In Re Allied Computer Repair, Inc.
MEMORANDUM-OPINION
This matter comes before the Court on Application of Kruger, Schwartz and Mor-reau (“Applicant”) for the Allowance of Compensation and Reimbursement of Expenses incurred by Applicant in the representation of the Bankruptcy estates of Allied Computer Repair, Inc. and Allied Computer Sales, Inc. All of the fees for professional services rendered and expenses incurred were attributable to the Applicant’s representation of the estates in a single Adversary Proceeding, Wm. Stephen Reisz v. G.H. Collins Enterprises, Inc., George Hunt Collins, Steven A. Dahmer, Richard Spurrier, and Louisville Computer Depot, Inc., Adversary Proceeding No. 94-3035 (“the Adversary Proceeding”). By Order entered February 1, 1995, this Court previously awarded Applicant attorney fees of $5,122.50 and expenses of $1,886.22 for its representation of the estate in connection with the Adversary Proceeding. Pursuant to the present Fee Application, the Applicant requests an additional $4,989.50 for attorney fees and $53.52 for expenses previously awarded by the February 1, 1995 Order, but never paid, in connection with the same Adversary Proceeding.
This Court has reviewed the Fee Application. While it finds that Applicant’s billing rate is reasonable and does not doubt that the time recorded was actually expended, this Court also finds that the efforts expended by Applicant were extremely disproportionate to the limited benefit produced thereby. Accordingly, this Court exercises its discretion to impose a global reduction on the attorney fees and expenses to be awarded. Pursuant to the present Fee Application, this Court awards Applicant fees and expenses in the total amount of $491.28, for the reasons set forth below.
FACTS
Allied Computer Repair, Inc. and Allied Computer Sales, Inc. filed for protection under Chapter 7 of the Bankruptcy Code on March 24, 1992. The cases were consolidated on June 17, 1992. Thereafter, Wm. Stephen Reisz was appointed Trustee. Mr. Reisz is, significantly, of counsel with the Applicant law firm. Subsequent to Mr. Reisz’s appointment as Trustee, he petitioned this Court to employ the Applicant to act as counsel for the estate and to assist him in the administration thereof. On July 2, 1992, this Court entered an Order authorizing that employment.
Pursuant to that representation, Applicant filed a Fee Application in December, 1994, seeking $7,370.00 in compensation for professional services rendered and $2,144.67 for expenses incurred. Included in that fee application was a request for attorney fees and expenses attributable to the Applicant’s representation of the estate in the above-referenced Adversary Proceeding. On February 1, 1995, the Court awarded Applicant attorney fees of $7,186.25 and expenses of $2,134.37. Of that amount, $5,122.50 of the attorney fees and $1,886.22 of expenses were for the Applicant’s representation of the estate in connection with the Adversary Proceeding. Applicant seeks by the present Fee Application to be awarded an additional $4,989.50 for attorney fees and $53.52 for expenses previously awarded by the February 2, 1995 Order, but as yet unpaid, in connection with the same Adversary Proceeding.
If this Court were to award Applicant the fees and expenses presently requested, Applicant would receive a total of $11,998.22 for its representation of the estate in the Adversary Proceeding. This Court finds this significant in light of the fact that the Applicant recovered only $15,000.00 for the estate through this Adversary Proceeding.
DISCUSSION
The Bankruptcy Court plays a significant role in protecting the assets of the
I. HISTORICAL BACKGROUND OF BANKRUPTCY FEES.
While the Bankruptcy Court is granted wide discretion in determining the appropriate fees to be awarded, the standard for assessing the requested fees has changed somewhat over the years.
In re Waxman,
Until 1978, a concept referred to as the “spirit of economy” controlled the awarding of attorney fees to those who practiced bankruptcy law.
Matter of Taxman Clothing Co.,
In 1978, the standard changed rather dramatically with Congress’s adoption of the 1978 Code, which demoted the policy of preserving estate assets from its controlling status.
Taxman,
By adopting this approach, it was Congress’s intent to attract highly qualified professionals to the field of bankruptcy law.
Taxman,
Bankruptcy specialists, who enable the system to operate smoothly, efficiently and expeditiously, would be driven elsewhere, and the bankruptcy field would be occupied by those who practice bankruptcy law only occasionally almost as a public service.
While the intent of Congress was to elevate fees received by bankruptcy practitioners to a level commensurate with the nonbankruptcy market place, this Court admonishes that it was not Congress’s intent to elevate the fees above what an attorney could expect to receive in the nonbankruptcy market place. This Court, in reviewing the Fee Application at issue, finds for the reasons set forth below that the requested fees are of just that nature; that is, the fees are above and beyond what the Applicant could expect to receive for comparable services outside the bankruptcy arena.
II. THE FEE APPLICATION DEMANDS PARTICULARLY CLOSE SCRUTINY BY THE COURT BECAUSE THE TRUSTEE WHO RETAINED THE APPLICANT LAW FIRM IS OF COUNSEL TO THAT LAW FIRM.
At the outset of its analysis, this Court notes that the Fee Application at issue warrants particularly close scrutiny as the Trustee who retained the Applicant law firm is of counsel to that law firm. Section 327(a) of the Bankruptcy Code empowers the Trustee to employ, with the Court’s approval, one or more attorneys or other professionals “that do not hold or represent an interest adverse to the estate, and that are disinterested persons, to represent or assist the Trustee in carrying out the Trustee’s duties ...” Subsection (d) of that Section authorizes the Court to approve the Trustee’s employment of himself or herself to act as attorney for the estate if it finds that such employment is in the best interest of the estate. Such employment, however, sometimes interferes with the Trustee’s obligation to carry out his required duties impartially. This is especially true when it comes to the Trustee’s duty to oversee the fees charged and services rendered by the professionals whom he has employed.
The Trustee bears the duty of “surveying[ing] the landscape and searching for property of the estate, defenses to claims, preferential transfers, fraudulent conveyances and other causes of action that may yield a recovery to the estate.”
In re McKinney Ranch Assoc.,
This Court has previously stated:
The trustee acting as his own attorney initially does not present an inherent conflict of interest between Trustee-attorney and the estate. However, such a conflict may exist and develop when an objection is raised as to the reasonableness of such compensation and may lead to the Trustee-attorney adopting a position adverse to the bankrupt and its shareholders.
Such potential for conflict, especially where the reasonableness of compensation is concerned, compels this Court to review the Fee Application at issue with even closer scrutiny than would otherwise be required. With that concern in mind, this Court has engaged in the following fee review analysis adopted by the Sixth Circuit.
III. A FEE REDUCTION IS WARRANTED UNDER THE LODESTAR ANALYSIS.
The analysis for awarding compensation to a professional begins with 11 U.S.C. § 330(a). That section provides:
(a)(1) After notice to the parties in interest and the United States Trustee and a hearing, and subject to sections 326, 328, and 329, the Court may award to a trustee, an examiner, a professional person employed under section 327 or 1103—
(A) reasonable compensation for actual, necessary services rendered by the trustee, examiner, professional person, or attorney and by any paraprofessional person employed by any such person; and
(B) reimbursement for actual, necessary expenses.
Thus, § 330(a) requires that requested fees must meet three criteria. They must be: (1) reasonable; (2) incurred for services that were
actually
rendered; and (3) incurred for services that were
necessary.
The Sixth Circuit has adopted the lodestar method for determining when these requirements are met.
Boddy,
A. HOURLY RATE
The Atwell case sets forth six factors that are to be considered in determining whether the hourly rate charged by the petitioning is reasonable:
1. The experience of the attorney and the hourly rate customarily charged by that attorney to similar clients with similar legal problems.
2. Whether the rate is comparable with the rates charged by comparable attorneys in the local area.
3. Quality of the legal services provided and the skill of the attorney.
4. The novelty and/or difficulty of the issues involved in the case.
5. Whether the work is distributed among the attorneys and support staff so as to minimize costs.
6. Billing judgment must be exercised. That is, outside the bankruptcy arena, attorneys frequently exercise what is known as “billing judgment” to reduce their fees where the total amount billed would be unreasonable in relation to the actual economic value produced by their services.
Atwell,
In this case, the hourly billing rate sought is: (1) $125 for Richard A. Schwartz,
B. HOURS EXPENDED
The Atwell Court likewise sets forth a list of six factors for determining the reasonableness of hours expended by a petitioning attorney:
1. The nature of the issues involved.
2. The time spent on comparable matters.
3. The individual characteristics of the debtor.
4. The litigation issues involved.
5. The amount of attorney time spent in the preparation of the fee application itself shall be limited to 5% of the total requested fees, absent a showing of exceptional circumstances.
6. Billing judgment is to be exercised. Outside the sphere of bankruptcy, the prudent attorney will often “writeoff’ some of the hours actually expended in an effort to bring the bill in line with the economic value actually produced by his or her services.
Atwell,
This Court has reviewed the hours expended and while none of the individual time entries appear excessive when considered in isolation, it appears that there was not a frugal expenditure of time and effort when the results obtained are balanced against the hours expended. Outside the bankruptcy arena, an attorney possessing even a small degree of business acumen would probably cut the number of hours charged in his or her bill to a client in the event of a recovery as limited in nature as occurred in this case. No paying client would appreciate being charged attorney fees so out of balance with the amount recovered and would in all likelihood refuse to pay such a bill. The client might even decide not to return to that attorney for professional services in the future.
Nevertheless, this Court chooses not to cut the hours for which the Applicant is entitled to compensation, but rather to reduce the total fees and expenses awarded as part of a global reduction under the third step of the “lodestar” analysis.
C. GLOBAL REDUCTION
The
Atwell
case sets forth five factors that are to be considered when determining whether a global adjustment to fees is warranted.
Atwell,
1. The applicant’s compliance with employment and fee request requirements.
2. The opportunity costs involved; that is, the time taken away from other cases.
3. The undesirability of the ease.
4. Whether the compensation requested is contingent in nature.
5. The results obtained from the services rendered.
Atwell,
Of the five factors, numerous courts have held that the fifth factor — the results obtained — carries the greatest determinative weight.
Norman v. Housing Auth.,
Moreover, at least two cases have held that where the results obtained were a partial or limited success, reduction of attorney fees is not only appropriate, but is
mandatory. Norman,
Attorneys must be disabused of the erroneous notion that they are entitled to compensation as long as the time recorded was actually expended.
Chas. A. Stevens,
The estate is not a cash cow to be milked to death by professionals seeking compensation for services rendered to the estate which have not produced a benefit commensurate with the fees sought.
Accordingly, the basic test of recovery requires the applicant to demonstrate that his or her services made a beneficial contribution to the estate or to the creditors.
Copeland,
While there is no directive mandating that counsel must achieve a result that is 100% successful in order to be awarded 100% of his or her fees, counsel for the estate does bear a fiduciary duty to the estate which requires counsel to exercise a certain degree of judgment in deciding what matters of litigation to pursue.
Taxman,
As the Seventh Circuit has accurately articulated:
The care, diligence, and skill that a lawyer for the debtor’s estate ... is required to bestow as part of his fiduciary duty is not merely care, diligence, and skill in the prosecution of the estate’s claims. It is also care, diligence, and skill in deciding which claims to prosecute, and how far.
Taxman,
This duty obligates the lawyer for the estate to abandon litigation once it becomes reasonably obvious that the cost of pursuing litigation over a particular matter is out of sync with the value of the asset sought to be recovered.
Taxman, 49
F.3d at 315;
See also Roger J. Au & Son,
These concerns have been astutely summarized by Nancy B. Rapoport, Associate Professor of Law at The Ohio State University College of Law, in her law review article entitled Avoiding Judicial Wrath: The Ten Commandments for Bankruptcy Practitioners. 5 Journal of Bankruptcy Law and Practice 615, 616 (1986). Professor Rapoport states:
Every party in interest in a bankruptcy case is already losing money. The debtor doesn’t have enough money to go around, and the creditors haven’t been paid what the debtor owes them. The more money spent on lawyer fees, the less money there is for the parties in interest themselves. Whether you prefer the creditor-oriented view of the purpose of the Bankruptcy Code (replacing the “first come, first served” system in favor of a more equitable, more orderly distribution) or the debt- or-oriented view (the “fresh start”) or even a broader view (bankruptcy law as a way of protecting competing societal needs), the basic economics are still the same. Unless the anticipated benefits of recovery from a particular motion, complaint, or other action, discounted by the possibility of failure, exceed the anticipated legal fees, the lawyer should not even file the papers to commence the action. Professionals should not churn fees.
Id.
With these concerns in mind, the overwhelming majority of Courts have recognized that a “reasonable” attorney fee for purposes of § 330 is one that is “commensurate with the potential or actual value obtained.”
Waxman,
This Court has applied these principles to the case at bar, and finds that the attorney fees sought are greatly out of balance with the benefit to the estate produced by the Applicant’s services. Applicant seeks attorney fees in the amount of $4,989.50 and expenses of $53.52. The expenses were part of this Court’s previous award of expenses in the amount of $1,886.22. The $53.52 presently requested is simply the amount of the previously awarded expenses that remain unpaid.
The attorney fees and expenses presently requested are all for Applicant’s representation of the estate in the one Adversary Proceeding referred to above. On February 1, 1995, this Court previously awarded Applicant attorney fees of $5,122.50 and the above mentioned expenses in the amount of $1,886.20, for its representation in the same Adversary Proceeding. Accordingly,, if this Court were to award the presently requested fees, Applicant would receive attorney fees in the total amount of $10,112.00 and expenses of $1,886.22, for a grand total of $11,998.22. However, Applicant only recovered $15,-000.00 for the estate through the Adversary Proceeding at issue. Accordingly, the attorney fees and expenses would consume nearly 80 percent, or all but approximately $3,000.00 of the amount recovered. Moreover, after the Trustee receives his fee there would be little or nothing left to distribute to the unsecured creditors. This Court finds attorney fees to be vastly out of proportion to the amount recovered for the benefit of the estate.
Furthermore, this Court notes that a review of the Adversary Proceeding file reveals that the amount in controversy was estimated to be approximately $50,000.00. Accordingly, Applicant’s recovery of only $15,000.00 further underscores the unsuccessfulness of the results obtained and, thus, additionally justifies a reduction of fees requested.
This Court finds that a reasonable award of attorney fees and expenses attributable to an attorney’s representation in a particular adversary proceeding should be limited to certainly no more than 50% of the amount recovered through the adversary proceeding by the Applicant. In fact, efforts should be made by the attorney to hold fees substantially below that percentage of recovery. Reducing fees to no more than 50% of the amount recovered is in line, and perhaps even more generous, than the reduction in fees imposed by numerous courts that have dealt with this issue.
See Taxman,
Applicant recovered $15,000.00 in the Adversary Proceeding at issue. Fifty-percent
This Court recognizes that Applicant may perceive this reduction to be harsh in nature. Nevertheless, this Court reiterates the Seventh Circuit’s observation that “being a creditor and seeing your claim get eaten by a lawyer is a harsh fate as well.”
Taxman,
CONCLUSION
For the above-stated reasons, this Court by separate Order shall approve legal fees and expenses in the total combined amount of $491.28.