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concluding that bankruptcy court from the Northern District of California abused its discretion when it approved, without explanation, fees for preparing fee application above the district's mandatory 5% limitation but noting that there are "circumstances that would justify an award of fees for preparing fee applications in excess of the five percent limitation"
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NOT FOR PUBLICATION
Argued and Submitted at San Francisco, California: November 20, 2008
Appeal from the United States Bankruptcy Court for the Northern District of California. Bk. No. 02-51420. Honorable Marilyn Morgan, Bankruptcy Judge, Presiding.
Before: DUNN, JURY, and MARKELL, Bankruptcy Judges.
MEMORANDUM
This appeal challenges the bankruptcy court's approval of a total of $663,446.61 in fees and expense reimbursements for the law firm Berliner Cohen, special counsel to the debtor and debtor in possession. Appellants, the debtor in possession and its limited liability company members, assert that more than $200,000 of this amount was approved improperly in violation of the bankruptcy court's own guidelines. The appellee, Berliner Cohen, responds that the bankruptcy court examined all of its charges and expense reimbursement requests in detail, disallowed a substantial amount, found the rest to be reasonable and of benefit to the estate, and entered appropriate approving orders.
See Guidelines for Compensation and Expense Reimbursement of Professionals and Trustees for the United States Bankruptcy Court for the Northern District of California (the " Guidelines"), available at http://www.canb.uscourts.gov/procedures/dist/guidelines/guidelines-compensation-and-expense-reimbursement-professional-and-truste.
We conclude that the bankruptcy court applied appropriate legal standards and did not abuse its discretion in approving expense reimbursements and, for the most part, in approving the fees that it awarded to Berliner Cohen. Accordingly, we AFFIRM the bankruptcy court's expense reimbursements and the bulk of the fees that it awarded to Berliner Cohen.
In one category--fees for preparing Berliner Cohen's fee applications themselves, section I.6-the Guidelines impose a 5% cap that was exceeded by the bankruptcy court in its fee award to Berliner Cohen without explanation. We conclude that in this one area, the bankruptcy court abused its discretion, and we REVERSE the bankruptcy court's fee award for preparation of fee applications in excess of the mandatory cap, in the amount of $35,363.17.
Finally, in their briefs and at oral argument, the Appellants noted that although Berliner Cohen received expense reimbursements on an interim basis totaling $22,454.38, the final award of expense reimbursements totaled only $16,515.61. Appellants argue that the difference of $5,938.77 was not netted against Berliner Cohen's final award of compensation and should be disgorged. The record before us is unclear on this issue, and we REMAND for a determination of whether Berliner Cohen should be ordered to disgorge the amount of interim expense reimbursements that it received in excess of the final amount awarded.
The following factual background information comes largely from the Bankruptcy Court's Memorandum Decision, entered on December 29, 2006 (the " 2006 Memorandum Decision").
Dimas, LLC (" Dimas"), filed for chapter 11 protection on March 13, 2002, to stop a foreclosure sale with respect to its single asset, a parcel of 24.5 acres of real property in Milpitas, California (the " Property"). At the time of Dimas's bankruptcy filing, the Property was encumbered by three trust deeds controlled by a " hard money" lender (" IGL"), a fourth deed of trust in the amount of $1,200,000 in favor of a joint venture investor with Dimas, and a lis pendens recorded by an individual who had provided financing for development of the Property.
Unless otherwise indicated, all chapter, section and rule references are to the Bankruptcy Code, 11 U.S.C. § § 101-1330, and to the Federal Rules of Bankruptcy Procedure, Rules 1001-9036, as enacted and promulgated prior to the effective date (October 17, 2005) of most of the provisions of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, Pub. L. 109-8, April 20, 2005, 119 Stat. 23.
On May 8, 2002, on Dimas's application, the bankruptcy court appointed Berliner Cohen as special counsel for Dimas in connection with claims Dimas might have against its creditors. The application for employment stated that Dimas " is involved with ongoing litigation involving breach of contract, fraud, and a complex real estate contract dispute." The employment application also provided that Berliner Cohen's professional services would include:
To provide [Dimas] with legal advice regarding any claims for contractual breach and fraud applicant may have against its creditors;
To take all necessary steps to determine if there is liability on the part of [Dimas's] creditor[s] for breach of contract and fraud;
To investigate and institute litigation, through trial and judgment, and/or settle or compromise any such claim on behalf of [Dimas].
A. Litigation and other proceedings concerning Dimas and the Property
Dimas commenced an adversary proceeding on May 31, 2002 to void the fourth deed of trust on the Property, asserting claims for misrepresentation, negligence and interference with prospective economic advantage, among other things. Berliner Cohen litigated the adversary proceeding to a stipulated resolution, resulting in reconveyance of the fourth deed of trust on the Property.
Berliner Cohen also substituted in as counsel for Dimas in the California state court litigation to defend against the claims of the filer of the lis pendens against the Property. Dimas ultimately prevailed in that litigation on a motion to expunge the lis pendens and was awarded attorneys' fees. Berliner Cohen obtained an agreed dismissal of the lis pendens action.
In the meantime, Dimas was unable to obtain additional financing, and it defaulted on its obligation to make a $3.285 million escrow deposit required by a stipulation with IGL. On September 9, 2002, the bankruptcy court granted relief from stay to allow IGL to foreclose on the Property. On September 10, 2002, IGL's representative conducted a foreclosure sale of the Property under its third deed of trust. On the date of the foreclosure sale, Dimas tendered $150,000 to the trustee's agent, which amount Dimas estimated was sufficient to exercise its equity of redemption under the third deed of trust. That tender was rejected as inadequate, and the foreclosing creditor proceeded with the foreclosure sale and later filed an unlawful detainer action to evict Ms. Adrienne Rakitin (" Ms. Rakitin"), Dimas's managing member, from the Property, where she had been living.
On November 18, 2002, Berliner Cohen commenced an adversary proceeding (the " IGL Adversary Proceeding") against IGL and others to set aside the foreclosure sale and recorded a lis pendens against the Property. Berliner Cohen successfully defended two motions to dismiss the IGL Adversary Proceeding. Following further preliminary proceedings and discovery in the IGL Adversary Proceeding, the bankruptcy court granted partial summary judgment in Dimas's favor.
Berliner Cohen filed a second motion for summary adjudication in the IGL Adversary Proceeding in February 2004. The ultimate result, after two hearings and supplemental briefing, was that the bankruptcy court granted a further partial summary judgment in Dimas's favor on its claim for relief based on redemption, set aside the foreclosure sale and restored title to the Property to Dimas, but reserved ruling on damages and other issues. Trial on the remaining issues in the IGL Adversary Proceeding was set for January 2005.
After title to the Property was restored to Dimas, IGL's representative renewed its motion for relief from stay to proceed with foreclosure because Dimas's obligations to IGL secured by deeds of trust on the Property remained in default. The evidentiary hearing on IGL's motion for relief from stay was consolidated with the trial of the open issues in the IGL Adversary Proceeding.
In January 2005, Dimas and IGL participated in a two-day, judicially supervised settlement conference, and after extensive negotiations, the parties entered into a settlement agreement premised on the formation of a new limited liability company to develop the Property. Berliner Cohen prepared the settlement agreement. The settlement never was consummated, however, because IGL's representative could not obtain lender approval for an acceptable project manager.
Thereafter, Dimas and IGL's representative reconvened to discuss possible settlement alternatives. After further extensive negotiations, Dimas and IGL entered into a second settlement agreement. The terms of the second settlement provided that IGL would release its trust deeds on the Property upon receipt of $3.1 million from the proceeds of a loan to be obtained by Dimas. IGL would receive an additional $900,000 from the proceeds of lot sales from the Property, but IGL refused to subordinate its right to receive such proceeds to the interests of the new lender, necessitating a " carve-out" from the new lender's security. Berliner Cohen expended considerable efforts addressing the complexities of the " carve-out" issue in documenting the settlement. The settlement terms further provided that if Dimas could not make the first required settlement payment by the agreed deadline, IGL would receive title to the Property upon payment of $1.8 million to Dimas.
The parties subsequently negotiated several extensions and a reduction in the payoff to IGL. Nevertheless, Dimas ultimately failed to obtain a loan that would enable it to perform its obligations under the second settlement. Upon Dimas's failure timely to perform, IGL's representative deposited $1.8 million in escrow. In accordance with the terms of the second settlement agreement, the $1.8 million was disbursed to Dimas in October 2005, and Dimas conveyed title to the Property to IGL's representative. On November 13, 2005, Dimas's chapter 11 plan was confirmed, with the proceeds from the sale of the Property to be distributed to pay Dimas's creditors in full, with a surplus to be distributed to Dimas's members.
The bankruptcy court noted that, " When [Berliner Cohen] undertook this representation [as special counsel to Dimas], there was no guarantee of success and a substantial risk of nonpayment." 2006 Memorandum Decision, at p. 9. The litigation that Berliner Cohen was called upon to undertake was complex and contentious. Berliner Cohen benefitted from working with Dimas's managing member, Ms. Rakitin, who was " well-informed, sophisticated, proactive, and engaged in developing the strategy for the litigation." Id . at pp. 9-10. However, she also was a very demanding client.
[Ms. Rakitin's] telephone contacts with the attorneys occurred on a near-daily basis, and often included weekends and holidays. Other times, [Ms.] Rakitin attended lengthy meetings at the law offices of Berliner Cohen. The attorneys sought to accommodate [Ms.] Rakitin by participating in both scheduled and unscheduled meetings with her.
Memorandum Decision, entered on February 28, 2008 (the " 2008 Memorandum Decision").
Ms. Rakitin did not always agree with the strategies proposed by Berliner Cohen, and over time, the attorney-client relationship between Dimas and Berliner Cohen eroded. Berliner Cohen withdrew from representing Dimas as special counsel by order entered on January 4, 2006.
B. Compensation issues between Berliner Cohen and Dimas
Berliner Cohen voluntarily wrote off $50,000 in fees to Dimas in December 2003 to reduce the account receivable on its books. Berliner Cohen filed four interim fee applications and was awarded $496,789.40 in fees and $22,454.38 in expense reimbursements on an interim basis. In its final application (" Final Application") for allowance of fees and expenses, Berliner Cohen requested approval of $727,673.50 in fees and $34,347.15 in expense reimbursements.
Dimas objected to Berliner Cohen's Final Application on a number of bases, including " the fees sought were inadequately described, were clumped, were for clerical services, involved duplication of services, were excessive, and billed large amounts of time for telephone calls with the managing member of debtor [Ms. Rakitin] which were either substantially inflated or never occurred." Appellants' Opening Brief, at p. 2. Following extensive briefing and evidentiary submissions, the bankruptcy court allowed Berliner Cohen, on a final basis, compensation of $586,207 and expense reimbursements of $16,515.61. The bankruptcy court set forth the background and stated its reasons for its allowance of fees and expenses in the 66-page 2006 Memorandum Decision. Requested fees totaling $64,152.50 were disallowed, with $8,549 of said total being denied without prejudice, and requested fees of $77,314 were reserved for a later determination.
Following further briefing and evidentiary submissions and a trial in 2007, the bankruptcy court allowed Berliner Cohen further fees in the amount of $60,724 on a final basis, and disallowed fees totaling $19,637.50. The bankruptcy court stated its reasons for its allowance of further fees in the 18-page 2008 Memorandum Decision.
The appellant members of Dimas filed a timely notice of appeal on March 7, 2008. An amended notice of appeal, adding Dimas as an appellant, was filed on the same date.
JURISDICTION
The bankruptcy court had jurisdiction under 28 U.S.C. § § 1334 and 157(b)(2)(A). The panel has jurisdiction under 28 U.S.C. § 158.
ISSUES
1. Did the bankruptcy court abuse its discretion in its award of fees and expense reimbursements to Berliner Cohen?2. Did the bankruptcy court abuse its discretion in awarding fees to Berliner Cohen for preparation of fee applications in excess of the mandatory percentage cap specified in the Guidelines?3. Should the case be remanded for a determination as to whether Berliner Cohen should be required to disgorge interim expense reimbursements that it received in excess of the final expense reimbursements award?
STANDARDS OF REVIEW
In the Ninth Circuit, " We review the factual determinations underlying an award of attorneys' fees for clear error and the legal premises a district court uses to determine an award de novo." Ferland v. Conrad Credit Corp., 244 F.3d 1145, 1147-48 (9th Cir. 2001) (per curiam) (citations omitted). " If we conclude that the district court applied the proper legal principles and did not clearly err in any factual determination, then we review the award of attorneys' fees for an abuse of discretion." Id . at 1148.
A bankruptcy court necessarily abuses its discretion if it bases its decision on an erroneous view of the law or clearly erroneous factual findings. Cooter & Gell v. Hartmarx Corp., 496 U.S. 384, 405, 110 S.Ct. 2447, 110 L.Ed.2d 359 (1991). Under the abuse of discretion standard, we must have a definite and firm conviction that the bankruptcy court committed a clear error of judgment in the conclusion it reached before reversal is proper. In re Black, 222 B.R. 896, 899 (9th Cir. BAP 1998).
DISCUSSION
A. The bankruptcy court applied appropriate legal standards and did not clearly err in its factual determinations in awarding expense reimbursements and the bulk of fees to Berliner Cohen.
Section 330 provides that a bankruptcy court " may award" to professionals employed by the estate " reasonable compensation for actual, necessary services rendered" and " actual, necessary expenses." The applicant must demonstrate that the services rendered were " reasonably likely" to benefit the bankruptcy estate at the time that they were performed. Roberts, Sheridan & Kotel, P.C. v. Bergen Brunswig Drug Co. (In re Mednet MPC Corp.), 251 B.R. 103, 108 (9th Cir. BAP 2000). " A bankruptcy court also must examine the circumstances and the manner in which services are performed and the results achieved in order to arrive at a determination of a reasonable fee allowance." Id.
In this case, the bankruptcy court described the standards applicable to its consideration of Berliner Cohen's applications for compensation as follows:
In determining the amount of reasonable compensation, the court considers the nature, extent, and value of the professional's services, taking into account all relevant factors, including whether the services were necessary to the administration of, or beneficial at the time at which the service was rendered toward the completion of, a case and whether the services were performed within a reasonable amount of time commensurate with the complexity, importance, and nature of the problem, issue, or task addressed.
2006 Memorandum Decision, at p. 9. In addition, the bankruptcy court clearly recognized that Berliner Cohen bore the burden of establishing its entitlement to compensation and demonstrating that the compensation requested was reasonable. See 2006 Memorandum Decision, at p. 9; and 2008 Memorandum Decision, at p. 4. Hensley v. Eckerhart, 461 U.S. 424, 437, 103 S.Ct. 1933, 76 L.Ed.2d 40 (1983).
Appellants do not appear to question that the bankruptcy court was guided by these general principles, but rather focus in this appeal on what they argue are inappropriate departures from the Guidelines. The preamble to the Guidelines states the following:
The following guidelines are promulgated pursuant to B.L.R. 9029-1 and govern the most significant issues related to applications for compensation and expense reimbursement. The guidelines cover the narrative portion of an application, time records and expenses. They apply in their entirety to professionals seeking compensation under 11 U.S.C. § 330 and, where indicated, to chapter 7 and chapter 11 trustees. The guidelines are not intended to cover every situation. The court is advised that compliance with these guidelines will satisfy the requirements of the United States Trustee. (emphasis added)
The Guidelines are aspirational, and the bankruptcy courts of the Northern District of California clearly intend that they be followed. But, for the most part, they are not written in mandatory language. They are guidelines.
In addition to their excerpts of record, the Appellants have submitted dozens of pages of what they contend are inadequately described time entries; charges for clerical services and clumped entries; charges for phone conferences that they argue were not held; unnecessary billings for services of more than one lawyer present at hearings and conferences; and excessive billings. In effect, they invite us to consider anew the allegedly offending billings that they specify, apart from overall consideration of Berliner Cohen's fee applications.
We decline the invitation. We have reviewed carefully the voluminous record presented in this appeal, and we particularly have focused our attention on the bankruptcy court's 2006 Memorandum Decision and 2008 Memorandum Decision. The record reflects that the bankruptcy court carefully and painstakingly reviewed Berliner Cohen's fee applications in light of the numerous objections raised by the Appellants. The bankruptcy court made detailed findings in response to those objections, supported in many cases by multiple examples of the types of time entries that the bankruptcy court approved and those that it did not approve. As Berliner Cohen argues, the bankruptcy court's approvals, in part, of its requested fees and expense reimbursements were " the culmination of countless hours of laborious review of time entries, legal briefs and a full day of evidentiary hearing." Appellee's Opening Brief, at p. 1.
The bankruptcy court found that,
This proceeding has presented particular challenges to the lawyers for the parties as well as for the court. Having presided over multiple hearings on a motion to expunge lis pendens, two dismissal motions, a motion for preliminary injunction to enjoin a sale of the [Property], and two motions for summary adjudication in which special counsel was involved, it appears that, throughout this litigation, [Berliner Cohen] produced a quality work product, acted professionally, and vigorously advocated the interests of its client. The adversary proceeding progressed at an appropriate pace considering discovery and research conducted.
2006 Memorandum Decision, at p. 9. Yet, these findings did not prevent the bankruptcy court from critically evaluating the fees and expense reimbursements requested by Berliner Cohen, and the bankruptcy court ultimately disallowed $80,742.50 of the fees and $17,831.54 of the cost reimbursements requested by Berliner Cohen.
We do not perceive evidence of clear error in the bankruptcy court's fact findings, and we do not have a definite and firm conviction that the bankruptcy court committed any clear errors of judgment in the fee and expense reimbursement awards that it approved for Berliner Cohen, with one exception discussed infra. Viewed in isolation, whether any particular itemized time entry complies fully with the Guidelines may be reflected differently in the eye of the beholder. However, the bankruptcy court's consideration of Berliner Cohen's fee applications was informed by its observation as the trial court of Berliner Cohen's representation of Dimas over the more than three and one-half years that Berliner Cohen served as Dimas's special counsel. That is a record of first-hand experience that we simply cannot match in reviewing an appeal. That is also why the abuse of discretion standard is particularly appropriate to our review of cases such as this. We conclude that the bankruptcy court's awards of $611,567.83 in fees and $16,515.61 in expense reimbursements should be affirmed.
B. The bankruptcy court erred in approving fees for preparation of fee applications in excess of the 5% cap in the Guidelines.
In one category, regarding preparation of fee applications, the Guidelines include a mandatory percentage cap.
Fees for preparation of a fee application may not exceed five percent of the total amount of fees and costs requested in the application. This five percent guideline is a ceiling rather than a floor; preparation expenses equaling five percent are not presumptively reasonable.... (emphasis in original)
Guidelines, § I.6. This is an exception to the generally discretionary language of the Guidelines. Nonetheless, the bankruptcy court approved fees for Berliner Cohen's preparation of fee applications in excess of ten percent of Berliner Cohen's entire fee and expense reimbursement applications, excluding fee requests for preparation of fee applications.
The bankruptcy court did not articulate any particular circumstances that would justify approving fees in this category in excess of the five percent cap. We can envision circumstances that would justify an award of fees for preparing fee applications in excess of the five percent limitation, but in light of the mandatory language of this particular Guideline, if the bankruptcy court approves fee application preparation fees in excess of the five percent cap, it must state why. As no explanation was provided in this case, it was an abuse of discretion to approve fees for preparation of fee applications in excess of the five percent Guideline. Five percent of the total non-preparation fees and expense reimbursements requested is $33,659.83, which Berliner Cohen may retain, but it must disgorge the excess over five percent in the amount of $35,363.17 to Dimas.
C. The treatment of interim cost reimbursements paid in excess of the final allowance is unclear.
As noted at the outset of this Memorandum, Berliner Cohen received expense reimbursements on an interim basis totaling $22,454.38, while its final award of expense reimbursements totaled only $16,515.61. Appellants argued in their briefs and at oral argument that Berliner Cohen should be required to disgorge the $5,938.77 difference.
It is unclear to us from the record how the difference between interim expense reimbursements paid and final expense reimbursements allowed was treated in the final awards to Berliner Cohen. If Berliner Cohen retained the excess cost reimbursements in addition to the total fees awarded to it, the excess expense reimbursements should be disgorged to Dimas, and we remand to the bankruptcy court for resolution of this accounting issue.
CONCLUSION
The bankruptcy court applied appropriate legal standards to its consideration of Berliner Cohen's applications for approval of fees and expense reimbursements. It is not for this panel to second-guess the bankruptcy court's fact findings, which were not clearly erroneous. Ultimately, we conclude that the bankruptcy court appropriately exercised its discretion in approving Berliner Cohen's expense reimbursements and the bulk of its fee awards. The bankruptcy court devoted considerable time to reviewing Berliner Cohen's fee applications, and it fully understood the difficulties of the special counsel representation that Berliner Cohen undertook. As a result, the bankruptcy court's approval of Berliner Cohen's fees and expense reimbursements is AFFIRMED on all points, except for its fee allowance for preparation of fee applications.
In light of the mandatory five percent cap contained in the Guidelines concerning fees for the preparation of fee applications, and the lack of an explanation by the bankruptcy court for allowing the cap to be exceeded, we REVERSE and require disgorgement of fees in the amount of $35,363.17.
We further REMAND for a determination as to whether Berliner Cohen should be required to disgorge the $5,938.77 in interim expense reimbursements it received in excess of the final expense reimbursement award.