JAMES S. STARZYNSKI, Bankruptcy Judge.
The Application by Attorneys as Special Counsel for Debtor [in Possession] for Approval and Payment of Compensation ("Application") (doc 130), and the Debtor's Response to Application for Compensation by Lurie and Park [sic] ("Objection") (doc 136), filed by Market Center East Retail Property, Inc. ("Debtor"), came before the Court for an evidentiary hearing on July 2, 2010, followed by briefing of certain issues.
Most of the background is set out in the findings of fact already issued by the Court, and the Court assumes the parties' familiarity with same.
Briefly recapitulated, Danny Lahave, president and sole shareholder of Debtor, together with Attorney Robert Diener,
From June 10, 2009, when the Employment Application was filed, until January 21, 2010, when it appears that Applicant completed the fee application (Application exhibit A, page 23 of 37), Applicant expended 43.75 hours
Debtor's objection raises a variety of issues, most of which the Court will address seriatim. There are, however, certain issues that the two sides agree on. They agree that the Retainer Agreement was not assumed by the Debtor, that Applicant is entitled to some compensation, that Applicant may file an administrative claim for compensation under § 503(b), and that Debtor may object to the amount of the requested fees and the methodology of calculating those fees. Both sides also agree that, with no compensation arrangements having already been approved by the Court (whether by approval of the prepetition Retainer Agreement or otherwise), the restriction on changing the compensation arrangements contained in the second sentence of § 328(a) is inapplicable.
From the papers, it would also appear that the parties are agreed that Applicant seeks an award of approximately $1,400,000. E.g., Debtor Memorandum at 10 ($1,400,000 fee for 108 hours of work) and Application at 7, ¶ 22 (request for $1,472,385.00 for fees and $851.75 for costs). Since the Court has determined instead to award most of the hourly fees dating from June 10, 2009 and 15% of the additional $2,250,000 obtained after the filing of the petition, for reasons explained below, that after-the-fact agreement by the parties (about the number they believe they are arguing about) is irrelevant. See Albrecht I (court may disregard agreement reached by parties on fee issue). The Court's decision also means that the number of hours to be compensated is 43.75 (detailed below) rather than the 108 that Debtor argues about. And it also means that there need be no proration of administrative expenses, as requested by Applicant. Application at 6.
The issues on which the parties are at odds are rather more numerous. They include whether all the hours worked were necessary and of benefit to the estate; whether Applicant is locked into a "lodestar" methodology; whether Applicant met its burden of proof on various elements of proving up its claim, including meeting the requirements of § 330(a)(3); whether Applicant needs to establish an alternative claim against the estate for promissory estoppel; and whether the Court can and should approve the Retainer Agreement on a nunc pro tunc or post facto basis— that is, whether Applicant should be compensated (and if so, how much) in connection with the "gap period" between the petition date of April 22, 2009 and the date the employment application was filed on June 10, 2010. There are other minor issues that the parties have argued, which the Court will address as needed.
Before proceeding to the contested issues, the Court needs to clarify what at least one consequence is of the history of this dispute. By agreement of the parties
Instead, the Stipulated Employment Order effectively employs Applicant for unspecified
Whether Applicant is entitled to compensation, and how much, is determined by reference to the relevant portions of §§ 503(b) and 330(a).
Section 503(b)(2) provides that
Section 330(a)(3) provides as follows:
The Court finds that Applicant has sufficiently met the applicable standards of both sections of the Code, as explained below.
Debtor appropriately cites to Rubner & Kutner, P.C. v. U.S. Trustee (In re Lederman Enterprises, Inc.), 997 F.2d 1321 (10th Cir.1993) for the proposition that Applicant must establish benefit to the estate to receive any compensation. Lederman goes on to say that "... the lodestar analysis ..., however, determines only the `reasonableness' of counsel's fees, not its entitlement. The Bankruptcy Code itself sets out the standard to be used in determining counsel's eligibility for compensation." Id., at 1323 (citations omitted). Accord, In the Matter of Taxman Clothing Company, 49 F.3d 310, 315-16 (7th Cir.1995) (Attorney seeking to recover preferential transfer for estate not entitled to unreasonable additional fees calculated pursuant to lodestar after it became apparent that the recovery action would not be successful).
Debtor presents several arguments in opposition to the Court's finding. The arguments are not persuasive.
First, it argues that the small amount of time that appears in Applicant's time records describing settlement negotiations with Lowe's counsel (excerpted and condensed in Debtor Memorandum at 14
The time listed, exclusive of "time spent reviewing Diener's work or talking to Lahave", Debtor Memorandum at 14, is slightly over six hours. The Court initially considered this amount of time surprisingly low, and it formed that opinion based on the assumption that a matter of this financial magnitude, representing a $13,500,000 original purchase price, a liquidated damages clause of $115,000 and a settlement of $9,750,000, must have been intensely negotiated within the relatively short amount of time between initiation of the litigation and final settlement.
In a related argument Debtor asserts that Mr. Diener and Robert (or "Bob") Feinberg, the real estate agent involved in the original sale transaction, did the bulk of the negotiating that resulted in the settlement figure reaching $9,500,000.
Mr. Diener also testified that he (Diener) did most of the negotiating with Lowe's.
Mr. Diener also professed not to know whether it was normal for litigation counsel to also engage in settlement negotiations. He conceded that from about March through August that he had no idea what Mr. Lurie, litigation counsel, was up to. He denied that the discovery demands constituted pressure on Lowe's to settle. And at one point, asked why Lowe's counsel would send a settlement offer to Mr. Lurie rather than to him, he responded that he considered that a breach of professional courtesy, with no explanation of why Lowe's counsel would do that were she negotiating primarily with Mr. Diener.
None of that testimony is credible, partly based simply on the face of it. For example, Mr. Diener testified that in the first three and a half years of his practice litigation was all that he did. It is common knowledge that frequently litigators also engage in settlement negotiations for their clients. And the suggestion that the discovery demands did not apply pressure to Lowe's that led to the settlement is also preposterous. See, for example, the April 21, 2009 e-mail from Ms. Mortimer to Messrs Lurie and Diener:
Applicant trial exhibit 8. Similarly, the e-mails exchanged on July 17 and 23, and August 27, 2009 between Mr. Lurie and Ms. Mortimer, Applicant trial exhibits 9, 11 and 12 respectively, are merely seven more examples that demonstrate how effective
Further evidence refuting Debtor's claim is in the time records submitted by Applicant (Applicant trial exhibit 2), the accuracy of which were not challenged, which show Mr. Lurie involved in settlement negotiations—either with Lowe's counsel or consulting with Mr. Lahave and/or Mr. Diener—on March 24, March 26, April 7 (x 2), April 13 (x 2), April 14, April 20, April 21, April 28, May 1, May 6, May 18, May 19, June, 1, June 4, and June 5.
Thereafter Applicant's time records show repeated communications between Messrs Lurie and Lahave about the status of the negotiations on June 29, July 2 (x 2), July 10, July 16 (x 2), July 31, August 7, August 10, August 11, August 12, August 14 (with a copy to Mr. Diener), August 18 (copy to Mr. Diener), August 19 (likely settlement discussed), August 20, August 24 (including the mention of a real estate broker's commission), August 25 (x 2), August 26 (correspondence to Mr. Diener), August 27 (apparently several updates to Messrs Lahave and Diener)
This is not to say that Mr. Diener conducted none of the negotiations with Lowe's. The first April 28 e-mail in Debtor trial exhibit O is from Mr. Diener to Ms. Mortimer that starts with "[i]n our telephone conversation the other day" and goes on to counteroffer a settlement of $8,500,000 in return for conveying to Lowe's less than all of the parcel in question. And it is also true that time entries from March 26, March 27, March 30, April 1, April 10 and April 21 suggest, some more explicitly than others, that there were communications between Mr. Diener and Lowe's counsel. And there are two references in the time sheets—February 17 and February 19—to "client's transactional attorney". What these time entries tell the Court is that, while the considerable bulk of the settlement communications were between Lowe's counsel and Mr. Lurie, Mr. Diener did have some involvement, but that most of that involvement was as the attorney for the client who knew the background of the original transaction, which was now being reactivated in the course of the settlement
In reaching this conclusion, the Court has taken into account the May 8, 2009 e-mail from Mr. Lurie to Mr. Diener (Diener Exhibit B attached to Affidavit of Robert Diener in Support of Debtor's Motion to Stay Award of Fees ("Diener Affidavit") attached as Exhibit D to Debtor Brief— doc 201-4 at page 6 of 6), and the February 2009 e-mail exchanges among Messers Diener, Lahave and Lurie and the September 30, 2009 e-mail from Mr. Lurie to Mr. Lahave (Exhibits B and C respectively to the Lahave Affidavit—doc 202-3 at pages 1-3 and doc 202-4 at pages 1-2).
The May 8, 2009 Lurie to Diener e-mail potentially suggests a more robust role for Mr. Diener. (Debtor asserts that this e-mail demonstrates that it was Mr. Diener and not Mr. Lurie who obtained the settlement. Debtor Brief at 20-21.) It recites as follows:
The e-mail is presented in isolation; what the antecedent communication was that "sound[ed] good" to Mr. Lurie is unspecified, and the Court has not found an e-mail exchange or other communication that immediately preceded the May e-mail. But even assuming that the e-mail is what Debtor purports it to be, its effect is in good measure offset by the trial testimony and other exhibits. The trial testimony was clear that it was Mr. Lurie's focus on Lowe's tactic of optioning several properties in a given area as the avenue to bypass the constraints of the liquidated damages clause. The February 19, 2009 e-mail from Mr. Lahave to Mr. Lurie, Lahave Affidavit, Exhibit B (doc 202-3, page 2 of 3)
Reinforcing Mr. Diener's already existing lack of credibility, Mr. Diener changed his testimony during the trial from asserting that he represented Debtor to saying that he works for Mr. Lahave directly for $15,000 per year.
Second, Debtor argues that a substantial component of the good result was Lowe's "greed" to obtain a property for $9,750,000 that they had originally decided to pay $13,500,000 for. Thus, Debtor argues, Applicant was not the one responsible for the benefit that accrued to the estate. Debtor Memorandum at 15. There are several responses to this. First, all the evidence suggests that Lowe's simply walked away from the deal in December 2008, with no intention of wanting to obtain the property or to renegotiate the price. It was perfectly willing to let Debtor keep the $115,000, but there is no evidence that it even considered conceding any more than that. Second, there was no evidence whatever that the economy improved substantially enough, or Lowe's overall business strategy changed, such that suddenly Lowe's wanted this property. Of course there was no testimony whatever from Lowe's itself on this issue; what Debtor argues is merely self-serving speculation. Third, even if Lowe's "greed" was a factor, Applicant surely gets credit for having triggered that greed and using it to Debtor's considerable advantage.
Third, Debtor raises the argument that "the sad fact is that the result achieved is not really a `good' result for the debtor. If Mr. Lurie wants to claim that he, and he alone, is responsible for the result, then he, and he alone, lost the debtor almost $4 million that it had invested." Debtor Memorandum at 15-16.
Debtor also argues that one way to interpret the contract is that the gain to the estate be measured by what is left over after the secured claim of ORIX has been paid in full. Debtor Memorandum at 17-18. By that standard, the estate will benefit no more than $600,000 to $1,300,000, and thus to pay out the bulk or at least a large amount of that sum to Applicant would be "non-sensical" [sic]. Id.
To begin with, there is no need to resort to Black's Law Dictionary to define the term "recovery", as Debtor does in its brief, nor is there a need to resort to rules for interpreting ambiguous contracts. The Retainer Agreement is not ambiguous, at least not with respect to the terms at issue here. The Court finds that Mr. Lurie is completely credible in stating the Mr. Lahave came to him to get Lowe's to purchase the property; the Retainer Agreement is consistent with that understanding between the two of them. This Court has already found that Mr. Lurie reached an agreement with Mr. Lahave to include the value of the sale of the property in calculating the amount of the recovery and then, with considerable prescience (or perhaps only good lawyering), made that mutual understanding quite specific in the Retainer Agreement. Although everyone knew about the ORIX debt, there is nothing in the Retainer Agreement to support Debtor's argument that any "recovery" should be net of what ORIX collects. Nevertheless, the recovery was sufficient to pay off the secured debt in full with Debtor remaining solvent. And even if it were the case that after paying off ORIX, the recovery was not sufficient to pay all the administrative claims, that result would still be a success given where this Debtor was in January 2009. The fact that the award of compensation and reimbursement to Applicant is $350,752.06 plus some supplemental attorney fees for Applicant's counsel, thus leaving enough to pay all the other creditors in full and put money back into Debtor's pocket, raises the success to the level of rousing.
What Debtor's argument illustrates is the pervasive inability of Mr. Lahave to distinguish between his personal interests on the one hand and the interests of the corporation and its creditors on the other hand.
Debtor does not explicitly assert that Applicant can only be compensated under a lodestar approach.
In a similar vein, Debtor also argues that because there is no agreement in effect for a part contingency, the Court is limited to relying on the lodestar. Debtor Memorandum at 6 (arguing for a lodestar approach, "Lurie & Park may be entitled to compensation, but not pursuant to the terms of the agreement.") and Response Memorandum in Opposition to Administrative Claim of Barak Lurie at 14.
In fact, it is not clear to this Court that the default position for compensation must be the lodestar in the absence of a specific agreement otherwise. For example, if there had been no agreement on compensation for an attorney to perform a certain task, and a party proved to the court that the customary and usual compensation in the legal community as a whole for that sort of task was a flat fee of a certain amount, the court might well award that compensation, regardless of how many hours and at what rate the attorney had taken to accomplish the task.
The lodestar is a method that takes an appropriate hourly rate based on the market and multiplies that by some supposedly reasonable number of hours for the work at hand. Such an approach makes sense when there is a no more specific mechanism for assessing the value of the services rendered such as by obtaining for the estate a specific sum of money, as happened in this case. Thus, for example, when counsel obtain a major reorganization and improvement of a state's foster care system, there is no immediate and easy quantifying in money terms that result. So attempting to reward the attorneys by paying them what defense counsel would have gotten paid for the same number of hours is one at least marginally adequate method of compensating counsel.
In this instance, as the Court has already found, the parties had reached an arm's length agreement on the compensation to be paid—the hybrid of an hourly rate of $200/hour and the 15% contingency fee on the total recovery—when they signed the Retainer Agreement. And they still had that understanding when the employment application was filed June 10, 2009.
Thus, when Debtor argues that there is no proof pursuant to § 330(a)(3)(F) of "whether the compensation is reasonable based on the customary compensation charged by comparably skilled practitioners in cases other than cases under this title", Debtor must first explain why the compensation was reasonable then but not now.
"[E]ven if it is undisputed that a professional has provided exceptional services, such as in this case, the bankruptcy court may not award it more than a `reasonable compensation.'" In re Commercial Financial Services, Inc., 298 B.R. at 747.
Permian Anchor Services, incorporating the Johnson factors, continues to be the governing law in the Tenth Circuit, albeit refined by the amendments to § 330(a) that now comprise § 330(a)(3).
Commercial Financial Services, Inc., 298 B.R. at 748 and note 42.
Subsection 330(a)(3)(A) requires a consideration of "the time spent on such services; ...." Measured from June 10, 2009, the date the employment application was filed, through November 17, 2009, the date of entry of the Order Approving Motion to Approve Settlement of Lowe's Litigation (doc 105), Applicant spent approximately 40 hours over five months improving the recovery from $7,500,000 to $9,750,000. Were the compensation in this case calculated by a simple lodestar, that would constitute an hourly rate of ($2,250,000.00 ÷ 40 =) $8,637.25. But obviously the arrangement is not a simple lodestar; it is a partial contingency. And one role for a compensation award contingent on success is to encourage and reward big risk-taking: big risk should be met with big reward when the risk-taking has turned out to be successful. Abrams, 605 F.3d at 246.
In this instance the parties thought initially that a $200,000 total recovery would be an excellent result, and that any recovery would likely be achieved only after considerable time and effort. The arm's length negotiations over the compensation arrangements reflect that these modest expectations were perfectly reasonable. Mr. Lurie initially sought a straight hourly compensation of $395 and Mr. Lahave sought a full contingency (presumably the standard 33%). Had the parties anticipated a large return as likely, perhaps neither of them would have taken the initial positions that they did. But what they did do was what parties do when they do not know the outcome: negotiate a deal based on the best information they have.
Therefore, in summary, from the perspective of a simple lodestar, the comparatively few hours that it took to obtain the additional recovery work against approval of a large award of compensation. From the perspective of accounting for risk by means of a partial contingency, the result
Subsection 330(a)(3)(B) looks at "the rates charged for such services;...." $200 per hour, by itself, is quite inexpensive. A contingency rate of 15% is less than the standard 33% (or higher) charged in many contingency arrangements. Combining these two—roughly halving both the hourly rate and the contingency percentage—is not at all unusual. And as noted above, Debtor has already effectively admitted that this arrangement is and was reasonable. This factor supports the award.
Subsection 330(a)(3)(C) demands to know "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 under this title; ...." As discussed, the answer to this question is "yes, in spades". This factor weighs very heavily in favor of the award.
Subsection 330(a)(3)(D) asks "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; ...." What this subsection targets is the bill for services that is too high for the work done, simply because the task was not that complex or important to the estate. What is presented in this case is the polar opposite: a huge return to the estate for relatively few hours spent finishing up the implementation of a smart and persistent legal strategy. Having created the condition for a successful chapter 11 case, Applicant meets this standard easily as well. It weighs heavily in Applicant's favor.
Subsection 330(a)(3)(E) inquires "with respect to a professional, whether the person is board certified or otherwise has demonstrated skill and experience in the bankruptcy field; ...."
Subsection 330(a)(3)(F) inquires "whether the compensation is reasonable based on the customary compensation charged by comparably skilled practitioners in cases other than cases under this title."
The Court has already discussed Debtor's actions which constitute an admission that the rates in the Retainer Agreement were reasonable. There was no testimony about what rates were being charged by litigation counsel in California, although $395/hour probably ranges from reasonable to cheap. So this factor would ordinarily weigh against Applicant.
1. Time and labor required: By the time the employment application was filed on June 10, Applicant's strategy— charge Lowe's with bad faith as a way of getting around the liquidated damages clause and then press forward on the litigation, especially discovery—was well along being implemented. As a consequence, relatively little time after June 10, 2009—roughly 40 hours—was expended completing the litigation and settlement. Whether someone else could have stepped in and completed the work, to obtain the additional $2,250,000 for the estate, is not clear. What is clear is that it was Mr. Lurie who conceived the strategy and carried it out. While the relatively small amount of time expended by Applicant (even if one considers all the time expended from January 2009 forward) weighs against the size of the award (as stated above), the evidence suggests that Mr. Lurie worked reasonably hard in obtaining the result. This part of the factor favors Applicant slightly. Balancing off the two considerations, the relatively small amount of time required of Applicant outweighs the hard work factor and results in this overall factor weighing in favor of Debtor.
2. Novelty and difficulty of the questions: Although Debtor plays down the novelty and difficulty faced by Applicant, the fact is that Applicant and Debtor alike considered this litigation quite risky and thought that a recovery of perhaps $200,000 would be a good result. Such a result, whether by settlement or litigation, would of course leave the shopping center in the hands of Debtor. Mr. Lahave argued that he could have sold the shopping center (70% vacancy rate, in this economy) for $11 million to $13 million.
Debtor also argues that the Lowe's litigation was fairly simple, and required no motion practice, no receipt of discovery, no depositions, no filing of a summary judgment motion, and no trial preparation. Debtor Brief, at 16-17. What the argument does not acknowledge is the strategy that was devised by Applicant, and then filing the complaint and pressuring Lowe's for discovery, that triggered Lowe's apparent willingness to work out a settlement. Indeed, the alleged simplicity of the case is likely a testament to the effectiveness of Applicant's approach. Debtor also asserts that both parties to the Lowe's litigation admitted that the litigation was not "complex". That statement is disingenuous because it refers to that part of the Rule 26(f) report in which the parties inform the Court that the litigation will not need to be treated as "complex litigation" such as is implicated in a large class action or mass tort claim.
This factor weighs strongly in favor of Applicant.
3. The skill necessary to perform the legal service properly: The results
Further, once the complaint was filed, Applicant's pressuring Lowe's for discovery expedited and perhaps increased the settlement. This factor weighs in favor of Applicant.
4. The preclusion of other employment by the attorney due to acceptance of the case: Whether one looks at about 108 hours over about nine months or 40 hours over five months (the bulk of the allowed post-petition work took place from early June through early November), clearly this employment did not preclude Applicant from taking on other work. Nor is there any evidence that by taking on this litigation, Applicant was conflicted out of taking on any other work. This factor weighs against a large award.
5. The customary fee: The Court has already discussed this factor explicitly above in connection with § 330(a)(3)(F) above. The lack of evidence weighs against the large award.
6. Whether the fee is fixed or contingent: The Court has already discussed this factor at length in connection with § 330(a)(3)(A) and (B) above. It weighs heavily in favor of Applicant.
7. Time limitations imposed by the client or the circumstances: Mr. Lurie testified that Mr. Lahave wanted the work done quickly because the ongoing ORIX litigation was major and he (Mr. Lahave) was a guarantor of the debt to ORIX. Overall, however, there was no significant time pressure on Applicant. This factor weighs against a large fee.
8. The amount involved and the results obtained: The Court has already discussed this factor. "[T]he most critical factor in determining the reasonableness of a fee award is the degree of success obtained." Abrams, 605 F.3d at 247 (internal quotation marks and citation omitted). This factor weighs heavily in favor of Applicant.
9. The experience, reputation, and ability of the attorneys: This is another factor that has at best only marginal relevance. In the absence of a specific method to place a dollar figure on the results of the work, one could reasonably argue that a more experienced and able attorney should obtain better results in the same amount of time it would take a less experienced and able attorney, thereby justifying a higher hourly rate.
10. The "undesirability" of the case: This factor has largely been addressed by pointing out how daunting a task that both Applicant and Debtor considered the case to be at the outset. However, as considered by the Fifth Circuit in Johnson
11. The nature and length of the professional relationship with the client:
12. Awards in similar cases: The Court has already discussed this factor as well in connection with § 330(a)(3)(F) above.
Combining the factors and their relative weights, the Court attributes the most significance to the apparent difficulty of the task at the outset, to Applicant's
As noted, the 43.75 hours represent the time beginning on June 10, 2009, for which everyone agreed that Applicant is entitled to some compensation. Stipulated Employment Order, ¶ A. The parties also agreed that Applicant could apply for (and Debtor could oppose) compensation from the petition date, April 22, 2009, through June 9, 2009. Id., ¶ B. If all of Applicant's hourly billing is allowed for the time in question, it will be entitled to an additional $840.00 (4.2 hours * $200 per hour) plus costs of $92.59 (billed at the end of April 2009). See Attachment II.
Applicant argues that it should be considered to have been employed effective on the date of the filing of the petition because Debtor should have filed an employment application for Applicant on the petition date or at least very shortly thereafter. Applicant vigorously contends that Debtor (through Mr. Lahave or Mr. Diener) deliberately did not notify it of the filing of the chapter 11 petition on April 22, the asserted motivation being that Messrs Lahave and Diener sought to improve the April 20 $7,500,000 offer and complete the settlement with Lowe's, without further participation by Applicant. Debtor responded that Applicant knew of the bankruptcy filing ahead of time, citing Mr. Lurie's fifteen-minute time entry of April 15: "Draft email to client re status, bankr. implications follow up." The Court also notes the June time entries of Mr. Lurie concerning the effect of the bankruptcy filing and the need for an employment order.
The facts mostly support Applicant's version of the events. A month and a half passed between the filing on April 22 and the e-mail on June 8 from Mr. Lahave to Debtor's counsel informing counsel that there was another attorney working for the estate. Applicant trial exhibit 3. The exchange of e-mails on April 28 among Messrs Diener, Lurie and Lahave make no mention of a bankruptcy filing. Debtor trial exhibit N. The behavior of Mr. Lahave in November in attempting to limit Applicant's fees by withdrawing the employment application suggests that Messrs Lahave and Diener may well have been pursuing that agenda from the outset. Mr. Lurie testified that he knew from past bankruptcy experience that Applicant needed an employment order to get paid.
The question thus presented is what is the effect of Debtor's nondisclosure of its status as a debtor (or debtor in possession) to a professional working for it? The Court concludes that Debtor is liable to Applicant for the fees and costs incurred up to the date that Applicant was put on notice of the filing, particularly where as here the estate is solvent and thus the cost of those services will come out of Debtor's pocket rather than from any other creditor. The Court also concludes, in light of the fact that the case is administratively solvent, that the allowable fees and costs constitute an administrative claim on a par with the other fees and costs awarded.
The starting point of the analysis is the baseline proposition that ordinarily only those professionals that are approved for employment by Court order pursuant to § 327 are entitled to be compensated from the estate. E.g., Albrecht II, 233 F.3d at 1260-61 ("§ 503(b)(1)(A) cannot serve as a basis for awarding fees to professional where employment was denied under § 327(a)."); In re Channel 2 Associates, 88 B.R. at 352 (same). The adverse consequences of a failure to obtain court approval is visited, at least initially, on the non-approved professional. See id. As a practical matter therefore, the burden falls on the professional to assure that it is employed. The professional hoping to be employed by the estate risks being treated as a volunteer until at least the employment application is on file. "[A]ny professional not obtaining approval is simply considered a volunteer if it seeks payment from the estate." Interwest Bus. Equip., Inc., 23 F.3d at 318 (citing 2 Collier on Bankruptcy ¶ 327.02, at 327-10 (15th ed.1993)).
Section 327 permits only the trustee (or debtor in possession pursuant to § 1107(a)) to move for the employment of a professional ("[T]he trustee, with the court's approval, may employ...."). See Hartford Underwriters Ins. Co. v. Union Planters Bank, N.A., 530 U.S. 1, 120 S.Ct. 1942, 147 L.Ed.2d 1 (2000) (Trustee and not an administrative claimant is the proper party to seek recovery under § 506(c).). So court approved employment is not within the control of the professional, except in the minimal sense that the professional can cease, or not begin, working for the estate until an employment application is filed. See Albrecht I at 672 ("Although the Firm contends it had no reason to believe it would not qualify for employment, that is the risk any attorney bears when he or she undertakes work prior to obtaining court approval for employment."), citing Interwest Bus. Equip., Inc., 23 F.3d at 318.
All that being said, the foregoing cases do not address the circumstance here, in which a debtor in possession for a period of time knowingly misled the professional by failing to inform the professional of the
Any number of cases, in ruling against employment or fee applications for work done before the filing of the employment application, state that employment or compensation will be approved for such work in "extraordinary circumstances." E.g., In re Jarvis, 53 F.3d 416, 419-420 (1st Cir. 1995) (post facto employment permitted in extraordinary or exceptional circumstances but not when the failure to timely apply for employment arises from trustee's mere inadvertence), citing, inter alia, Land v. First National Bank of Alamosa (In re Land), 943 F.2d 1265, 1267-68 (10th Cir. 1991):
(Citations and footnote omitted.) See Albrecht II, at 1260 (citing conflicting authorities on post facto employment of professionals).
One of the cases cited by Albrecht I is F/S Airlease II, Inc. v. Simon, 844 F.2d 99 (3rd Cir.1988), which states
Id. at 105. The court then held that the circumstances of that case—mere oversight by the professional in question—did not constitute a basis for post facto approval of employment.
However, other cases have approved employment post facto, using roughly the same considerations as did the Third Circuit.
Although it is an Act case, Stolkin v. Nachman, 472 F.2d 222 (7th Cir.1973) somewhat closely portrays what is happening in this case. Nachman filed a chapter XI case for Stolkin, "rendered yeoman service," id. at 224, and then sought to be paid for his services. Stolkin, emerging
The Court went on to comment:
Id. at 229. Stolkin's behavior was rather egregious, including a dispute with his attorney about whether Stolkin should comply with an agreed upon court order. The Court is certainly not suggesting that Mr. Lahave has done anything comparable in this case, but Mr. Lahave's cynical approach to the employment and compensation of Applicant justifies permitting Applicant to recover all its costs, including attorney fees, in defending its request for compensation.
Similarly, in Atkins v. Wain, Samuel & Co. (In re Atkins), 69 F.3d 970 (9th Cir. 1995), the chapter 11 debtors employed the accounting firm, Wain, Samuel & Co., on an emergency basis in litigation with the Internal Revenue Service. The firm scrambled to prepare discovery responses for the estate, and then assisted in further discovery and trial preparation. Debtors signed the initial engagement letter with Wain, Samuel and repeatedly promised that they would pay the Wain, Samuel bills. Id. at 972. But although Debtors promised to have their counsel file an employment application for Wain, Samuel, their counsel never did so, apparently on instructions from the debtors. Id. at 973. In good part due to the firm's work, the IRS claim was reduced from $200,000 to $85,000. Debtors' case was ultimately dismissed with all creditors paid and the debtors solvent. Id. The 9th Circuit upheld the bankruptcy court's finding of exceptional circumstances to justify compensation to the firm.
In In re Lee, 146 B.R. 13 (Bankr. E.D.Cal.1992), the court found that special counsel had been hired by the debtors prepetition on a contingency basis, and that debtors did not disclose to special counsel that they had filed a chapter 11 case until counsel had obtained a very favorable settlement. At that point debtors sought to employ and compensate counsel, which was opposed by two creditors. The court, relying on In re THC Financial Corp., 837 F.2d 389, 392 (9th
In In re First Security Mortgage, Inc., 117 B.R. 1001, 1008 (Bankr.N.D.Okla. 1990), the court approved the post facto employment of a head hunter firm who had been requested by the debtor in possession mortgage company to obtain for it a loan closer, and who did so, but never obtained an employment order in reliance on the debtor's unfulfilled promise to obtain the employment order. In addition, the court approved a contingency fee compensation arrangement, as originally agreed to by the parties. See also In re Western Real Estate Fund, Inc., 922 F.2d at 595 (when attorney obtained valuable settlement for the estate and then debtor in possession rejected the contingency fee contract with attorney and adopted the settlement, bankruptcy court erred in allowing attorney only lodestar compensation instead of recognizing claim for breach of contract damages measured by contract contingency rate).
The first two circumstances to note in the instant case are the most important ones: the failure to apply to employ Applicant was not due to the Debtor's oversight—it was intentional—and there was nothing Applicant could have done about that problem, since it had not been informed of the bankruptcy filing. These facts are sufficient by themselves to justify the post facto employment of Applicant at least for purposes of compensating Applicant on an hourly basis for the period of time when it was in the dark about the bankruptcy filing.
The decision to award the fees in this case is made particularly easy due to the fact that no innocent parties, such as creditors, are adversely affected by the award.
Another source of authority for the post facto employment in this case is Reading Co. v. Brown and its progeny. Reading Co. had its origins in the postpetition negligence of a Chapter XI receiver who operated a building that burned down and in the process caused surrounding property to be destroyed or damaged. The resulting claims against the estate far outstripped the value of the assets. The trustee argued that the damage claims did not arise from an "actual and necessary cost of operating the debtor's business". Id. at 476, 88 S.Ct. 1759. The Supreme Court responded:
Id. at 477, 88 S.Ct. 1759. The court went on to hold that "damages resulting from the negligence of a receiver acting within the scope of his authority as receiver give rise to `actual and necessary costs' of a Chapter XI arrangement." Id. at 485, 88 S.Ct. 1759.
The intentional (or even negligent) failure to tell Applicant of the filing of the petition without filing an application to employ Applicant and knowing that Applicant would continue working on the case against Lowe's constituted a tort. McElhannon v. Ford, 134 N.M. 124, 128, 73 P.3d 827, 831, 2003-NMCA-091, {13} (Ct. App.2003). See also Restatement (Second) of Torts § 551 (1977). Under the Reading doctrine, Applicant is clearly entitled to be compensated for the period of time it was kept in the dark. E.g. Copeland (trustee's use of and failure to promptly remit collected state taxes resulted in administrative treatment for statutory interest on the unremitted taxes) and In re Hayes Lemmerz Intern., Inc., 340 B.R. 461, 480 (Bankr.D.Del.2006) (postpetition damage to machinery leased from creditor and cannibalization by debtor in possession of the machinery resulted in administrative claim).
Thus, both the case law concerning employment of counsel and Reading Co. and its progeny entitle Applicant to be paid the hourly rate for the time entries from April 22 through June 1. Those entries total 2.3 hours, worth $460.
In consequence, the Court therefore adds up the following four elements of compensation and reimbursement to arrive at the preliminary figure that represents a reasonable amount of compensation for Applicant:
1. Contingency fee: 15% of $2,250,000: $337,500.00 2. For April 23, 200966 through June 1, 200967 for attorney fees ([hourly rate of $200/hour * 3.80 =] $760-$300 [April 30, 2009 "additional courtesy discount"] = $460) and costs ($92.59): $ 552.59 3. For June 10, 2009 through January 21, 2010 for attorney fees ([hourly rate of $200/hour * 39.9568 =] $7,990.00) and costs ($53.98): $ 8,043.98 4. Keleher and McLeod attorney fees to date: $ 4,655.49 ___________ Preliminary Total $350,752.06
Applicant is also authorized to file a supplemental request for reimbursement of its Keleher & McLeod, P.A. attorney fees including but not limited to those incurred in preparing for and trying the evidentiary hearing on June 16, 2010 and the subsequent briefing.
The foregoing explanation and award leaves some questions that need to be answered, as follows:
Application exhibit B is Applicant's additional billing for the period November 10, 2009 through January 20, 2010 at the rate of $425/hour for Mr. Lurie in
Also, the parties have argued about Mr. Lurie's efforts to come up with a factually accurate complaint early in the course of the representation before the filing of the petition. In particular, Debtor has argued that Applicant did a poor job of getting the facts right in the complaint and then improperly billed the client for correcting its own work. E.g., Debtor Brief at 17-19. Since Applicant is not being compensated for that work, all of which occurred prepetition, that debate is moot.
The Court finds that Applicant's postpetition services have substantially benefitted the estate, generating additional proceeds of $2,250,000. The cost of those
An order will enter.
See, e.g., In re Texas Securities, Inc., 218 F.3d 443, 445 (5th Cir.2000) (holding that "section 328 applies when the bankruptcy court approves a particular rate or means of payment, and § 330 applies when the court does not do so."). Accord, Riker, Danzig, Scherer, Hyland & Perretti v. Official Committee of Unsecured Creditors (In re Smart World Technologies, LLC), 552 F.3d 228, 232-33 (2nd Cir.2009) ("These two inquiries are mutually exclusive, as there is no question that a bankruptcy court may not conduct a § 330 inquiry into the reasonableness of the fees and their benefit to the estate if the court already has approved the professional's employment under 11 U.S.C. § 328."). (Citation and internal punctuation omitted.) However, notwithstanding the categorical tone of the quotation, the Court does not read Smart World Technologies to preclude any review whatever of the reasonableness of the requested compensation even if counsel has been employed pursuant to § 328.
Id., ¶ 18.
Debtor Brief at 15-16.
Connolly v. Harris Trust Co. of California (In re Miniscribe Corp.), 309 F.3d 1234, 1243-44 (10th Cir.2002) (emphasis added; citations omitted). Of course, regardless of what test the Supreme Court may dictate to flesh out the vague contours of a "reasonable" fee in civil rights litigation, the Court bases its decision on the Bankruptcy Code, including the factors Congress has specified in § 330(a)(3), some of which appear to be Johnson factors. Following the dictate of Permian Anchor Services, the Court also specifically applies the Johnson factors.
(Emphasis in original.) In Gisbrecht, the Supreme Court approved contingent fee arrangements in social security appeals.
Johnson at 718-19.
June 2: "Leave word with client re bankr. effect and need for employment of counsel" (.15 hour); June 5: "Telephone call with client re bankruptcy filing and estate's need to employ firm, settlement prospects with Lowe's" (.25 hour); June 8: "Telephone call with (leave word) atty for bankr. court re employment app; exchange emails re same" (.35 hour); June 9: "Telephone call with client bankr. firm re employment app request" (.25 hour).
