 31, 2006 and March 24, 2006, Accountant spent approximately 31 hours, incurring fees of $9,641 to analyze 21 Morgan Stanley brokerage accounts over a four year period. As part of this analysis, Accountant examined the funding of AIM LLC, records regarding private equity investments, records regarding partnership investments and the various transfers between the brokerage accounts and other family investments. In light of the complexity of Debtor's affairs, these hours are reasonable. In August 2006, after Counsel received documents subpoenaed from Bank of America, Accountant incurred another $4,265.50 in fees to reconcile the information received from Bank of America with the information regarding the 21 Mortgage Stanley accounts. This work led to Trustee's complaint against the AIM Entities filed in September 2006. Thereafter, Accountant incurred only small amounts related to Accountant's forensic work: $434 on October 5, 2006 to trace partnership distributions into personal accounts and $868 in January 2007 to review additional financial records and brokerage statements. Based on an analysis of Accountant's time records, the Court finds that the the forensic accounting substantially contributed to the Trustee's action against the AIM Entities and Star Trust and, as a result, the related fees were reasonably likely to benefit to the bankruptcy estate at the time that the services were rendered and should be allowed in full. The objections of both Debtor and Attorney Tevin related to the forensic accounting are overruled.
Debtor next contends that all of Accountant's services were complete on February 26, 2007 when Accountant filed what Debtor characterizes as a "work completion report." Debtor argues that all subsequent work unrelated to tax return preparation was unauthorized. This argument lacks merit. The February 26, 2007 report is an expert report that Accountant prepared in connection with Trustee's adversary proceeding to deny Debtor's discharge. The report does not constitute evidence that Accountant's work had been completed or that Accountant's services had ended. Debtor's objection on this basis is overruled.
Finally, Attorney Levin contends that fees of $9,462 that Accountant incurred to prepare an expert report in support of Trustee's complaint objecting to Debtor's discharge were neither necessary nor beneficial to the bankruptcy estate. The Court will address this contention below, together with the analysis of Counsel's fees related to the same complaint objecting to Debtor's discharge.
III. COUNSEL'S FEE APPLICATION
Counsel asks the Court to approve fees in the total amount of $134,128.50 and expenses in the amount of $11,172.73 for the period December 27, 2005 through March 8, 2011. Debtor and Attorney Levin object to fees related to several specific project categories. Each project category is addressed separately below.
A. Motion to Disqualify Attorney Levin
Counsel seeks approval of $14,574 in fees incurred in connection with Trustee's motion to disqualify Attorney Levin ("DQ Motion"). Attorney Levin objects and asks the Court to disallow all but $1,493 associated with this project category. In support of his objection, Attorney Levin asserts that the DQ Motion was unnecessary because 1) the UST could have challenged Attorney Levin's qualification to serve as Debtor's counsel but did not, and 2) Trustee could have administered the chapter 7 estate without filing the DQ Motion. Attorney Levin further contends that the fees associated with the DQ Motion did not benefit the estate because the requested $14,574 in fees led to a recovery of only $4,480 for the estate. Levin proposes that Counsel's fees in this category be limited to one third of the value recovered.
In reviewing the necessity and reasonableness of fees, courts consider the nature, extent and value of the professional's services. 11 U.S.C. § 330(a)(3)(A). This standard does not require an applicant to show that the services resulted in a material benefit to the estate before compensation is appropriate. Mednet, 251 B.R. at 108. Rather, as previously discussed, the applicant need only demonstrate that the services were "reasonably likely" to benefit the estate at the time the services were rendered. Id.
Additional facts considered by the Court are as follows: Soon after Trustee's appointment, Counsel reviewed emails exchanged between the UST's office and Attorney Levin where the UST expressed concern that Attorney Levin was acting on behalf of both Debtor and AIM Inc. As a result, in January 2006, when Attorney Levin filed his second fee application, seeking $37,912 in fees - in addition to $47,135 Attorney Levin had been paid with respect to Attorney Levin's first fee application - Trustee objected by asserting, in part, that Trustee was investigating whether Attorney Levin had an undisclosed conflict of interest that would disqualify Attorney Levin from receiving compensation. On May 31, 2006, Counsel filed Trustee's motion to disqualify Attorney Levin. Trustee contended that in seeking approval of employment, Attorney Levin had misrepresented his disinterestedness to the court because in June 2005, Attorney Levin was simultaneously representing Debtor's estate and a conflicting interest of AIM Inc. Specifically, in June 2005, while Attorney Levin was Debtor's chapter 11 counsel, Attorney Levin filed a $51,000 administrative expense claim in the Aptix bankruptcy on behalf of AIM Inc. AIM Inc. and Debtor had competing claims to funds from the Aptix bankruptcy because Debtor had a $97,000 claim against ATM Inc. Ultimately, Aptix and AIM Inc negotiated a compromise of the administrative claim for $24,400. But, to allay the UST's concerns about the conflict of interest between Debtor and AIM Inc., AIM Inc. agreed that any funds from Aptix would be held by Debtor's estate pending a determination of ownership of the funds. According to the DQ Motion, despite the agreement with the UST, Attorney Levin acted contrary to Debtor's interests by deducting $4,480 from the total transferred to Debtor's estate and transmitting the $4,480 to Attorney Levin's general account as payment under Attorney Levin's contingency fee agreement with AIM Inc. The DQ Motion requested disqualification of Attorney Levin, denial of all fees requested, and disgorgement of all fees already paid to Attorney Levin.
After briefing and oral argument, the bankruptcy court (Judge Efremsky) denied the motion to disqualify because the court was not persuaded that Attorney Levin had intentionally misrepresented the absence of any conflict of interest. Rather, the court accepted that Attorney Levin may not have appreciated the extent of the conflict based on Attorney Levin's dual representation of AIM Inc. and Debtor. While the court did not believe complete disqualification was appropriate, it is plain that the court was concerned about Attorney Levin's representation of both Debtor and AIM Inc. The court expressed hope that Attorney Levin had learned from this experience and understood that, going forward, conflicts must be thoroughly weighed and considered. The court suggested that Attorney Levin should have worked through the arrangement with his two clients and brought the arrangement to the court's attention before engaging in any further representation. Ultimately, the court required Attorney Levin to return the $4,480 in funds that Attorney Levin had retained as payment of Attorney Levin's contingency fee for representing AIM Inc.
At the time the motion to disqualify was filed, Attorney Levin had already received $47,539.60 in fees and expenses pursuant to Attorney Levin's first interim fee application. Additionally, the Court had approved over $38,000 in fees and expenses pursuant to the second interim application that remained unpaid. Looking forward, the DQ Motion, if successful, could have recovered over $85,000 for Debtor's estate. Under that scenario the $14,574 in fees charged by Counsel would not have been unreasonably large - about 17% of the total recovery. According to Counsel's most recent declaration, at the time the DQ Motion was filed it was difficult to perform a cost-benefit analysis of the DQ Motion because Attorney Levin was not forthcoming with information related to his conflict of interest. Nevertheless, before the DQ Motion was filed, Trustee had some evidence that Attorney Levin had acted in his own interest and in the interest of ATM Inc. to the detriment of Debtor's estate and that Attorney Levin had failed to fully disclose his connections with AIM Inc. Moreover, the Ninth Circuit has held that, under the Bankruptcy Code and Rules, full disclosure of counsel's connections is strictly construed and is a prerequisite to receipt of compensation. See, e.g., Neben & Starrett, Inc. v. Chartwell Fin. Corp. (In re Park-Helena Corp.), 63 F.3d 877, 880-81 (9th Cir. 1995). As a result, Counsel and Trustee had reason to believe that the motion to disqualify could reasonably result in a significant recovery for Debtor's estate.
Moreover, according to Counsel's supplemental declaration, Trustee and Counsel believed the DQ motion had benefits beyond any potential monetary recovery. Trustee and Counsel wanted to prevent Attorney Levin from using information gained as Debtor's chapter 11 counsel to defeat Trustee's claims against the AIM Entities. See Davis Decl. dated Apr. 23, 2012 at ¶ 7.
While, ultimately, the DQ Motion only resulted in a $4,480 return for Debtor's estate, at the time the services were rendered, the motion was reasonably likely to benefit Debtor's estate through a significant monetary recovery. It is apparent from Judge Efremsky's comments on the record, that Attorney Levin's representation of both Debtor and AIM may have actually constituted a conflict but that the court was unwilling to disqualify Attorney Levin without further proof that Attorney Levin had understood the extent of the conflict. Based on all of these circumstances and for the reasons explained, the Court finds that Counsel's fees for the motion to disqualify were reasonably likely to benefit to the bankruptcy estate at the time that the services were rendered. Attorney Levin's objection based on necessity and benefit to the estate is overruled.
Nevertheless, Counsel's belief that the DQ motion would result in a substantial recovery for the estate did not give Counsel free reign to devote many hours to a project that should have been accomplished in much less time. Attorneys have a duty to exercise good billing judgment when they apply for fees. Hensley v. Eckerhart, 461 U.S. 424, 437 (1983). Hours that are excessive in relation to the task accomplished are not reasonable and should be excluded from fee applications. See 11 U.S.C. § 330(a)(3)(D) and (a)(4)(A). In deciding whether time spent is excessive, the court must consider factors such as the skill and experience level of the practitioner, as well as the complexity, importance and nature of the task at hand. Id. at § 330 (a)(3)(D) and (E).
After reviewing Counsel's time records, the Court concludes that the time spent to research and draft the DQ Motion was excessive. Between April 7, 2006 and May 31, 2006, two attorneys spent nearly 20 hours, incurring $7,820.50 in fees, to prepare and file the DQ Motion. It should be noted that the applicant is a well-known firm in the San Francisco Bay Area, and the primary attorney handling this matter is a seasoned attorney with substantial bankruptcy experience. The primary attorney appears to have been assisted by a fourth or fifth year associate. The DQ Motion, while potentially important, was not particularly complex. The motion included a two page summary of facts and merely five pages of legal argument. The DQ Motion is supported by a two page declaration with multiple exhibits attached. In light of the experience of counsel, the hourly rates charged and the nature of the task at hand, it appears that Counsel allowed an excessive amount of time to be allocated to this project. In light of those factors, the Court concludes that twelve hours Of a senior attorney's time should have been more than ample to research and draft the motion, along with the supporting declaration and will reduce Counsel's fees in this project category by $2,200.00.
B. Litigation Against Star Trust and the AIM Entities
Counsel further incurred $44,283 in fees for services related to claims that Trustee asserted against Star Trust and the AIM Entities. Attorney Levin asks the Court to reduce the allowable fees to $30,265, and Debtor contends that Counsel should not receive any fees in connection with this litigation.
When this case converted to chapter 7, Debtor claimed that $51,000 of the funds from the debtor in possession account that were turned over to Trustee, were held in trust for the AIM Entities. This amount included the amount discussed above received in connection with AIM Inc.'s administrative claim in the Aptix bankruptcy. Counsel assisted Trustee with investigating the ownership of the funds and whether other assets existed that could be recovered. These efforts included reviewing records from various entities and conducting Rule 2004 exams of Attorney Levin and Ehab Mohsen, the trustee of Star Trust. The investigation uncovered $68,407 that Trustee recovered from Cadence, but again Debtor claimed that AIM LLC owned these funds because they represented AIM LLC's investment interest in Cadence.
Although Trustee held the funds, Trustee had to file an adversary proceeding against Star Trust and the AIM Entities to determine ownership of the nearly $120,000 in dispute. The complaint, filed September 26, 2006, sought declaratory relief establishing that: (1) all property of Star Trust became property of Debtor's bankruptcy estate upon the post-petition revocation of Star Trust on March 3, 2005; (2) the AIM Entities were alter egos of Debtor; (3) AIM LLC owned an interest in get2chip, Inc., an entity that merged with Cadence, and is now the owner of any distributions due from that merger as well as any resulting stock in Cadence; and (4) all assets of Star Trust and the AIM Entities are assets of the bankruptcy estate,
Star Trust answered the complaint, and discovery with Star Trust ensued. Meanwhile, in January 2007, Attorney Levin, acting as counsel for the AIM Entities, filed a motion asking the court to require Trustee to release $20,000 of the disputed funds so the AIM Entities could retain counsel to defend the adversary proceeding. Counsel researched and prepared opposition to that motion arguing that there was no evidence suggesting that the AIM Entities had any claim to the funds and that Attorney Levin was representing an adversary of the estate without obtaining Debtor's waiver of that conflict. The bankruptcy court denied the request to release funds on February 8, 2007.
Although Debtor, individually, filed a "response" to Trustee's complaint on behalf of the AIM Entities, which "answered" Trustee's allegations, Trustee moved to strike the answer and to default the AIM Entities because Debtor, who is not an attorney, could not properly appear and act on behalf of the AIM Entities. Debtor filed a competing motion to dismiss Trustee's complaint or, alternatively, to reconsider the decision not to release funds to retain counsel. Counsel prepared Trustee's opposition to the motion to dismiss again asserting that Debtor was not authorized to act on behalf of the AIM Entities. By order of May 8, 2007, the bankruptcy court granted Trustee's motion to strike the answer that Debtor had filed on behalf of the AIM Entities, directed the clerk to enter the default of the AIM Entities, denied Debtor's motion to dismiss for lack of jurisdiction and denied the motion for reconsideration of the request to release funds. Counsel then prepared a request for entry of default judgment supported by declaration, deposition testimony and other documents establishing grounds for relief. On June 13, 2007, the court entered a default judgment against both of the AIM Entities.
Debtor filed two separate appeals to the bankruptcy appellate panel ("BAP"), one of the Court's May 8, 2007 order and one from the default judgment. Counsel prepared Trustee's motion to dismiss the appeals. Before the BAP dismissed Debtor's appeals, Debtor filed multiple pleadings with BAP, including a motion to appoint counsel to which Counsel prepared opposition. By the time of the BAP's August 14, 2007 dismissal of the appeal as interlocutory, Counsel had incurred approximately $30,000 in fees related to pre-complaint investigation, preparation of the complaint, prosecution of the adversary proceeding with respect to Star Trust, motion practice with respect to the AIM Entities and defending Debtor's appeals of the bankruptcy court rulings.
The closing of the adversary proceeding, following the BAP's dismissal of the appeal, did not deter Debtor. In August 2008, more than a year after the Court entered judgment and eight months after the adversary proceeding was closed, Debtor filed a motion with this Court to set aside the June 13, 2007 default judgment. For the first time, Debtor argued that Debtor had standing to defend against the complaint based on Debtor's status as a manager and/or director of the AIM Entities. Debtor contended that he could be liable to individual shareholders of the AIM Entities and, therefore, had been injured directly and independently when Trustee seized assets of the AIM Entities. On September 23, 2008, Debtor also filed a motion to impose disciplinary sanctions on Counsel for allegedly violating the rules of professional conduct due to inappropriate contact with Debtor's son. Counsel prepared thorough but succinct opposition to both motions explaining Debtor's lack of standing to seek reconsideration, the untimeliness of the requested reconsideration, the absence of any breach of the rules governing professional conduct and the lack of authority to impose the requested sanctions. Thereafter, Debtor sent letters to the court and filed supplemental declarations which necessitated Counsel's preparation of a reply brief. Judge Efremsky heard argument on both of Debtor's motions on January 22, 2009. By written order entered January 26, 2009, the Court denied both motions. Debtor requested reconsideration, and Counsel prepared a short opposition reiterating Debtor's lack of standing. On April 30, 2009, Judge Efremsky denied Debtor's motion to reconsider. Counsel devoted approximately $6,000 of time to this post-judgment motion practice.
On May 15, 2009, Debtor filed another appeal with the BAP. This time Debtor took issue with Judge Efremsky's orders denying Debtor's motions to set aside the default judgment, to impose sanctions against Counsel and to reconsider the Court's denial of the first two motions. Counsel prepared a motion to dismiss the appeal as untimely, but continued to monitor various motions that Debtor filed with the BAP. In January 2010, the BAP set a briefing schedule. Counsel spent approximately eight hours preparing Trustee's appellee brief and attended a hearing before the BAP. By a memorandum decision filed on December 21, 2010, the BAP affirmed the bankruptcy court's rulings. The Debtor petitioned for re-hearing, but Counsel did not respond to that motion. After rehearing was denied, Debtor took a further appeal to the Ninth Circuit. Counsel spent less than four hours preparing Trustee's Ninth Circuit brief. The Ninth Circuit appeal remains pending. Counsel has incurred just over $8,000 in fees related to all the appeals of this adversary litigation.
Despite the proceedings described above, Attorney Levin argues that $44,283 is excessive because Counsel did little or nothing to collect the funds from Star Trust and the AIM Entities. According to Attorney Levin, Trustee should have closed the bankruptcy estate, rather than keep it open and defend against Debtor's appeals, because the decision to defend merely used up estate funds and did not benefit the estate. Attorney Levin contends that, at most, one third of the value recovered, or $30,265, is the appropriate award under the reasoning of Unsecured Creditors' Comm. v. Puget Sound Plywood, Inc., 924 F.2d 955 (9th Cir. 1991). Debtor goes further and contends that no fees should be allowed with respect to the litigation against Star Trust and the AIM Entities. Debtor urges that the work was neither necessary nor reasonably likely to benefit the bankruptcy estate because Debtor was only a shareholder of the ATM Entities and, therefore, the assets recovered did not belong to Debtor or Debtor's estate. Debtor further asserts that, under Ahcom, Ltd v. Smeding, 623 F.3d 1248 (9th Cir. 2010), California does not recognize the quasi-after ego cause of action on which Trustee sued the AIM entities. As a result, Debtor urges, Trustee had no standing to sue the AIM Entities, and the Ninth Circuit is likely to reverse the judgment in Trustee's favor.
The Court has reviewed the fee application, Counsel's several declarations in support, the several submissions in opposition and the docket in this litigation. Based on that review, the Court finds that with minor exceptions discussed below, the requested fees are reasonable. While judgment was entered by default, the history of this litigation described above, reveals that the default judgment was not easily obtained and, subsequently, had to be defended against multiple attacks both before the bankruptcy court and on appeal. A review of Counsel's filings establish that Counsel made brief but thorough arguments. There is no indication that Counsel went beyond what was necessary to defend the default judgment.
Moreover, Attorney Levin's reliance on Puget Sound, to suggest a one third contingency-type fee, is unpersuasive. In Puget Sound, the Ninth Circuit found that it was within the bankruptcy court's discretion to calculate and award $6,172 in fees based on a hypothetical 30% contingency fee rather than the traditional $21,000 lodestar amount. The fees subject to challenge in Puget Sound related to work on the unsecured creditor's committee's objection to $120,000 in attorneys' fees paid to a secured creditor. The Ninth Circuit noted that prior to committee counsel's work, the general manager of the committee had advised committee counsel that the fee challenge would not be cost-effective and that the committee did not want to "throw good money after bad." Further, under the relevant loan documents, an award of reasonable attorneys' fees to the secured creditor was mandatory so complete recovery of $120,000 was virtually impossible.
Here, there were no similar contraindications to proceeding with Trustee's litigation against Star Trust and the AIM Entities. Without the litigation, the Trustee risked losing the $120,000 that was in dispute because Trustee would not have clear title to the funds. According to Counsel's most recent declaration, without the funds, the estate was immediately insolvent. See Davis Decl. dated Apr. 23, 2012 at ¶ 5. Counsel believed the documentation establishing Trustee's claims against the AIM Entities and Star Trust was clear and that the litigation would be straightforward. In Counsel's opinion, this type of litigation was not likely to cost more than $15,000. Id. There is no dispute that much of the increased expense arose from Debtor's repeated attempts to reverse the bankruptcy court's finding that the AIM Entities were Debtor's alter egos. Attorney Levin's argument that Counsel should have somehow factored in the cost of Debtor's multiple appeals in performing the initial cost-benefit analysis simply asks for too much hindsight. Counsel cannot be expected to have foreseen that, following a default judgment and the dismissal of the original BAP appeal, Trustee would have to defend yet another motion for reconsideration and two more appeals. Moreover, there is no clear evidence as to whether or when Counsel knew of Debtor's litigious nature, but even if Counsel had been aware, there was little Counsel could do short of abandoning the funds to Debtor, a result that would have been detrimental to the estate. Under these circumstances, there is no basis for imposing a hypothetical contingency fee on Counsel when the parties negotiated, and the court approved, a different fee arrangement.
In reviewing Counsel's time records, however, the Court did find several items that merit some reduction in the requested fees. For example, within this project category, there are time entries totaling approximately 2 hours that represent time spent downloading documents, calendaring deadlines, confirming papers were filed, organizing files, and electronically filing documents. All of these tasks are non-compensable clerical tasks for which a reduction of $950 is warranted. Counsel also billed $625 for 2.5 hours on August 3, 2006 to attend a hearing in Debtor's criminal case. This time does not appear to have any benefit for Debtor's bankruptcy estate and will be disallowed. The total reduction in this project category is $1,575.
C. Trustee's Litigation Against State Farm
When Debtor's chapter 11 bankruptcy case was converted to chapter 7, Trustee substituted in as plaintiff in litigation that Debtor filed, post-petition and pre-conversion, against State Farm. The lawsuit sought recovery of $232,000 in additional insurance coverage that Debtor claimed was owed as a result of substantial pre-petition fire damage to Debtor's residence. Counsel seeks $29,404 in fees related to this litigation. Attorney Levin objects to the fees because Trustee settled the $232,000 claim against State Farm for $30,000 and, after Debtor's $6,075 exemption, the real recovery for the bankruptcy estate is $23,925. As a result, Attorney Levin again urges that the fee award should be reduced to one third of the value of the asset recovered, or $7,974, under In re Strand, 375 F.3d 854, 854 (9th Cir. 2004), and Puget Sound Plywood. Debtor goes further and requests that the Court disallow all fees related to the State Farm litigation. Debtor asserts that incurring over $29,000 in fees to settle Debtor's $418,788 fire insurance claim for $30,000 breached Counsel's duty to exercise billing judgment and, as a result, Counsel should not receive any compensation for this work.
When Trustee substituted in as plaintiff, the State Farm litigation was less than four months old. Although State Farm had filed a general denial of Debtor's allegations, little else had happened. Counsel proceeded to investigate the merits of Debtor's claims through both written discovery and depositions. Ultimately, Counsel concluded that there was no evidence to support Debtor's claim that State Farm owed additional money to Debtor's estate.
In response to the Court's inquiry as to when Counsel knew that there was no evidence to support the claim, Counsel explains that this knowledge accumulated over time. See Davis Deck dated Apr. 23, 2012 at ¶ 6. First, Counsel asked Debtor, through Attorney Levin, to turn over all files related to the State Farm litigation. The documents, consisting of 31 pages, suggested only that Debtor had disagreed with State Farm's evaluation of Debtor's losses, and did not directly support Debtor's claims. While this indicated that Debtor had not supplied Attorney Levin with enough evidence, it did not necessarily indicate that no evidence existed. Id. Counsel prepared requests for production directed to State Farm, reviewed a box of documents related to Debtor's insurance claim that State Farm produced, and attended the depositions of Debtor and Kip Martin, an adjustor that had represented Debtor in his pre-litigation dealings with State Farm. Based on Counsel's declaration filed in support of the application to approve the State Farm compromise, it appears that the deposition testimony of Mr. Martin on October 3, 2006 was the point where Counsel was relatively certain that there was no available evidence to support the pending claims asserted against State Farm. Up through Mr. Martin's deposition Counsel incurred approximately $8,000 in fees for Counsel's investigation into the merits of the claims. This amount is reasonable in that it included written discovery, document review, appearances at several status conferences, ongoing communications with opposing counsel and Trustee and two lengthy depositions.
Over the next four months, Counsel incurred approximately $1,400 negotiating the settlement with State Farm. The time records reflect that this time consists largely of telephonic and email communications with opposing counsel, attendance at court status conferences and multiple communications with Trustee. The time spent negotiating the compromise is not unusually large and appears to be reasonable, especially in light of the fact that it led to a $30,000 settlement in a case where Trustee had no evidence to support the claims.
However, the same cannot be said about the time Counsel spent preparing and prosecuting Trustee's application for court approval of the compromise. Counsel's time records reflect that Counsel spent over 15 hours, incurring approximately $5,000 in fees, to draft the application to approve the compromise and a supporting declaration. This amount of time is clearly excessive in relation to the task. The factual summary was repeated virtually word for word in Counsel's supporting declaration. Moreover, the law related to approving compromises is straightforward and well known. There was no need to spend 15 hours drafting a relatively simple application. Next, Counsel incurred $2000 in time spent reviewing and replying to Debtor's opposition to the compromise. Then, after Judge Efremsky overruled Debtor's objections and approved the compromise, Counsel spent over $800 of time drafting a short written order approving the compromise. All in all, Counsel incurred about $9,000 in fees to prosecute an uncomplicated application to approve compromise in a case where Counsel knew that recovery would be limited to $30,000 and where Counsel had already incurred nearly $10,000 in fees investigating the claims and negotiating the settlement. Based on the nature of the task performed and Counsel's level of experience, the Court concludes that $3,000, approximately ten hours of time, should have been sufficient to obtain an order approving the compromise. The Court disallows $6,000 of the requested fees as excessive in relation to the task performed.
Debtor appealed the order approving the compromise to the BAP. The BAP affirmed the bankruptcy court on March 6, 2008 in a thirteen page decision, which found that the bankruptcy court had made appropriate findings of fact and weighed the four required factors set out in Woodson v. Firman's Fund Insur. Co. (In re Woodson), 839 F.2d 610, 620 (9th Cir. 1988), that those findings of fact were not clearly erroneous, that the bankruptcy court had not ignored Debtor's objections to the compromise, that it was not an abuse of discretion to find the compromise fair and equitable, and that the bankruptcy court did not improperly shift the burden of proof onto Debtor. The Debtor appealed again to the Ninth Circuit, which affirmed the BAP based on a de novo review. Counsel incurred about $5,000 in fees representing Trustee in each of Debtor's two appeals. In most cases, a charge of $5,000 for an appeal would not be out of the ordinary. Here, however, Counsel knew the limits of recovery and the amount Counsel had already billed to this project category. As a result, with respect to the time billed to the BAP appeal, the Court will reduce fees by $1,200, which represents miscellaneous time reviewing various orders, notices and motions to which Trustee had no need to respond. For the same reasons, the Court reduces the fees associated with the Ninth Circuit appeal by $900.
In light of the above analysis, Attorney Levin's plea to limit Counsel's fees to one third of the State Farm settlement's net proceeds to the estate is denied. Counsel performed actual and necessary services to investigate and settle the adversary proceeding. The mere fact that Trustee had to defend against multiple unsuccessful attacks on the court-approved settlement should not be held against Counsel. As with the litigation against Star Trust and the AIM Entities, defense of the settlement was the only means to ensure that the estate would realize any benefit from the State Farm litigation.
Similarly, Debtor's objection that Trustee is not entitled to any fees because Counsel failed to exercise good billing judgment and settled a large claim for too little is overruled. Trustee conducted a reasonable investigation to determine the value of the claim against State Farm. Judge Efremsky ruled that, the $30,000 settlement was fair and equitable, and both the BAP and the Ninth Circuit upheld that ruling. The Court has made appropriate reductions for Counsel's excessive time.
D. Trustee's Objection to Debtor's Discharge
Three months after her appointment as chapter 7 trustee, Trustee filed an adversary proceeding to deny Debtor's discharge ("727 Action"). Trustee's complaint alleged that Debtor either concealed, destroyed, falsified or failed to keep adequate books and records from which his affairs could be ascertained. See 11 U.S.C. § 727(a)(3). Counsel seeks $27,526 for work related to the 727 Action, and as mentioned above, Accountant seeks $9,462.
Debtor and Attorney Levin ask that the Court disallow all professional fees related to the 727 Action - whether charged by Counsel or Accountant. Attorney Levin asserts that Debtor defeated Trustee's 727 Action at trial by a simple explanation that Debtor's records were lost due to Debtor's incarceration and movement between prison facilities before and during Debtor's bankruptcy case. Based on that result, Attorney Levin contends that the 727 Action had no value for the estate that could support either Counel's or Accountant's fee requests. Similarly, Debtor asserts that the fact that Counsel lost at trial against an incarcerated pro se debtor who could only participate for 15 minutes via telephone, demonstrates that Trustee's case lacked merit. As a result, Debtor contends that $27,526.50 in fees constitutes a failure of Counsel's billing judgment to the detriment of the bankruptcy estate.
The Court asked Counsel to provide additional information regarding the benefits that Trustee anticipated from the 727 Action and legal authority concerning the appropriate standard for evaluating professional fees related to the 727 Action because, as the Court noted, an objection to discharge may not benefit the estate in the usual sense of bringing dollars to the estate. Having reviewed the parties' supplemental submissions, the Court finds as follows.
Under the Bankruptcy Code, chapter 7 trustees have an express statutory duty to challenge a debtor's right to receive a discharge, "if advisable." See 11 U.S.C. § 704(a)(6); In re Hugues, 2006 WL 3590253, at *2 (Bankr. D. Idaho, Dec. 8, 2006)(Pappas, J.). As one treatise explains, this duty is imposed on trustees in their capacity as a representative of the estate and, as a result, the duty to oppose discharge should be predicated on whether it will be of substantial benefit to the unsecured creditors holding dischargeable debts. 4 Norton Bankruptcy Law AND PRACTICE § 77:17 (3rd ed, 2008). In deciding whether an objection to discharge will be of substantial benefit, and therefore advisable, the treatise identifies three general factors that trustees should evaluate: 1) whether grounds to object under § 727 exist; 2) whether any creditor has objected to discharge and the probable outcome; and 3) whether creditors will be substantially benefitted by continuing a debtor's liability for pre-petition debt. Id. If an objection to discharge is advisable, then the assistance of attorneys or accountants with respect to the discharge litigation is authorized as necessary to carry out the trustee's statutory duties under § 327(a) of the Bankruptcy Code and § 330(a) authorizes reasonable compensation for actual necessary services. Hugues, 2006 WL 3590253, at *1. Reasonableness of the compensation is determined under the factors set forth in § 330(a) of the Bankruptcy Code. Id. at *2.
In Hugues, a chapter 7 trustee filed an adversary proceeding to revoke debtors' discharge alleging fraud and willful failure to disclose a valuable asset - a horse trailer. Although the court refused to revoke the discharge because the trustee had not demonstrated any intent to defraud, the court subsequently awarded trustee's counsel $2,400 in fees and $193 in expenses related to the adversary proceeding. The court noted that the action had been advisable because the trustee had reason to believe that debtors had not properly disclosed an asset, which the trustee ultimately liquidated for $12,000 for the benefit of the unsecured creditor. As a result, the court concluded that counsel's fees related to the discharge litigation were necessary to carry out the trustee's statutory duties. The court then applied the non-exclusive list of factors set forth in § 330(a)(3) to find that the requested compensation was reasonable. Id.
Here, unlike Hugues, the Trustee has not identified any particular assets that Trustee sought to recover via the 727 Action. Nevertheless, Counsel states that Trustee, Counsel and Accountant all believed that Debtor's claims of poverty were a ruse to allow Debtor to hide assets. As discussed above, Debtor had a history of deceit. Moreover, according to Counsel, at the time the case converted to chapter 7, there was evidence indicating that Debtor continued to maintain a residence in Egypt and, while free on bail, Debtor had been arrested in an airport parking lot with $40,000 in cash and a substitute passport. See Davis Decl. dated Apr. 23, 2012 at ¶ 3. Counsel explains that Debtor's financial affairs were complex. Debtor had controlled millions of dollars flowing through multiple individuals and entities. That complexity, when weighed against the relative dearth of documentation, raised questions in the minds of Counsel and Trustee as to whether Debtor had adequately maintained records, and Counsel believed that Debtor would produce records if faced with a loss of his discharge. This was enough to provide a reasoned basis for a claim under § 727(a)(3) for concealment of, or failure to keep, records. Additionally, no other creditor had objected to discharge and, as Counsel advised at the hearing on these fee applications, the UST had asked Trustee to file the 727 Action. Finally, even though no particular undisclosed assets had been identified, Debtor's history of wealth and untruthfulness gave Trustee a basis for believing that, if Debtor's records were produced, it was likely that additional assets would be exposed and could be liquidated for the benefit of Debtor's creditors. The Court finds these circumstances sufficient to render the filing of the 727 Action "advisable."
However, the Court is not persuaded that the substantial amount of fees incurred for prosecution of the 727 Action through trial was reasonable. Counsel insists that neither Debtor nor Attorney Levin raised the notion that any documents were lost until Debtor made that claim at trial in September 2007. But there is also no evidence that Counsel asked enough questions to rule out lost documents during the discovery process. Despite Counsel's knowledge that Debtor was incarcerated and that Debtor's home had been foreclosed during that incarceration, Counsel appears to have relied on general statements of Debtor, Debtor's son and Attorney Levin regarding the location of "remaining" or "available" records, without following up to determine whether those remaining and available documents constituted the universe of records that had ever existed. Counsel could have posed that question to Debtor by way of deposition, but did not. While Debtor initially was not available for deposition due to the pending criminal proceedings, Counsel concedes that by May 2007, Counsel was aware that the criminal proceeding had ended after Debtor was convicted in January 2007. As a result, Counsel could have sought Debtor's deposition following Judge Efremsky's denial of the parties' cross-motions for summary judgment on May 3, 2007. Instead, Counsel issued a fourth request for production of documents to Debtor on May 11, 2007 and began to prepare for trial. Counsel's explanation for relying on multiple rounds of written discovery is not convincing. Counsel states that "[g]iven Mohsen's arrest for attempting to hire an assassin to kill a District Court Judge, I was leery of having any face to face contact with Mohsen." Davis Supp. Decl. dated Dec. 14, 2011 at ¶ 3. Yet, Debtor was incarcerated, so any deposition would have proceeded in a secure environment. Further, Counsel had already sent another lawyer from Counsel's firm to attend the 2006 deposition of Debtor in connection with the State Farm litigation without adverse consequences.
Based on Counsel's time records, Counsel incurred about $7,500 in fees up through the parties' cross-motions for summary judgment in the 727 Action. This included preparing three rounds of interrogatories and production requests to Debtor, responding to Debtor's discovery, engaging Accountant to prepare Accountant's expert report regarding Debtor's finances, preparing Trustee's motion for summary judgment and responding to Debtor's motion for summary judgment. The Court finds the fees up through that point, including the preparation of Accountant's expert report, fall within the range of what was reasonable under the circumstances.
However, once summary judgment was denied, it was ill advised to incur another $20,000 in fees to proceed to trial based on the lack of adequate records. By May 2007, the use of the 727 Action to encourage Debtor to produce records under threat of losing his right to a discharge was unrealistic. Debtor did not produce documents despite the potential for summary judgment against Debtor. Moreover, based on Debtor's earlier request for dismissal of this Case, Debtor does not appear to have been concerned with receiving a discharge. If the records were in fact non-existent, then there was nothing that would help uncover any assets; and even if Trustee was able to establish that Debtor concealed, destroyed, falsified or failed to keep adequate books and records, the denial of Debtor's discharge alone was unlikely to provide a substantial benefit for creditors because Debtor was, and still is, incarcerated with little to no income while serving out a seventeen year sentence.
All of these factors differentiate this Case from Hugues where the court found the action to revoke discharge to be" advisable, " Based on the record before this Court, by the time the cross-motions for summary judgment was denied, it was apparent that the 727 Action was not likely to substantially benefit creditors and, as a result, the Court concludes that after May 2007, continued prosecution of the 727 Action cannot be said to have been "advisable, " nor were additional fees reasonable. As a result, the Court reduces Counsel's fees in this category by $20,000. Accountant's fees related to the expert report related to the 727 Action were incurred prior to the summary judgment motions and will be allowed in full.
E. Fees Related to Asset Identification
Both Debtor and Attorney Levin request that this Court disallow in full the $5,415 in fees for the Asset Identification project category on the grounds that these fees are for work that is part of Trustee's ordinary duties and because the services in this project category were both unnecessary and not reasonably likely to benefit the bankruptcy estate under Mednet. Debtor asserts that Debtor described all material assets in Debtor's bankruptcy schedules. Debtor also asserts that the efforts of Counsel to trace and pursue assets of corporations partly owned by Debtor was contrary to more than a century of corporate law under U.S. v. Bennett, 621 F.3d 1131, 1136 (9th Cir. 2010). Debtor further objects on the ground that the work performed by Counsel to determine the whether the property in Cairo was able to be sold was unnecessary because that activity was Trustee's administrative obligation. Lastly, Debtor asserts that the $68,407 recovered from Cadence does not belong to the bankruptcy estate, but rather belongs to the AIM Entities, and Debtor's appeal from the court's default judgment against the AIM Entities is on appeal to the Ninth Circuit.
The Court has reviewed the itemization of services rendered in the Asset Identification project category and finds that the services fall within the domain of compensable legal services. Counsel billed time to communications with the lawyer for Debtor's son related to documents located in a storage facility and the son's Rule 2004 examination. Counsel also worked with Accountant regarding the review and investigation of the records in the storage facility. Counsel prepared and served third party subpoenas and had follow-up telephone conversations with the subpoena recipients. Counsel conducted a Rule 2004 examination of Debtor's son. Finally, Counsel communicated with Trustee concerning the abandonment of certain property in Egypt, prepared a related notice and motion to abandon and prepared an application for relief by default.
All of these tasks are well within the type of services that counsel for a trustee would typically render. They are not ordinarily part of a trustee's administrative duties. The objections that the work described in the Asset Identification Category was part of Trustee's ordinary duties is overruled.
Debtor continues to contest whether assets that Trustee identified and recovered properly belong to the estate. Although Debtor has taken an appeal from the court's default judgment against the AIM Entities, there has been no showing that Counsel's services reflected in the Asset Identification category could be characterized as unnecessary or unreasonable. As a result, Debtor's objection to the asset identification fees based on Debtor's perceived lack of merit to Trustee's claims against the AIM Entities is overruled. The $5,415 in fees in the Asset Identification category are allowed.
F. Counsel's Miscellaneous Project Category
Finally, Attorney Levin asks the Court to disallow $8,176 in fees for the miscellaneous tasks on the grounds that these fees are for work that is part of Trustee's ordinary duties. Attorney Levin is mistaken. In the Miscellaneous project category, Counsel reviewed Debtor's schedules and statement of affairs, prepared an employment application, engaged in communications with Trustee to keep Trustee current on status of pending matters, reviewed documents received from Attorney Levin, reviewed and responded to multiple motions that Debtor filed, reviewed hearing transcripts, attended hearings, prepared orders following hearings, and prepared status reports. All of these activities fall within the domain of legal counsel. The only specific tasks that Attorney Levin has challenged are entries for time spent "reviewing the debtor's Statement of Financial Affairs, Schedules and other documents and reviewing the Chapter 11 pleadings in the case and conferring with representatives of the United States Trust [sic] and of the debtor." In December 2005, at the beginning of Counsel's appointment, Counsel billed one half hour to review Debtor's schedules, in addition to preparing Counsel's employment application. This brief review of the petition was entirely reasonable and necessary to acquaint counsel with the case. In that same December 2005 time frame, Counsel spent.6 hours on three separate telephone conversations with Trustee and two representatives from the office of the United States Trustee. These conversations to familiarize Counsel with the case were well within the bounds of reason. Attorney Levin's objection to the time billed in the Miscellaneous project category is overruled and those fees will be allowed in full.
CONCLUSION
For the reasons stated above, the Court overrules all objections to the final account and fee application of Trustee; both are approved as filed. The final fee application of Accountant is allowed in the amount requested, $36,562 for fees and $115.62 for expenses. After application of the $10,000 interim award that Accountant received, Accountant is entitled to receive $26,677.62 in additional funds. The final fee application of Counsel is approved in the amount of $102,226.50 for fees and $11,172.73 for expenses. After application of the $72,650.62 interim award that Counsel received, Counsel is entitled to receive $40,748.61 in additional funds. Counsel for Trustee shall submit a form of order after service on Attorney Levin and Debtor.