Opinion
Bankr. No. 03-10194.
July 10, 2007
SECOND INTERIM DECISION RE: WOODS FULLER'S SECOND INTERIM APPLICATION FOR FEES
The matter before the Court is the Second Interim Application for Allowance of Compensation and Reimbursement of Expenses filed by Woods, Fuller, Schultz Smith P.C.; the objection thereto filed by Tri-State Financial, L.L.C.; the response thereto filed by Woods, Fuller, Schultz Smith P.C.; the Court's Memorandum Re: Several Pending Matters and attendant order; the supplemental objection filed by Tri-State Financial, L.L.C.; and the response thereto filed by Woods, Fuller, Schultz Smith P.C. This Second Interim Decision and accompanying order shall constitute interim findings and conclusions under Fed.Rs.Bankr.P. 7052 and 9014(c). As set forth below, several of Tri-State Financial, L.L.C.'s remaining objections will be overruled; one will be set for an evidentiary hearing.
I.
In its February 20, 2007, objection to Woods, Fuller, Schultz Smith P.C.'s ("Woods Fuller") Second Interim Application for Allowance of Compensation and Reimbursement of Expenses ("second interim fee application"), Tri-State Financial, L.L.C. ("Tri-State Financial") set forth, in ten numbered paragraphs, several facts it deemed material. In three more numbered paragraphs, Tri-State Financial then set forth its objections to Woods Fuller's second interim fee application:
11. In the representation of the Trustee, [Woods Fuller] provided advice and services to the Trustee that are contrary to and in conflict with the advice and services that [Woods Fuller] had provided to [Tri-State Ethanol] as debtor and debtor-in-possession before and after the commencement of this case on 5/23/03.
12. To a large extent, the professional services of [Woods Fuller] were misdirected, often at [Tri-State Financial], and not focused on enhancing the estate for the benefit of creditors and holders of equity security interests. To a significant extent, but not exclusively, on account of this, the aggregate fees to date and the fees claimed in [Woods Fuller]'s Second Application for Fees and Expenses are unreasonable and excessive, the hours spent are unreasonable, unnecessary, and may sometimes be duplicative, and professional services for which the fees are claimed have often not benefited [sic] the Chapter 7 estate. The efforts of [Woods Fuller] on major problems such as the claim of North Central Construction, Inc. ("NCC") and Gaylor Engineering ("Gaylor") have not enhanced the Chapter 7 estate, reduced unsupportable claims against the Chapter 7 estate, or, in other words, resulted in a sufficiently high degree of success so as to be commensurate with the amount of fees. Litigation was not brought at all or not timely brought by the Trustee against NCC or Gaylor. No objections to the claim of NCC identifying the Chapter 7 estate's defenses and/or counterclaims was [sic] ever filed by [Woods Fuller] on behalf of the Trustee and appropriate litigation was either never commenced (NCC and others) or not timely commenced (Gaylor Engineering). The litigation against Gaylor was belatedly filed by the Trustee and has appeared to encounter the defense by Gaylor that the litigation should be dismissed for failure to timely prosecute. Results commensurate with the fees have not been and are not identified in [Woods Fuller]'s Second Application for Fees and Expenses.
13. Alternatively, [Woods Fuller]'s Second Application for Fees and Expenses is premature before the results of and by [Woods Fuller] are known.
As discussed in its May 2, 2007, Amended Memorandum Re: Several Pending Matters and set forth in its April 18, 2007, Order Overruling in Part Tri-State Financial, L.L.C.'s Objection to Second Fee Application Filed by Woods, Fuller, Schultz Smith P.C. and Setting Certain Deadlines, the Court overruled all of Tri-State Financial's objections to Woods Fuller's February 20, 2007, Second Interim Application for Allowance of Compensation and Reimbursement of Expenses except two. The objections that were overruled were those that related to Tri-State Financial's arguments that Woods Fuller is not eligible for employment by Trustee John S. Lovald under 11 U.S.C. § 327(e); or that the firm may not be paid under 11 U.S.C. §§ 328 or 330, either because the firm is not disinterested because the firm holds an interest adverse to the estate or Debtor, or because the firm counseled Trustee Lovald to settle the claim of North Central Construction, Inc. ("North Central"). The two surviving objections were whether some post-conversion services rendered by Woods Fuller failed to benefit the estate and whether some of the firm's fees were unreasonable, excessive, or duplicative.
In the April 18, 2007, order, the Court directed Tri-State Financial to file a supplemental objection "that better identifies each entry" of Woods Fuller's second interim fee application to which it objects and "set[s] forth the specific reason for the objection to each entry[.]" As discussed in the attendant memorandum, the reason for the objection to an entry "must be something other than Woods Fuller counseled Trustee Lovald to settle North Central's claim." Tri-State Financial timely filed its supplemental objection, and Woods Fuller responded.
II.
When an attorney is employed by a bankruptcy estate and renders services in connection with that employment, § 330(a)(1) of the Bankruptcy Code governs the awarding of fees to the attorney. Lamie v. United States Trustee, 540 U.S. 526, 529 (2004). To the extent fees are awarded to the attorney under § 330, they are payable as an administrative expense under 11 U.S.C. § 503(b)(2).
The burden of proof rests on the fee applicant. Walton v. LaBarge (In re Clark), 223 F.3d 859, 863 (8th Cir. 2000). The applicant's standard of proof is a preponderance of the evidence. In re Birky, 296 B.R. 480, 484 (Bankr. C.D. Ill. 2003). An objector, however, may not merely allege general dissatisfaction with the results obtained and must have evidence to support an argument that the applicant spent too much time. See In re Marlar, 315 B.R. 81, 86 (Bankr. W.D. Ark. 2004). Further, even absent an objection, the Court has an independent duty to review a fee request for reasonableness. In re Griffin, 302 B.R. 1, 4 (Bankr. W.D. Ark. 2003) (numerous cites therein).
In calculating the appropriate compensation award for legal services, the Court utilizes the "lodestar" method. Chamberlain v. Kula (In re Kula), 213 B.R. 729, 736-37 (B.A.P. 8th Cir. 1997) (citing, inter alia, P.A. Novelly v. Palans (In re Apex Oil Co.), 960 F.2d 728, 731 (8th Cir. 1992)). The lodestar figure is the number of hours reasonably expended multiplied by a reasonable hourly rate. Id. It presumably reflects many of the factors often referred to as the Johnson factors, including,
(1) the novelty and complexity of the issues, (2) the special skill and experience of counsel; (3) the quality of representation, and (4) the results obtained[.]
Kula, 213 B.R. at 737-38. Consequently, these factors cannot serve as an independent basis for increasing a fee award above the lodestar amount. Pennsylvania v. Delaware Valley Citizens' Council for Clean Air, 478 U.S. 546, 564-65 (1986). Adjustments should be made only under rare and exceptional circumstances. Kula, 213 B.R. at 738 (citing Apex Oil, 960 F.2d at 732), and Delaware Valley Citizens' Council for Clean Air, 478 U.S. at 565). Any adjustments must also be supported by specific evidence and detailed findings by the Court. Kula, 213 B.R. at 738. For an upwards adjustment, the applicant bears the burden of showing "the quality of service rendered and the results obtained were superior to what one reasonably should expect in light of the hourly rates charged and the number of hours expended." Id. (cites therein).
During the administration of a bankruptcy estate, a professional employed under 11 U.S.C. § 327 may seek interim compensation. 11 U.S.C. § 331 and Fed.R.Bankr.P. 2016(a). The same standards set forth in § 330 and Rule 2016(a) apply. Id. The purpose of an interim compensation award is to alleviate the financial burden on certain estate professionals in long and complicated cases. Leichty v. Neary (In re Strand), 375 F.3d 854, 858 (9th Cir. 2004); Fokkena v. Byron (In re Hyman Freightways, Inc.), 2006 WL 3757972, slip op. at 2 (Bankr. D. Minn. Dec. 20, 2006) (citing In re Mansfield Tire Rubber Co., 19 B.R. 125, 127 (Bankr. N.D. Ohio 1981)).
III.
Regarding both its original and its supplemental pleadings, Tri-State Financial did not object to the hourly rates charged by Woods Fuller. It also did not allege any services rendered or costs incurred were not actually rendered or incurred. The Court concurs the record does not support either basis for disapproving Woods Fuller's second interim fee application. Thus, those two grounds will not be raised sua sponte.
In its supplemental objection, Tri-State Financial first argued the form of Woods Fuller's second interim fee application did not lend itself to an entry by entry analysis of benefits, reasonableness, or duplicated services; it did not organize services by subject matter; and it lumped diverse matters into single entries over several hours. Since this particular objection was not raised by Tri-State Financial in its original objection, it is untimely and will be overruled.
The Court also notes it has not historically required itemizations of services and costs in fee applications to be organized by topic; in this district, itemizations traditionally have been set forth chronologically. If Tri-State Financial or another party in interest wants a different format used in the future in this case, they may request an order to that effect by motion and notice.
Tri-State Financial, on its own initiative, organized Woods Fuller's second interim fee application into six categories:
(1) North Central's November 21, 2005 Motion to Enforce Mediated Settlement Agreement [docket entry no. 1624];
(2) Trustee Lovald's February 21, 2006, and February 24, 2006, Motion and Amended Motion to Approve Settlement with North Central and Tri-State Financial, LLC [docs. 1691 and 1699];
In the supplemental objection, Tri-State Financial refers to this motion only as Trustee Lovald's motion to approve a settlement with North Central. Tri-State Financial never acknowledges the same motion addressed a more comprehensive settlement purported to resolve claims held by both North Central and Tri-State Financial.
(3) Trustee Lovald's June 20, 2006 Motion to Approve Compromise Agreement with American Prairie Construction Co., f/k/a North Central Construction Inc. [doc. 1856];
(4) Tri-State Financial's June 29, 2006, Motion for Recusal [doc. 1873];
(5) Attorney Robert E. Hayes' March 10, 2005, Application for Compensation and/or Reimbursement of Attorneys' Fees [doc. 1258];
(6) ICM, Inc.'s October 19, 2004, and November 17, 2004, Application and Amended Application for Allowance of Administrative Expense [docs. 1115 and 1137]; the Court's October 26, 2004, status letter regarding the original application [doc. 1120]; and Trustee Lovald's December 13, 2004, response to ICM, Inc.'s application [doc. 1159].
After establishing these categories, Tri-State Financial then briefly stated its arguments regarding each category. While doing so, it seemingly added a seventh category of services related to "the appeal involving First Dakota [National] Bank." Some of Tri-State Financial's arguments were made against more than one category of services. These duplicative arguments will be addressed first.
Woods Fuller represented conflicting interests and breached its fiduciary duty. Tri-State Financial argued Woods Fuller's fees were unreasonable and excessive
because the statutory term `reasonable compensation' requires strict adherence to the equitable principles that govern the conduct of fiduciaries and those with fiduciary duties; in the performance of the services within the scope of Paragraph 3A, [Woods Fuller] represented interests adverse to and in conflict with interests of the estate, [Debtor], or both; [Woods Fuller] thereby breached [Woods Fuller]'s authorized statutory, ethical, and fiduciary duties; and by reason of such breaches, [Woods Fuller]'s fees are subject to reduction and/or forfeiture under bankruptcy law, nonbankruptcy law, professional standards, or any or all of them.
Tri-State Financial made the same argument, nearly verbatim, regarding services by Woods Fuller related to North Central's Motion to Enforce Mediated Settlement Agreement, Trustee Lovald's Motion and Amended Motion to Approve Settlement with North Central and Tri-State Financial, LLC, Tri-State Financial's Motion for Recusal, Attorney Hayes' Application for Compensation and/or Reimbursement of Attorneys' Fees, and First Dakota National Bank's appeal. In a footnote the first time this objection was stated, Tri-State Financial added the argument that Trustee Lovald had not been authorized to employ Woods Fuller regarding any litigation against Tri-State Financial or Debtor. As to services by Woods Fuller related to Trustee Lovald's Motion to Approve Compromise Agreement with American Prairie Construction Co., f/k/a North Central Construction Inc., Tri-State Financial made essentially the same, though condensed, argument that the firm had "represented interests adverse to and in conflict with the interests of the estate foreseeably and litigated with [Tri-State Financial,] which is acting for the benefit of [Debtor]."
In its April 18, 2007 interim decision (amended on May 2, 2007), the Court previously overruled any objection by Tri-State Financial that Woods Fuller may not be paid under 11 U.S.C. §§ 328 or 330 because the firm is not disinterested or because the firm holds an interest adverse to the estate or Debtor. Tri-State Financial's supplemental objection thus attempts to plow old ground. The Court's original ruling still stands, however, and these objections are all overruled.
As to the breach of any statutory, ethical, or fiduciary duty by Woods Fuller, those objections also are overruled for the reasons set forth in a companion letter decision entered concurrently by the Court regarding Tri-State Financial's Motion to Disqualify Woods, Fuller, Shultz Smith as Attorneys for Trustee. The companion letter decision is incorporated herein by reference.
Services by Woods Fuller were unreasonable, excessive, wasteful or did not benefit the estate. Tri-State Financial argued Woods Fuller's services regarding North Central's Motion to Enforce Mediated Settlement Agreement "were wasteful, of no benefit to the estate, and of benefit only to [Woods Fuller.]"; the services related to the trustee's Motion and Amended Motion to Approve Settlement with North Central and Tri-State Financial, LLC were "wasteful and of no benefit [to] the estate"; the services related to Trustee Lovald's Motion to Approve Compromise Agreement with American Prairie Construction Co., f/k/a North Central Construction Inc. were "wasteful and of no benefit to the estate" because of the time spent and the poor result achieved; and the services regarding Attorney Hayes' fee application were "wasteful and in opposition to [Tri-State Financial,] which was acting to benefit the estate. They were of no benefit except to [Woods Fuller]." Apparently combining many of these objections, Tri-State Financial also argued Woods Fuller's services in connection with ICM, Inc.'s claims were "wasteful, and of no benefit except to [Woods Fuller] . . . because of the time spent and the poor result achieved."
Tri-State Financial failed to set forth any specific factual allegations or statutory support or case law for these duplicative objections. Tri-State Financial did not set forth why it believed too much time had been spent on the particular category of service, why the time spent was wasteful, or why the results of the particular category were poor. Tri-State Financial also did not set forth why it believed these services may have benefitted only Woods Fuller. Accordingly, these unsubstantiated objections will be overruled.
In addition to the duplicative objections to several categories of services discussed above, Tri-State Financial also set forth some more particular objections in its supplemental pleading. It argued services by Woods Fuller related to North Central's settlement were wasteful and of no benefit to the estate because Trustee Lovald did not have the power to dispose of Tri-State Financial's objections to North Central's claim or Tri-State Financial's adversary proceeding to equitably subordinate North Central's claim. In the Decision re: Trustee John S. Lovald's Proposed Settlement with North Central Construction, Inc. entered June 19, 2007, the Court discussed and ruled the trustee's settlement did indeed resolve Tri-State Financial's objection to North Central's proof of claim and was binding on the estate as to the amount of North Central's allowed claim. The Court further held the subordination issue raised by Tri-State Financial in Adversary Proceeding No. 05-1009 was deemed to remain on the table. Those findings and conclusions, at pages 26-29, are incorporated by reference herein, and this objection is overruled.
Tri-State Financial argued Woods Fuller's services regarding Tri-State Financial's Motion for Recusal were "wasteful and of no benefit to the estate . . . because the Trustee is not a party and has no standing in the appeals or contested matter [in] which the Trustee voluntarily rendered the services." Tri-State Financial did not set forth any statutory or case law support for this objection. It also failed to recognize the Court, by order entered July 6, 2006, sought any joinders or responses to the Motion for Recusal. Finally, any standing issues regarding Trustee Lovald were presumably presented by Tri-State Financial and resolved in the trustee's favor by the District Court during related appeals. Accordingly, this objection is overruled.
No one timely filed a direct appeal of the September 1, 2006, decision and order denying the Motion for Recusal. The District Court addressed the matter through some circuitous appeals, however, because jurisdiction had not been challenged. In Tri-State Ethanol Co., LLC, ___ B.R. ___, 2007 WL 1464576, slip op. at 1 (D.S.D. May 17, 2007).
Regarding an appeal taken by First Dakota National Bank, Tri-State Financial argued the services by Woods Fuller for Trustee Lovald did not benefit the estate "because the Trustee is not a party to that appeal, did not intervene, and has no standing." The services itemized on those dates by Woods Fuller all dealt with conferences related to appeals then pending and motions that apparently were filed with the District Court. Again, any standing issues regarding Trustee Lovald were presumably presented by Tri-State Financial to the District Court and resolved in the trustee's favor by the District Court. Accordingly, this objection will be overruled.
Tri-State Financial's final objection was to services by Woods Fuller that it deemed duplicative. Tri-State Financial set forth this objection in paragraph 10 of its supplemental pleading and essentially raised two arguments therein. It first argued too many Woods Fuller attorneys had worked on matters for Trustee Lovald. Few specific factual allegations were made, and the entries related to this objection were not set forth, contrary to the Court's directive in its April 18, 2007, order. Accordingly, this objection will be overruled.
Tri-State Financial's second argument regarding duplicative services was that several entries related to discovery issues in general and privilege issues in particular were unnecessary or misguided. Though it was not abundantly clear, it appears Tri-State Financial believed Woods Fuller was, more than necessary, researching and writing memos regarding privileges Trustee Lovald could assert. An evidentiary hearing will be held on this objection, and this objection only.
As to blanks in the two middle sentences of paragraph 10. of Tri-State Financial's May 18, 2007, supplemental objection, the Court presumes this portion of the pleading should read:
The entries above in the table starting on page 12 of this Supplement that are bolded with asterisks reflect the misguided unnecessary services related to privilege and discovery issues that [Woods Fuller] unreasonably raised. There are 77 entries for which the dollar amount claim is $45,915.00.
If Tri-State Financial intended different numbers, it may docket a new page 23 with a cover pleading that is signed and dated.
An order will be entered denying all objections except the final one discussed. The order will also set a status conference for July 16, 2007, which will be held in conjunction with a status conference on Tri-State Financial's December 14, 2006 Objection to Claim of Woods, Fuller, Schultz and Smith, P.C. During the status conference, a date for the rescheduled hearing on Woods Fuller's second interim fee application will be set. The parties should note the Court hopes to schedule the evidentiary hearing on Woods Fuller's second interim fee application and Tri-State Financial's December 14, 2006 Objection to Claim of Woods, Fuller, Schultz and Smith, P.C. for August 9, 2007. The location of the hearings will depend on the availability of a courtroom.