EDWARD ELLINGTON, Bankruptcy Judge.
Although not directly relevant to the matter pending before the Court, the Court will briefly describe the events leading up to the bankruptcy filing. Community Home Financial Services, Inc. (CHFS) is in the business of purchasing and servicing loan portfolios. The president of CHFS is William D. Dickson (Dickson). CHFS entered into various business transactions with several companies controlled by Dr. Charles C. Edwards (Dr. Edwards). This bankruptcy case evolved out of disputes between Dickson and CHFS on the one hand, and Dr. Edwards and his companies on the other.
CHFS and Edwards Family Partnership, LP and Beher Holdings Trust
On February 15, 2012, CHFS (and Dickson individually) filed suit against Edwards and others in the Chancery Court of the First Judicial District of Hinds County, Mississippi. A variety of relief was sought in the complaint, including: specific performance; an accounting; damages for breach of contract; and rescission or modification of the agreement. On April 11, 2012, Edwards removed the suit to the United States District Court for the Southern District of Mississippi (District Court Litigation) [USDC Case No. 3:12-cv-252-CWR-LRA].
In the District Court Litigation, Edwards denied that CHFS and Dickson were entitled to any relief. Edwards also filed a counterclaim against CHFS and Dickson requesting various relief including: judgments against CHFS on the promissory notes; a judgment against Dickson on his guaranty agreements; and, the appointment of a receiver for CHFS. Edwards filed a separate motion for the appointment of a receiver, and the district court set the receiver motion for trial.
Over the course of several days, the receiver motion was heard by United States District Court Judge Carlton W. Reeves (in Case No. 3:12-cv-252-CWR-LRA). The day prior to the final hearing before Judge Reeves, CHFS (Debtor) filed a petition for relief under Chapter 11 of the United States Bankruptcy Code on May 23, 2012.
On June 11, 2012, Derek A. Henderson (Henderson) filed his Application of Debtor to Employ Counsel (Dkt. #34). The Order Authorizing Debtor to Employ Counsel (Dkt. #52) was entered on July 5, 2012.
Except for the Internal Revenue Service, Edwards is, for the most part, the only creditor to actively participate in the Chapter 11 case. The relationship between Edwards and the Debtor appears to have been amicable at one point, but it deteriorated rapidly as the Chapter 11 case progressed. Any motion filed by the Debtor was hotly opposed by Edwards and vice versa. The Debtor filed adversary proceedings against Edwards that were also hotly contested. The Debtor proceeded as the debtor-in-possession (DIP) in the bankruptcy case for approximately a year and a half.
On December 20, 2013, Henderson filed Disclosure of Transfer of Funds and Other Matters (Dkt. #426) (Disclosure). In the Disclosure, Henderson stated that the Debtor had changed its principal place of business from Jackson, Mississippi, to the country of Panama, and had opened branch offices in Panama and in the country of Costa Rica. Further, Henderson disclosed that the Debtor transferred all of the funds from the Wells Fargo DIP bank accounts to banks located in the country of Panama. All of these actions were done by the president of the Debtor, Dickson, without the knowledge or the advice of Henderson or Dickson's personal bankruptcy attorney, Eileen N. Shaffer.
On that same day, the United States Trustee (UST) filed the United States Trustee's Emergency Motion for Order for the Appointment of a Chapter 11 Trustee (Dkt. #427). On December 23, 2013, the Court entered the Order Granting United States Trustee's Emergency Motion for Order for the Appointment of a Chapter 11 Trustee (Dkt. #429). The UST was directed to appoint a Chapter 11 trustee for the Debtor.
The United States Trustee's Application for Approval of Chapter 11 Trustee (Dkt. #455) was filed on January 8, 2014. On January 21, 2014, an Order (Dkt. #473) was entered appointing Kristina M. Johnson as the Chapter 11 trustee (Trustee) for the Debtor.
On January 2, 2014, Henderson
On January 23, 2013, Edwards Family Partnership, L.P. and Beher Holdings Trust's Objection to Fee Applications of Derek Henderson (DK #443) (Dkt. #479) (Objection) was filed. In its Objection, Edwards contends that Henderson should not be compensated because "a considerable amount of time was spent working on . . . matters which are of no apparent value to the bankruptcy estate."
The Trustee filed Trustee's Objection to Fifth Application of Attorney for the Debtor for Allowance of Fees and Allowance of Costs and Expenses [Dkt. #443] (Dkt. #529) (Trustee's Objection).
A trial was held on the Application and the objections on January 30, 2015. At the trial, Henderson announced that he had agreed with the Trustee to voluntarily reduce his request by 2.60 hours (2.60 hours × $275.00 = $715.00). Further, the Trustee stated that "the trustee has agreed to defer to the Court's ruling today and then compensate professionals accordingly, based on the Court's ruling." (Trial Tr. at 4). At the conclusion of the trial, Henderson and Edwards agreed upon a briefing schedule. The transcript of the trial was received on April 14, 2015 (Dkt. #1037).
On April 7, 2015, the Trustee filed Urgent Motion to: (1) Withdraw the Reference to Bankruptcy Court of the Whole Chapter 11 Case or, Alternatively, of Certain Adversary Proceedings and Contested Matters, and (2) Consolidate Certain Adversary Proceedings and Contested Matters with Pending District Court Actions
On April 9, 2015, the Court of Appeals for the Fifth Circuit entered an opinion relating to the compensation of professionals in bankruptcy cases, Barron & Newburger, PC v. Tex. Skyline, Ltd. (In re Woerner), 783 F.3d 266 (5th Cir. 2015). On August 24, 2015, and September 15, 2015,
On June 29, 2015, Judge Reeves entered an Order
This Court has jurisdiction of the subject matter and of the parties to this proceeding pursuant to 28 U.S.C. § 1334 and 28 U.S.C. § 157. This is a core proceeding as defined in 28 U.S.C. § 157(b)(1) and (2)(A).
When CHFS filed bankruptcy under Chapter 11 of the Bankruptcy Code, CHFS became the DIP pursuant to 11 U.S.C. § 1101
As stated previously, pursuant to § 327, the Debtor hired Henderson to represent it in the above-styled bankruptcy case. Subsequently, Henderson filed his Application for compensation pursuant to § 330(a), and Edwards filed its Objection. Section 330(a) provides in pertinent part:
11 U.S.C. § 330(a).
Furthermore, § 330(a)(4) lists those items for which a court may not award a professional compensation:
11 U.S.C. § 330(a)(4).
In Perdue v. Kenny, 559 U.S. 542, 551 (2010), the Supreme Court of the United States adopted the method to calculate attorney's fees as established by the Court of Appeals for the Third Circuit.
"The lodestar is calculated by multiplying the number of hours an attorney reasonably spent on the case by an appropriate hourly rate, which is the market rate in the community for this work. There is a strong presumption of the reasonableness of the lodestar amount." Black v. SettlePou, P.C., 732 F.3d 492, 502 (5th Cir. 2013) (citations omitted). The party seeking an award of attorney's fees bears the burden of "establishing entitlement to an award and documenting the appropriate hours expended and hourly rates." United States ex rel. Rigsby v. State Farm Fire & Cas. Co., No. 1:06cv433, 2014 WL 691500, at *9 (S.D. Miss. Feb. 21, 2014).
In the bankruptcy context, the method a court must follow in order to determine the amount of an award of attorney's fees was explained by the Fifth Circuit:
CRG Partners Grp., LLC v. Neary (In re Pilgrim's Pride Corp.), 690 F.3d 650, 656 (5th Cir. 2012), as revised (Aug. 14, 2012) (citation omitted) (footnote omitted).
The Johnson factors are:
Pilgrim's Pride, 690 F.3d at 654.
It should be noted that the United States Supreme Court has stated that there is a strong presumption that the lodestar method provides a reasonable fee. Perdue v. Kenny A. ex rel. Winn, 559 U.S. 542, 552 (2010). The Supreme Court has further held that "`[t]he district court also may consider [the] factors identified in Johnson v. Georgia Highway Express, Inc., 488 F.2d 714, 717-719 (CA5 1974), though it should note that many of these factors usually are subsumed within the initial calculation of hours reasonably expended at a reasonable hourly rate.'"
In summary, the Court must first determine the lodestar fee "by multiplying the number of hours an attorney would reasonably spend for the same type of work by the prevailing hourly rate in the community. A court then may adjust the lodestar up or down based on the factors contained in § 330 and its consideration of the twelve factors listed in Johnson." In re Cahill, 428 F.3d 536, 540 (5th Cir. 2005) (citations omitted) (footnote omitted).
At the start of the trial, the attorney for Edwards, Stephanie Rippee (Rippee), stated: "We're not here questioning the rates or whether he did the work, what we're here to question is whether or not it benefitted the estate." (Trial Tr. at 6). Since Edwards is only objecting to the Application based on § 330(a)(4)(A)(ii)(I), the Court finds that in reviewing the Application, the number of hours expended by Henderson to be reasonable.
Because of the contentious nature of the relationship between the Debtor and Edwards, the Court is aware of the time and labor this case required of Henderson and that this case at times precluded other employment by Henderson. Henderson has been practicing before this Court for over 28 years, therefore, the Court is well aware of his experience and reputation. This Court routinely approves applications for compensation for attorneys, and in this same case, the Court recently approved an application for attorneys' fees for the law firm for the Trustee. Consequently, the Court is aware of other awards of attorney's fees in this case and in this district. Considering all factors, the Court finds that the hours billed by Henderson and his paralegal to be reasonable.
Further, since the Court recently held that a reasonable maximum hourly rate and the prevailing maximum market rate in this Court for attorneys to be $350.00
The Court finds the following to be the final lodestar figure for the Application:
The Court will now determine whether the lodestar amount should be adjusted pursuant to § 330(a)(4)(A)(ii)(I).
As noted previously, Edwards objects to the Application because it claims Henderson's actions did not benefit the estate, and therefore, compensation should be denied pursuant to § 330(a)(4)(A)(ii)(I). Specifically, Edwards objects to the Application because it asserts that at the time Henderson performed the services, "it was not reasonable for Mr. Henderson to believe that the litigation activities he was pursing at Butch Dickson's direction would provide a material benefit to the estate."
In Woerner, the Fifth Circuit revisited its prior decision in Family Snacks, Inc. v. Andrews & Kurth, L.L.P. (In re Pro-Snax Distibs., Inc.), 157 F.3d 414 (5th Cir. 1998). In Pro-Snax, one of the issues addressed by the Fifth Circuit was whether the services were beneficial at the time they were performed or whether in hindsight the services resulted in a material benefit to the estate. Woerner, 783 F.3d at 273. In Pro-Snax, the Fifth Circuit "adopted the stricter `hindsight' or `material benefit' measure." Id. Upon reconsideration of Pro-Snax in Woerner, the Fifth Circuit overturned Pro-Snax and adopted "the prospective, `reasonably likely to benefit the estate' standard endorsed by our sister circuits." Id. at 268.
The facts of Woerner are similar to the facts of the case before the Court. Woerner and Texas Skyline, Ltd. entered into a partnership for the purpose of undertaking a real estate venture. Similar to Edwards, Texas Skyline was the sole investor. During the three year relationship, Woerner misappropriated funds. After Texas Skyline discovered the misappropriated funds, Texas Skyline sued Woerner in state court. At the completion of the bench trial, the state court orally ruled in favor of Texas Skyline. The court set a remedies hearing a few weeks off. The night before the remedies hearing, Woerner filed a Chapter 11 bankruptcy case and hired bankruptcy counsel to represent him. Over the next eleven (11) months, the debtor and Texas Skyline clashed over adversary proceedings and numerous motions and also attempted mediation. When it was discovered that the debtor had concealed assets, another creditor moved to have the case converted to a Chapter 7. The debtor opposed the conversion, however, the court ultimately converted the case to a Chapter 7. Id. at 268-70.
After the case was converted, the debtor's attorneys, the law firm of Barron & Newburger, P.C. (B & N), filed its fee application. The bankruptcy court allowed B & N to be compensated in full for its expenses, but following Pro-Snax, cut the amount of attorney's fees requested by 85%. Id. at 270. "Most of the disallowed fees were denied due to B & N's lack of success. Specifically, the bankruptcy court found much of B & N's billed time was not of identifiable benefit to the estate." Id. The district court affirmed the bankruptcy court. On appeal to the Fifth Circuit, a panel of the court affirmed the district court's decision, but all three members called for an en banc reconsideration of Pro-Snax. Id. at 268. The Fifth Circuit granted a rehearing en banc to reconsider Pro-Snax.
Upon reconsideration, the Fifth Circuit held:
Id. at 268 (footnote omitted).
The importance and effect of Woerner on fee applications was addressed in In re Digerati Technologies, Inc., 537 B.R. 317 (Bankr. S.D. Tex. 2015):
Digerati, 537 B.R. at 331. (footnote omitted).
In summary, under the new standard of reasonable at the time established in Woerner, "if a fee applicant establishes that its services were `necessary to the administration' of a bankruptcy case or `reasonably likely to benefit' the bankruptcy estate `at the time at which [they were] rendered,' see 11 U.S.C. § 330(a)(3)(C), (4)(A), then the services are compensable." Woerner, 783 F.3d at 276.
The Court acknowledges that when reviewing the Application with the knowledge that Dickson depleted the estate of its cash and set up the Debtor's operations outside of the United States, it would be easy to find that Henderson's services did not provide a material benefit to the estate. The Court finds, however, that at the time Henderson was performing the bulk of the services for the Debtor, he was totally unaware of what Dickson was planning. The services Henderson was performing were necessary for the administration of the bankruptcy estate, and but for Dickson's later actions, were a material benefit to the bankruptcy estate.
During the approximately eighteen months the Debtor operated as a DIP, Henderson was attempting to move the case forward as required by Chapter 11 of the Code. Like the attorneys in Woerner, early in the case, Henderson filed the Debtor's mandatory Schedules and Statement of Financial Affairs (Dkt. #40) and later, filed amended schedules; filed applications to employ attorneys; filed applications to approve salaries; attended the meeting of creditors; negotiated Edwards' motion to prohibit use of cash collateral (Dkt. #23), and participated in mediation. Henderson also filed several adversary proceedings against Edwards which were vigorously opposed by Edwards.
Approximately eight (8) months after the case was filed, Henderson filed the Debtor's Disclosure Statement with Respect to Plan of Reorganization (Dkt. #167) and its Plan of Reorganization (Dkt. #168) on January 29, 2013. On March 5, 2013, the Edwards Family Partnership, LP and Beher Holdings Trust's Objection to Disclosure Statement of Community Home Financial Services, Inc. (Dk #167) (Dkt. #204) was filed. In an attempt to resolve Edwards' objection to the disclosure statement, Henderson filed an Addendum to Disclosure Statement (Dkt. #205) on March 6, 2013, and a Second Addendum to Disclosure Statement (Dkt. #286) on July 18, 2013. On August 8, 2013, an Order on Objection to Disclosure Statement (Dkt. #303) was entered resolving Edwards' objections to the disclosure statement and the Order Approving Disclosure Statement and the Two (2) Addendums and Fixing Time for Filing Acceptances or Rejections of the Plan of Reorganization Combined with a Notice of Hearing (Dkt. #304) was entered.
Edwards filed an objection to confirmation of the plan. In addition, Edwards filed a motion to appoint a trustee and a motion to dismiss the case or to convert the case to a Chapter 7. Confirmation of the Debtor's plan was held in abeyance pending the resolution by the Court of the motions to appoint a trustee and dismiss or convert. The trial on the motion to convert and the motion to dismiss was set for January of 2014, and the time entries in Henderson's Application show that Henderson was preparing for the January 2014 trial. During the same time period, Henderson was conducting discovery in the adversary proceedings he had filed on behalf of the Debtor.
Edwards contends that because the plan provided for a release of Dickson's personal guaranties, the Debtor's plan was not confirmable, and therefore, Henderson should not be compensated for work he performed on a non-confirmable plan. The Court finds, however, that there is no prohibition against the Debtor including such a provision in its plan-indeed, over the years, this Court has seen many similar provisions in Chapter 11 plans. The inclusion in the plan of the release of Dickson's guaranties was a gamble, which ultimately proved to be an unsuccessful gamble because Edwards objected to the provision. The Fifth Circuit has held that a provision to release a non-debtor is not permitted by the Code when the affected creditor timely objects to the release. Feld v. Zale Corp. (In re Zale), 62 F.3d 746, 780 (5th Cir. 1995). Edwards objected to the release, therefore, before the plan could be confirmed, that provision would be removed from the Debtor's plan.
As for the Debtor's opposition to the appointment of a trustee, it is routine for a Chapter 11 debtor to contest the appointment of a Chapter 11. Therefore, the Court finds that Henderson's opposition to the trustee motion is not unusual and was necessary for the Debtor to continue as the DIP and to administer its bankruptcy estate.
Without getting into the details of the complex adversaries, the Court finds that the adversary proceedings filed by the Debtor were for the benefit of the bankruptcy estate and necessary for the administration of the bankruptcy estate. Edwards status as a creditor, whether it is secured or unsecured, will impact the Debtor's estate and will impact the provisions of the Debtor's plan. It appears that Edwards holds the belief that because Edwards believes that the Debtor's claims in the adversary proceedings are baseless and that Edwards will prevail, then Henderson's litigation of the adversary proceedings should not be compensated because the litigation of the adversary proceedings cannot benefit the estate. It is the ultimate decision of this Court, however, to determine whether the Debtor's claims in the adversary proceedings are valid. At this point in time, the Court is of no opinion as to the validity of the Debtor's claims in the adversary proceedings. Consequently, the Court cannot find that Henderson's actions in litigating the adversary proceedings were not "`reasonably likely to benefit' the bankruptcy estate `at the time at which [they were] rendered.'" Digerati, 537 B.R. at 331 (citation omitted).
Further, the Court notes that the Trustee apparently agrees with the Debtor that there is a question as to whether Edwards is a secured creditor-the Trustee has elected to proceed with the adversary proceedings filed by the Debtor against Edwards. On November 19, 2015, the Court held a trial on Edwards' motion to dismiss one of the adversary proceedings. At the trial, the Trustee argued against the motion to dismiss, or alternatively, the Trustee requested time to file an amended complaint if the Court granted the motion to dismiss.
With hindsight, it is easy to see that Dickson "played" Henderson, and that Henderson had no knowledge that Dickson was plotting to take the bankruptcy assets out of the country. Henderson's Application has numerous entries where Henderson was consulting with Dickson about various matters in the bankruptcy case. Indeed, seven days before Henderson filed the Disclosure, he consulted with Dickson regarding matters in the bankruptcy case.
As the Fifth Circuit held in Woerner, as long as a court finds that at the time the services were rendered, an attorney's services were reasonably likely to benefit the bankruptcy estate, the court may award an attorney compensation regardless of whether the services ultimately resulted in a material benefit to the estate.
Woerner, 783 F.3d at 274. (footnote omitted).
Consequently, subject to the items listed below, the Court finds that the services rendered by Henderson were "objectively reasonable at the time they were made,"
In reviewing the Application, the Court agrees with Edwards that the services provided by Henderson in connection with the motion to have the § 362 stay applied to Dickson personally should not be compensable as an "identifiable tangible, and material benefit"
In reviewing the Application, the Court finds that some of the time entries which mention the stay for Dickson are block entries. "The term `block billing' refers to the `time-keeping method by which each lawyer and legal assistant enters the total daily time spent working on a case, rather than itemizing the time expended on specific tasks.' Glass v. United States, 335 F.Supp.2d 736, 739 (N.D. Tex. 2004) (citation omitted). Since the Court cannot determine how much of the block of time was spent on the matters involving the stay for Dickson, Henderson may not be compensated for the entire time entry. The Court finds that Henderson will not be compensated for the following entries:
Consequently, the Application will be reduced by $2337.50.
"A request for attorney's fees should not result in a second major litigation. Ideally, of course, litigants will settle the amount of a fee. Where settlement is not possible, the fee applicant bears the burden of establishing entitlement to an award and documenting the appropriate hours expended and hourly rates." Hensley v. Eckerhart, 461 U.S. 424, 437 (1983). Since the parties were unable to settle the amount of Henderson's fee, Henderson "bears the burden of establishing entitlement to an award." Id.
Under the new standard of reasonable at the time established in Woerner, "if a fee applicant establishes that its services were `necessary to the administration' of a bankruptcy case or `reasonably likely to benefit' the bankruptcy estate `at the time at which [they were] rendered,' see 11 U.S.C. § 330(a)(3)(C), (4)(A), then the services are compensable." Woerner, 783 F.3d at 276. The Court finds that, except for the entries related to the imposition of a stay for Dickson, Henderson has established that his services were necessary for the administration of the bankruptcy case and were reasonably likely to benefit the bankruptcy estate at the time he performed the services. Henderson may not, however, be compensated for the $2,337.50 of his requested fees which relate to the imposition of a stay for Dickson personally.
A separate judgment consistent with this Opinion will be entered in accordance with Rule 9014 of the Federal Rules of Bankruptcy Procedure.
