DANIEL S. OPPERMAN, Bankruptcy Judge.
Counsel for the Debtor filed an Application for Compensation requesting compensation of $111,170.00 and expenses of $1,928.07 for services incurred from November 15, 2017 through July 27, 2018 ("Application"). Creditors, Four Courts, Inc., Farley Manufacturing, Inc., and Anthony Gushow & Sons, Inc., object to this Application. The Court heard oral arguments regarding counsel's Application on September 17, 2018 and after careful consideration of the pleadings and arguments of counsel, concludes that Debtor's counsel should be awarded a portion of the fees requested, but that the remaining fees requested should not be approved at this time for the reasons stated in this Opinion.
The Debtor's consolidated operations include the ownership and operation of a sports dome facility in Auburn, Michigan. The Debtor had significant construction issues regarding the sports dome and incurred significant cost overruns and delays which put the Debtor over budget and behind schedule. The Debtor could not overcome these significant obstacles and filed a Chapter 11 Bankruptcy Petition with this Court on August 31, 2015. Through extensive negotiations with its creditors, namely a series of mortgage holders and construction lien claimants, the Debtor emerged from its first Chapter 11 proceeding with a consensual Chapter 11 Plan that promised to pay all of its secured creditors in full over the course of many years. Unfortunately for all, the Debtor was unable to make payments to its creditors per its confirmed Chapter 11 Plan. As allowed under that Plan, one creditor, Four Courts/Farley Manufacturing, sent a Notice of Default which triggered certain remedies to all of the secured creditors of the Debtor. These remedies included the surrender of the facility to the creditors, a result that the Debtor wished to avoid, so the Debtor filed this Chapter 11 proceeding on July 14, 2017.
The Debtor did not get its hoped for breathing spell in that Four Courts/Farley Manufacturing filed a Motion to Dismiss on July 25, 2017, and many secured creditors joined that Motion. The Debtor responded to this Motion and the Court held a series of hearings to determine if the Motion to Dismiss should be granted. As part of these hearings and conferences resulting from the Motion to Dismiss, the Debtor shared its general approach to reorganization in this case by arguing that the current value of the Debtor's assets were much less than the $2,713,307 listed by the Debtor in its first bankruptcy and that the Debtor could earn sufficient income to pay its secured creditors, as their interest appeared, with a reduced value. The Court denied the Motion to Dismiss, but placed certain conditions upon the Debtor to report income, develop a capital contribution plan for the Debtor's insiders, and to otherwise pay property taxes and insurance to protect the Debtor and creditors alike. By the time the September 28, 2017 Order Denying the Motion to Dismiss was entered, all parties had an inkling that the Debtor would argue that the value of its assets were significantly less than as agreed to in the previous Chapter 11 Plan, but that the Debtor would pay its creditors that value, as well as address any other objections that can be raised by creditors such as the absolute priority rule with its corresponding payment of new value and any election made by any creditor under Section 1111(b) of the Bankruptcy Code.
As forecast, the Debtor hired an appraiser to value its assets, but was handcuffed because the appraiser could not timely perform the appraisal. Over concerns raised by the creditors, the Court allowed the Debtor additional time to give Debtor's appraiser the opportunity to prepare a report, which he ultimately did. This report, which detailed three classic approaches to appraising assets such as that of the Debtor, utilized the replacement cost, sales comparison, and income approaches and pegged the Debtor's assets at $1,342,000, $1,155,000, and $300,000 under each approach respectively.
After the Debtor survived the Motion to Dismiss and retained an appraiser, the Debtor initiated a series of innovative programs to raise additional income. The Debtor also began investigation of the various claims made by the secured creditors, as well as prepare a Chapter 11 Plan. Unrelated to the Debtor's operations, but relevant to this Opinion, however, counsel for the Debtor filed an Interim Application for Compensation seeking $66,855.00 in fees and $4,043.28 in expenses. Four Courts/Farley Manufacturing objected to this Application as did Gushow and Valley Electrical Contractors, Inc. Prior to the Court holding a hearing on the Debtor's Application, however, the parties entered into a stipulation that awarded $56,700.00 in fees and $4,043.28 in expenses, with an additional provision that only $48,717.00 of this amount would be paid. The remaining $13,743.28 was not to be paid until confirmation of the Debtor's Chapter 11 Plan or further order of the Court.
The Debtor filed a Combined Plan of Reorganization and Disclosure Statement with this Court, but also instituted an adversary proceeding against all of its secured creditors claiming that various creditors enjoyed a higher priority than other creditors, all in contradiction of the Debtor's confirmed Chapter 11 Plan in the previous case. As a result, confirmation of the Debtor's Chapter 11 Plan was stalled as secured creditors addressed various issues raised by the Debtor. Many creditors brought their own summary judgment motions as to their various claims. One creditor, Gushow, filed a Motion for Summary Judgment, which this Court granted, holding in part that the terms of the Debtor's confirmed Chapter 11 Plan in the previous case were binding upon the Debtor and Gushow and prohibited the Debtor from relitigating the issues raised in the adversary proceeding. Other Defendants in the adversary proceeding enjoyed similar rights, but an issue was raised as to Four Courts/Farley Manufacturing as to whether those creditors enjoyed greater rights because additional information was made known through the adversary proceeding. The adversary proceeding is currently going through the discovery stage and has stalled the issue of confirmation.
In the Application filed by Debtor's counsel, fees of $111,170.00 are requested, as well as expenses of $1,928.07. Counsel correctly reports that $12,256.72 remains of the retainer held by Debtor's counsel and seeks not only approval of the fees and expenses, but the right to withdraw this retainer to pay a portion of the fees and expenses owed to it. Debtor's counsel followed the project category format, so the fees requested are reported as:
For the most part, the services described in each category are correctly labeled, but in some instances, entries in the case administration category are more properly characterized as adversary proceeding services.
Four Courts/Farley Manufacturing and Gushow objected to the Debtor's Application, primarily arguing that 11 U.S.C. § 330 prohibits counsel from receiving this amount of fees because the services rendered do not benefit the estate. In support of their assertion, these creditors point to the challenges facing the Debtor to confirm a Chapter 11 Plan, including the requirement to pay $1,100,000 to secured creditors, the lack of income of the Debtor to make these payments, the challenges of the absolute priority rule prohibiting Debtor's members from retaining their unit interest unless significant new value is paid, and the possible significant Section 1111(b) elections made by various secured creditors.
Debtor's counsel replies by arguing that all services were necessary and that this case has grown because of the myriad of issues raised by various parties. While the Debtor has earned over $100,000.00 in net income over the course of the last year, the objecting creditors reply that real property taxes of approximately $42,000.00 have not been paid and that an insider of the Debtor, Mr. Delaney, has received at least $26,000.00 in compensation while they have not received any money.
This Court has jurisdiction over this matter pursuant to 28 U.S.C. § 157, 28 U.S.C. § 1334, and E.D. Mich. LR 83.50. This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(A) (matters concerning the administration of the estate).
Debtor's counsel has supplied an extensive, more than 30-page statement of work performed, which was further broken down by project categories. No creditor claims that the hourly rate charged by Debtor's counsel is unreasonable or that Debtor's counsel did not work hard on behalf of its client. What each creditor does argue, however, is that the value of Debtor's counsel's services to the Debtor's estate is not worth the $111,170.00 requested, especially in light of the additional fees previously approved by this Court. In support of their argument, creditors do not point to any particular line item as being excessive, but instead argue that the value of the services rendered to date do not justify an award of the fees requested.
In support of their position, the creditors cite In re Williams, 378 B.R. 811 (Bankr. E.D. Mich. 2007) to support their argument that attorney fees should not be awarded when it should be apparent that reorganization of the Debtor is beyond hope. The creditors essentially argue that Debtor's counsel should by now realize that reorganization along the lines that the Debtor wishes to take is not possible and that Debtor's counsel should necessarily rein in their services to fit the landscape currently in place.
This Court distinguishes Williams in that Williams involved a Chapter 13 debtor who had her Chapter 13 plan confirmed, but with the knowledge of all that the funding of her plan was very tight and that the failure to make a payment would be catastrophic. The debtor did fail to make a payment, which prompted two creditors to file motions to lift the stay, which debtor's counsel valiantly defended, but failed. Subsequently, after requesting additional fees, the Williams court denied the fees in part and concluded that debtor's counsel should have known much earlier in the case that the debtor would not have a viable Chapter 13 plan and should have taken other alternative means to protect the debtor.
While Williams involved a Chapter 13 case in a post-confirmation setting and is therefore distinguishable, the basic lessons of Williams are instructive. As argued by the creditors, it is the Debtor, and presumably by proxy, Debtor's counsel, who has escalated this case way beyond its normal and expected scope. Per the creditors' arguments, while this Court perhaps incorrectly denied their Motion to Dismiss, a very clear, but narrow path of reorganization is available to the Debtor: Determine the value of the Debtor's assets, propose a plan to pay that value to secured creditors, prepare for a brief battle over the amount of the new value under the absolute priority rule, and then have a Chapter 11 Plan confirmed. In this scenario, Debtor's counsel's attorney fees would be a fraction of the amount already approved and much less than the amount requested currently. The Debtor does raise good responses in that the Section 1111(b) election of various creditors could prove problematic in that the Section 1111(b) election can only be made by a secured creditor. As Debtor's counsel posits, if Four Courts/Farley Manufacturing's claim is not secured, then the Section 1111(b) election is of no avail and the Debtor can pay the $1,100,000 to the remaining secured creditors. And Debtor has some support for that result with its creditors in that certain creditors have indeed indicated that they would approve and consent to such a plan.
The objecting creditors also argue, however, that some of the fees involved in the instant Application include the Debtor's attorney's efforts to essentially impeach their own appraiser by trying to advance the lesser value by utilizing the income approach even though their own appraiser did not view that value as being a reasonable method to approach the Debtor's assets. While the creditors make this argument, they cannot point to any set of entries that supports their argument, but beseech this Court to undertake that analysis on its own and make a determination. In doing so, this Court notes the following entries that support the creditors' objections:
The Court also notes that some of the adversary proceeding services were reported as case administration expenses. The following entries should be categorized as services related to the adversary proceeding:
After analyzing these entries, Debtor's counsel is certainly entitled to payment of some of the attorney fees because their efforts have taken the Debtor this far and perhaps to the brink of confirmation of a Chapter 11 Plan. In this regard, the Court concludes that of the fees requested, Debtor's counsel should be compensated for the efforts of drafting the Chapter 11 Plan, portions of the valuation hearing that ultimately arrived at a $1,100,000 valuation, as opposed to the $2,713,307 in the Debtor's previous Chapter 11, as well as certain negotiation sessions and conferences with creditor's counsel. The Court now turns to application of this format.
Starting with the Chapter 11 Plan category, the January 8 and 9 entries of $70 and $945 are not allowed because each entry described services for valuation. The remaining entries are allowed in the amount of $19,445.00 ($20,460.00 - $1,015.00 = $19,445.00). The Court defers any award for the adversary proceedings, so $16,315.00 is reserved for a later determination. Of the case administration services, $18,510.00 is attributed to Debtor's efforts to convince the Court that its assets were worth $300,000.00 when its appraiser reported a much higher value. While the Court allows some fees for the valuation hearing because value was an open issue, the Court will only allow and award 10 hours at $350.00, or $3,500.00, because a reasonable approach to value would have reduced the effort devoted to a valuation hearing. The remaining $15,010.00 is disallowed ($18,510.00 - $3,500.00 = $15,010.00).
After deducting $21,795 for the case administration entries, which the Court defers as adversary proceeding services, the Court awards $7,000.00 because 20 hours of time was proper at this time given the circumstances of the Debtor's plight. The remainder will likewise be reserved for later consideration.
Of the remaining fees requested, the Court is not currently in a position to either award or deny these fees. For example, if the Debtor is successful in the adversary proceeding as to Four Courts/Farley Manufacturing, and can defeat any Section 1111(b) election by those creditors, then the Debtor has a much easier path to confirmation. That said, the financial performance of the Debtor, as it currently stands, causes questions to be raised as to the feasibility of the Debtor's Plan. For example, while the Debtor has significantly improved operations and has increased income, property taxes still remain unpaid and Mr. Delaney has received approximately $26,000.00 for his Herculean efforts to date. Second, while the Debtor has in place a mechanism to determine new value for purposes of the absolute priority rule, there is nothing before the Court today to comfort the Court that this amount can or will be paid by anyone associated with the Debtor. That being said, the Court has not asked for such confirmation either.
Following a practice used by the parties previously, the Court awards $29,945.00, disallows $16,025.00, but holds the remainder in abeyance until this Court either confirms a Chapter 11 Plan or until further order of the Court.
