Opinion
Consolidated Case No. 11-95-11659 MA.
November 6, 2001
Mr. Michael K. Daniels, Albuquerque, New Mexico, Attorney for Santa Fe Aviation.
Mr. Leonard Martinez-Metzgar, Albuquerque, New Mexico, Office of the United States Trustee.
Ms. Barbara K. Hoffman-Hill, Dallas, Texas, Attorney for Aviation Services.
Ms. Julia B. Rose, Santa Fe, New Mexico, Attorney for Aviation Services.
MEMORANDUM OPINION
THIS MATTER came before the Court upon an Application for Allowance of Administrative Claim filed by Santa Fe Aviation Services, Ltd. Co. ("Services"). Having heard the arguments of counsel, reviewed the pleadings and being otherwise fully advised, the Court grants the Application in part and denies the Application in part.
FACTS
Santa Fe Aviation Services, Ltd. Co. filed a reorganization plan ("Plan") and disclosure statement in January 1996, and the plan was confirmed with amendments on May 30, 1996. The confirmed Plan classifies Services' professional fees and costs as Class I administrative claims, and provides for payment of Services' professional fees and costs, subject to approval by the court. The Corrected First Amended Disclosure Statement for First Amended Plan of Reorganization Providing for Acquisition of Assets of Santa Fe Aviation and Santa Fe Fliers, Inc. ("Amended Disclosure Statement"), filed April 23, 1996, estimates Services' administrative claims for professional fees and costs to be between $50,000 and $55,000. The Amended Disclosure statement also provides for a contribution of $475,000 by Services to the Plan. Services' estimated administrative expenses were to be paid out of the $475,000 contribution. Exhibit A to the Amended Disclosure statement represents that the amount of Finally Allowed Class I administrative claims will total $85,000.
On May 30, 1996, the Court verbally issued its order confirming the plan. The Court entered a formal Order Confirming Plan of Reorganization and Establishing Deadlines ("Confirmation Order") on June 5, 1996. The Confirmation Order confirmed the Corrected First Amended Plan of Reorganization providing for Acquisition of Assets dated March 8, 1996, filed by Ralph Tingle, d/b/a T T Investments and Services.
The Plan provides that Class I Administrative Claims "shall include but not be limited to the Finally Allowed claims of Aviation Services for professional fees and costs as approved by the Court after filing appropriate fee applications for professionals and appropriate claims for costs and expenses incurred by Aviation Services, relating to the preparation, filing and confirmation of a Plan . . ." (Corrected First Amended Plan of Reorganization Providing for Acquisition of Assets, p. 4) .
Services filed its Application for Allowance of Administrative Claim on December 17, 1996 seeking reimbursement for professional fees and costs associated with formation and culmination of the Plan. Services supplemented its application for allowance of administrative claim on January 21, 1997 and again on June 26, 1997. Services seeks a total administrative claim in the amount of $176, 825.80 for professional fees and costs incurred from October 1, 1995 to November 30, 1996.
A summary dated September 24, 1997 categorizes the amounts requested:
Environmental Testing and Evaluation $ 9,584.24 Tank Removal and Reclamation 4,522.50 Environmental Attorneys (Modrall, Sperling, et. al.) 6,984.45 Jean Wells 3,638.71 Misc. Expenses of Securing Property 310.13 Fees Expenses of Barbara Hoffman-Hill 107,935.33 Fees Expenses of Julia Rose 43,850.44
The Debtors filed an Objection to Services' Application for Administrative Claim on January 17, 1997. In the objection, the Debtors assert that (1) Services exceeded estimated professional fees and costs made to the court during confirmation hearings; (2) no reimbursement should be allowed for expenses incurred eight months prior to confirmation of the Plan; (3) some portion of the reimbursement Services now seeks conferred no benefit to the estate; and, (4) Services' attempt to hold James Hayes, Debtor's principal equity owner, in contempt of court unfairly inflated the amount of Services' administrative expenses.
The United States Trustee ("Trustee") also filed an Objection to the Application on January 17, 1997. The Trustee filed a supplement to the Objection on January 30, 1997. The Trustee asserts that (1) the amount claimed by Services greatly exceeded the estimated professional fees and costs noted in the Amended Disclosure Statement; (2) because Services did not state the statutory grounds for the administrative expense request, 11 U.S.C. § 503(b)(3)(D) is presumed applicable, thereby requiring Services to satisfy the elements of the "substantial contribution" test; and, (3) Services should utilize the categorization scheme proposed in the U.S. Trustee Fee Guidelines.
The Trustee filed a Memorandum in Support of its objection on September 24, 1997. The Trustee argues that Services does not qualify as a claimant under 11 U.S.C. § 503(b)(3)(D) because the claim arose post-petition. Alternatively, the Trustee asserts that there is no provision elevating a post-petition creditor to pre-petition claimant status by virtue of its having been designated as such in a confirmed reorganization plan. Assuming, arguendo, that the court permits Services' claimant status, the Trustee also asserts that Services' claim does not satisfy the substantial benefits test. Finally, the Trustee contends that the administrative fees are not reasonable.
Services filed its response to the Trustee's objection on June 26, 1997. In its response, Services argues that payment of its professional fees and costs as a Class I Administrative Claim is proper because the Plan expressly permits Services' administrative claim for professional fees and costs. Further, Services asserts the elements of the substantial contribution test are satisfied. Finally, Services urges that the Trustee and creditors are bound to the terms of the Plan by having participated in the formation of the Plan and by being present at the confirmation hearing.
DISCUSSION
The Court must consider first whether Services is entitled to treatment as a Class I administrative claimant. The Plan and the Disclosure Statement state that Class I administrative claims:
shall include but not be limited to the Finally Allowed claims of Aviation Services for professional fees and costs as approved by the Court after filing appropriate fee applications for professionals and appropriate claims for costs an expenses incurred by Aviation Services, relating to the preparation, filing and confirmation of a Plan . . .
Both the initial disclosure statement and plan as well as the amended and corrected disclosure statement and plan contained this provision. The Confirmation Order confirmed the Corrected First Amended Plan of Reorganization Providing for Acquisition of Assets.
Services contends that the order of confirmation merits treatment as a final judgment with res judicata effect, barring any subsequent objections to Services' status as Class I administrative claimant. Under the doctrine of res judicata, a bankruptcy court's order of confirmation is regarded as a final judgment binding all parties to the terms of the plan. See Stoll v. Gottlieb, 305 U.S. 165, 172 (1938). The doctrine of res judicata may preclude parties from challenging the elements of a confirmed plan if such challenge should have or could have been raised prior to confirmation. See generally Turshen v. Chapman, 823 F.2d 836, 839 (4th Cir. 1987). Likewise, the doctrine bars parties from asserting a post-confirmation legal position unless reserved by objection during the confirmation process or preserved on appeal of the confirmed plan. See Dep't of the Air Force v. Carolina Parachute Corp., 907 F.2d 1469, 1474 (4th Cir. 1990).
The Trustee's objection to Services' administrative claim was made post-confirmation. The Trustee takes the position that Services is not a creditor for the purposes of asserting an administrative claim under 11 U.S.C. § 503(b)(3)(D) because Services' claims for professional fees and costs are post-petition claims. Although the Bankruptcy Code makes no provision for elevating a post-petition creditor to administrative claimant status, a plan having a provision inconsistent with the Code may nonetheless bind the parties where that plan is confirmed without objection and the confirmation is not under appeal. See Republic Supply Co. v. Shoaf, 815 F.2d 1046, 1050 (5th Cir. 1987). The Trustee participated in the formation of the Plan, had opportunity to object at the confirmation hearing, and failed to do so. Also, the confirmation order has not been appealed. Thus the doctrine of res judicata applies, and the Plan, as confirmed, is binding on the parties. This Court finds, therefore, that Services is entitled to treatment as a Class I administrative claimant.
Because this Court finds that Services is entitled to payment of its professional fees and expenses as a Class I administrative claimant under the confirmed Plan, the Court must next consider the amount of Services' allowed administrative expense. First, the language of the plan itself places a limit on the professional fees and costs that will be paid as Class I administrative claims. Specifically, the Plan and the Disclosure statement state that Class I administrative claims "include . . . claims of Aviation Services for professional fees and costs . . . relating to the preparation, filing, and confirmation of a Plan . . ." (emphasis added). The plan does not contemplate that Services' administrative claim for professional fees will include post-confirmation fees and costs. Although the Plan's language, "shall include but not be limited to," could be interpreted to mean that post-confirmation fees would be included as Class I administrative claims, any ambiguity should be construed against the plan proponent. Furthermore, the creditors should be entitled to rely on the representations made by the proponent of the plan, namely, Services' estimate of $85,000 for Class I administrative claims. This Court limits Services' treatment as a Class I administrative claimant to claims relating to the preparation, filing and confirmation of a plan. All post-confirmation professional fees, costs and associated taxes are disallowed. The Court reduces Attorney Hill's professional fees and costs by $35,900.27, representing fees and costs incurred after June 5, 1996, the date the Court entered the order confirming Services' plan. Likewise, the Court reduces Attorney Rose's professional fees, costs and associated taxes by $2,468.65.
The June invoices for Attorneys Hill and Rose include work performed after the plan confirmation date. The Court calculated the deduction by determining the exact amount of fees incurred after June 5, 1996, and, for Attorney Rose's invoice, by deducting post-confirmation costs in the amount of $22.50, and by making a proportionate deduction for associated taxes on the disallowed fees and costs.
The Court must next decide whether the fees and costs sought by Services made a substantial contribution to the estate pursuant to the mandates of 11 U.S.C. § 503(b)(3)(D). The substantial contribution test requires the Court to examine "whether the services substantially contributed to a successful result, that is, an actual and demonstrable benefit to the debtor's estate, the creditors, and, to the extent relevant, the stockholders." In re Jensen-Farley Pictures, Inc., 47 B.R. 557, 569 (Bankr. D. Utah 1985). The benefit received must be more than an incidental benefit arising from activities pursued in the applicant's own interest. See Lebron v. Mechem Financial Inc., 27 F.3d 937, 944 (3d Cir. 1994). Additionally, as applicants are presumed to act in their own interest, the court must be satisfied that the efforts of the applicant "have transcended self-protection." Lebron, 27 F.3d at 944. Most activities of the applicant benefitting the estate will also benefit the applicant; nevertheless, the existence of a self-interest does not preclude recovery of professional fees and costs. See Lebron, 27 F.3d at 944. However, the substantial contribution test of § 503(b)(3)(D) mandates no reimbursement where the activities primarily serve the applicant's own interest and where the applicant would have undertaken the same activities absent any expectation of reimbursement. See Lebron, 27 F.3d at 944.
Section 503 provides, in relevant part:
(b) After notice and a hearing, there shall be allowed administrative expenses, other than claims allowed under section 502(f) of this title, including —
(3) the actual, necessary expenses, other than compensation and reimbursement specified in paragraph (4) of this subsection, incurred by —
(D) a creditor, an indenture trustee, an equity security holder, or a committee representing creditors or equity security holders other than a committee appointed under section 1102 of this title, in making a substantial contribution in a case under chapter 9 or 11 of this title; 11 U.S.C. § 503 (1994).
With three exceptions noted below, the professional fees and costs for which Services seeks reimbursement satisfy the substantial contribution test. The Trustee posits that asset acquisition, as a primary motivating factor, necessarily requires the court to reject Services' Application for fees and costs. This Court disagrees. Services' self-interested motivation does not negate the fact that more than an incidental benefit was conferred on the estate. Services formulated a plan for reorganization where the debtors had failed, discovered hidden assets subsequently reinstated for the benefit of the estate, brought the property into environmental compliance, made payments to creditors, maintained a property lease, and corrected the operating statements and financial reports of the estate. But for Services' diligence, the estate would have been liquidated with considerably less assets for distribution to creditors.
Similar to the application of the substantial contribution test, requests for reimbursement of attorney's fees associated with a debtor are evaluated pursuant to the "actual and necessary" fiat of 11 U.S.C. § 330(a)(1). Satisfaction of this mandate requires that the activities underlying the request "were necessary and benefitted the estate." Rubner Kutner, P.C. v. U.S. Trustee (In re Lederman), 997 F.2d 1321, 1323 (10th Cir. 1993). Three items in Services' request for reimbursement fail to meet the substantial benefit test and the "actual and necessary" requirement of 11 U.S.C. § 330(a)(1), and this Court will deny those claims. First, the Court denies reimbursement requested in Services' Supplement filed June 26, 1997 for pre-confirmation activities performed by Attorneys Hill and Rose in the amount of $11,997.50. This amount represents fees associated with investigation by the Applicant in ascertaining investor interest in proposing a plan of acquisition. The activities have no measurable benefit to the estate. Likewise, the Court denies reimbursement in the amount of $3,638.71 requested for activities performed by Jean Wells. This amount represents fees associated with formation of a business organization. The Court notes that the request was withdrawn by Services in the Memorandum of Authorities filed October 8, 1997.
Section 330 provides, in relevant part:
(a)(1) After notice to the parties in interest and the United States Trustee and a hearing, and subject to sections 326, 328, and 329, the court may award to a trustee, an examiner, a professional person employed under section 327 or 1103 —
(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.
(2) The court may, on its own motion or on the motion of the United States Trustee, the United States Trustee for the District or Region, the trustee for the estate, or any other party in interest, award compensation that is less than the amount of compensation that is requested.
11 U.S.C. § 330 (1994).
Third, the Court reduces by $526.66 the request for reimbursement of fees for Environmental Attorneys. The Environmental Attorney time-keeping entries, "review of UST regulations," on October 27, 1995, June 11, 1996 and June 19, 1996, and "review of New Mexico statutes and Environmental Department regulations," on May 21, 1996 are clearly requests for reimbursement of attorney education. There is no more than an incidental benefit to the estate. The Court will not permit the estate in bankruptcy to be assessed the costs of educating an attorney who, having accepted a legal task, seeks familiarization with the germane body of law. A pro rata reduction in the associated costs and taxes is accomplished by dividing the professional fees reduced by the total amount for professional fees billed in the respective invoice. This percentage represents the amount by which the costs and taxes invoiced are to be reduced. From the invoice dated March 15, 1996, $290 of professional fees and $20.25 of costs and taxes will be reduced. From the invoice dated December 16, 1996, $203.00 of professional fees and $13.41 of costs and taxes will be reduced.
In addition to meeting the substantial contribution test, an allowed claim must also be reasonable. Requests for reimbursement are then analyzed for reasonableness in light of twelve distinct factors. See Johnson v. Georgia Highway Express, 488 F.2d 714, 717-719 (5th Cir. 1981). See also First National Bank v. Niccum (In re Permian Anchor Services, Inc.), 649 F.2d 763, 768 (10th Cir. 1981) (holding that reasonable attorney's fees are to be based upon an evidentiary inquiry which meets generally the twelve Permian factors). Though the present case is unusual in that the reorganization plan was not pursued by the debtor but by Services, "the benchmark for the awards under nearly all of . . . [the statutes awarding fees] is that the attorney's fees must be `reasonable.'" Pennsylvania v. Delaware Valley, 478 U.S. 546, 560 (1986).
The factors are
(1) the time and labor involved;
(2) the novelty and difficulty of the questions;
(3) the skill requisite to perform the legal service properly;
(4) the preclusion of other employment by the attorney due to acceptance of the case;
(5) the customary fee;
(6) whether the fee is fixed or contingent;
(7) time limitations imposed by the client or by the circumstances;
(8) the amount involved and the results obtained;
(9) the experience, reputation and ability of the attorneys;
(10) the undesirability of the case;
(11) the nature and length of the professional relationship; and,
(12) awards in similar cases.
In re Periman Anchor Services, Inc., 649 F.2d 763 (10th Cir. 1981).
Any adjustment to a claim for attorneys' fees requires a court to express in suitable detail the reasoning for that adjustment.See Mares v. Credit Bureau of Raton, 801 F.2d 1197, 1210 (10th Cir. 1986). See generally Ramos v. Lamm, 713 F.2d 546 (10th Cir. 1983). The Mares requirement does not remove the burden of proof from the claimant but reinforces the claimant's responsibility to justify the claim thoroughly while according a court broad discretion in evaluating and adjusting the claim.See Mares v. Credit Bureau of Raton, 801 at 1210.
This Court will review Services' claims by category (as set forth in footnote 3) to test for reasonableness, making reductions as necessary. From the Summary of Aviation Services' Administrative Claim As Supplemented of September 24, 1997, the Court finds the requests for reimbursement for Environmental Testing and Evaluation, Tank Removal and Reclamation and Misc. Expenses Of Securing Property are reasonable. Therefore, the Court approves Services' claim for those items in the amount of $14,416.87. As discussed above, the Court reduces the requested fees for Environmental Attorneys by $526.66, leaving a total allowed claim in the amount of $6,457.79.
Services failed to provide the Court with sufficient and thorough documentation supporting the request for reimbursement of professional fees and costs. Services' Response to the Trustee's Objection To Administrative Claim And Supplemental Administrative Claim, at Item 5, notes inclusion of "a category by category breakdown of Hill's and Rose's professional fees . . . [that] describes the specific services performed in each category and explain [sic] the necessity for the services." Looking first to the reimbursement of $43,850.44 requested for Fees Expenses Of Julia Rose as per the Summary of Aviation Services' Administrative Claim As Supplemented dated September 24, 1997, the Court notes that the accompanying invoices total only $34,575.69. No explanation is given for the discrepant $9,274.75. Only $27,728.75 of the $34,575.69 may be discerned from the invoices as professional fees, exclusive of any associated costs or taxes. It is a mystery to the Court that, in the breakdown referenced in Service's Response, $27,719.50 for professional fees, presumably exclusive of any associated costs or taxes, is requested. As no explanation is given for this discrepancy, the Court will adopt the source invoices and presume that $27,728.75 represents the correct amount sought for Attorney Rose's professional fees and $6,846.94 for associated costs and taxes, for a combined total of $34,575.69.
First, as stated above, the Court disallows all post-confirmation fees and costs as not contemplated by the terms of the confirmed Plan. Therefore the Court deducts $2,062.50 in fees and $406.15 in costs and associated taxes from the total requested amount. In addition, the Court has reduced the fee by $11,997.50, representing pre-confirmation activities performed by Attorneys Hill and Rose, as having no more than an incidental benefit on the estate. Of that amount, $1,278.75 is noted as having been generated by Attorney Rose in October 1995. This is the amount tied to the professional fees referenced in Attorney Rose's October 1995 invoice. The Court therefore must therefore also reduce the reimbursement by $184.33 for associated costs and taxes as referenced in the invoice. Following a review for reasonableness, the Court determines that no other reductions are needed.
The amount requested in the Summary Of Aviation Services' Administrative Claim As Supplemented for Fees Expenses of Barbara Hoffman-Hill is $107,935.33. This amount ties to the invoices submitted and includes fees and associated costs. According to the invoices, professional fees exclusive of any associated costs or taxes total $91,293.75. However, from the breakdown of professional fees referenced in the Response, Attorney Hill requests $95,593.74 for professional fees, presumably exclusive of any associated costs or taxes. Attorney Hill provides no explanation for the $4,299.99 increase in requested professional fees. Because of this unexplained discrepancy, the Court will again presume that the source invoices, totaling $107,935.33, contain the correct billing.
Again, as with Attorney Rose's invoices, the Court disallows all of Attorney Hill's postconfirmation fees and costs, totaling $35,900.27. Next, as noted above, the Court reduced the Application by $11,997.50 representing pre-confirmation fees having no more than an incidental benefit on the estate. Of that amount, $10,718.75 was generated by Attorney Hill from November 1995 to May 1996. The Court must also reduce the reimbursement request for costs (no taxes are specified in the invoices for Attorney Hill) by a pro rata calculation. The calculation involves first determining the professional fees sought by month in Item 1 of the breakdown and dividing that months fee by the professional fees sought for that month in the invoices. The percentage is then factored against the total costs invoiced. The result is that $336.55 is deducted for the invoice dated November 1, 1995; $66.97 is deducted from the invoice dated December 1, 1995; $64.23 is deducted from the invoice dated January 1, 1996; $133.47 is deducted from the invoice dated February 1, 1996; $92.14 is deducted from the invoice dated March 21, 1996; $696.68 is deducted from the invoice dated April 1, 1996; and, $1,200.71 is deducted from the invoice dated May 1, 1996. Following a review for reasonableness, the Court determines that no other reductions are needed.
Lastly, the Court reduces the Application by $6,665.53. This amount is duplicative, having been awarded to Services in the Order filed August 7, 1997 finding James Hayes in contempt of the Court's Order Approving Motion for Rule 2004 Examination and Production of Records. The amount should have been excluded from Attorney Hill's invoices and should not have been included in Services' administrative claim. Therefore, this amount will also be deducted from Attorney Hill's requested fees and expenses.
The application is therefore granted in the amount of $103,578.45.
A summary of the disallowed and allowed amounts is as follows: Claim Amount Disallowed Amount Allowed TOTALS
CONCLUSION
For the foregoing reasons, the Court approves the Application submitted by Services, with adjustments. This opinion constitutes the Court's findings of fact and conclusions of law pursuant to Rule 7052 of the Federal Rules of Bankruptcy Procedure. An appropriate order will enter.
Environmental Testing and Evaluation $00.00 $9,584.24 Tank Removal and Reclamation $00.00 $4,522.50 Environmental Attorneys (Modrall, Sperling, et. al.) $526.66 $6,457.59 Jean Wells $3,638.71 $00.00 Misc. Expenses of Securing Property $00.00 $310.13 Fees Expenses of Julia Rose $3,931.73 $30,643.96 Fees Expenses of Barbara K. Hoffman-Hill $55,875.30* $52,060.03 $63,972.40 $103,578.45 * this figure includes the deduction for the duplicate claim for sanctions previously awarded