In Re McLean Wine Co., Inc.
Three matters are before the Court. The first is Kilpatrick & Associates, P.C.’s, counsel for the Chapter 7 Trustee, first and final fee application. The second is the Chapter 7 Trustee’s motion to surcharge certain property pursuant to 11 U.S.C. § 506(c). Finally, creditors James and Shirley McLean motion for sanctions against the Chapter 7 Trustee and the Trustee’s counsel pursuant to Federal Rule of Bankruptcy Procedure 9011. The Court held several hearings on these matters and took them all under advisement. For the reasons the follow, the Court (1) will allow in part and disallow in part the fee application; (2) denies the surcharge motion; (3) and denies the motion for sanctions.
I. Background
Although this case has been with this Court for some time, a recitation of the events leading up to the instant motions is required. Debtor McLean Wine Co., Inc. filed its voluntary Chapter 11 petition on July 23, 2004. Debtor proposed a plan of reorganization and the Court subsequently confirmed the plan on September 9, 2005. On July 10, 2006, the U.S. Trustee filed a motion to convert Debtor’s case to one under Chapter 7. This Court entered an order granting the motion to convert on August 21, 2006 (Docket No. 240). On August 22, 2006, Trustee Karen Evangelis-ta was appointed as the Chapter 7 Trustee (“Trustee”). Following an ex parte application to employ Kilpatrick & Associates, P.C.’s (“Applicant”) and with the U.S. Trustee’s concurrence, the Court entered an Order on August 31, 2006, granting the application (Docket No. 248).
Applicant filed its First and Final Fee Application (the “Application”) pursuant to 11 U.S.C. §§ 330 and 331 on August 6, 2010 (Docket No. 456). Applicant seeks fees of $109,833.50 and costs of $3,793.56, for a total of $113,627.06. These fees and costs are sought for post-conversion services rendered by Applicant from August 30, 2006, through August 5, 2010. Creditors James and Shirley McLean (“Creditors”) filed an objection to Applicant’s Application on August 27, 2010 (Docket No. 460). The Court held a hearing on the Application on September 30, 2010, following which it took the matter under advisement. The Trustee, per this Court’s direction, filed a Summary of Estimated Distribution (“Distribution Summary”) on October 14, 2010.
On February 9, 2011, while the Application was under advisement, the Trustee filed a Motion for Authority to Surcharge Property in which James McLean and Shirley McLean Hold Secured Claims (the “Surcharge Motion”) (Docket No. 473). The Creditors objected to the motion on February 28, 2011 (Docket No. 474), and the Court held a hearing on the motion on March 24, 2011. After hearing argument on the motion, the Court took that matter under advisement as well.
On March 25, 2011, the day after the hearing on the Surcharge Motion, the Creditors filed a Motion for Sanctions Against Trustee and Trustee’s Counsel (the “Sanctions Motion”) (Docket No. 480). The Trustee objected to the motion on April 6, 2011 (Docket No. 481). Following a hearing on the Sanctions Motion, the Court took the matter under advisement.
II. Statement of Jurisdiction
This Court has jurisdiction over these matters pursuant to 28 U.S.C. § 1334(c),
III. Facts
Applicant’s Application states that it has expended a total of 513.10 hours providing services to the Trustee between August 30, 2006, and August 5, 2010. While the Application includes a summary of the total hours worked by each attorney, the Application does not associate 222.10 of the 513.10 hours with any specific attorney. In conformance with Local Bankruptcy Rule 2016-1 (E.D. Mich), Applicant’s Application provides a narrative summary of the nature of the services performed and the results achieved from its services. Based on the summary and for ease of discussion, the Court groups Applicant’s description of the services it provided to the Trustee into broad categories: (1) General and Administrative fees; (2) Asset Analysis and Recovery; (3) the KHN adversary proceeding; (4) the Stetson Litigation; and (5) other adversary proceedings.
With respect to the first category, the Application details the general administrative services Applicant performed on behalf of the Trustee in responding to inquiries from various creditors and parties in interest as well as making initial investigations. Applicant also filed ex parte applications to employ various professionals, such as itself, an auctioneer (Winebid.com), a real estate broker, and an accountant (Waxenburg & Mueller, PLLC). Applicant also prepared a motion to auction of the Debtor’s real property and a fee application for the accountant. Also included in this category are “the fees and costs incurred by [Applicant] in obtaining employment and those incurred as Counsel for the Trustee.” (Applicant’s Application, p. 2). Applicant requests fees of $7,772.50 and costs of $591.28 in this category.
Regarding the second category, Asset Analysis and Recovery, the Application details Applicant’s efforts to secure authority for the Trustee to wind down the Debtor’s affairs and to assist the Trustee in selling Debtor’s wine inventory, real property, and vehicles. As to the wine inventory, Applicant negotiated an eventual settlement with the Creditors regarding their claims to Debtor’s assets. The settlement resulted in the Creditors accepting an allowed secured claim of $301,000 and a distribution of $125,000 in partial satisfaction of that claim, an agreement that the Creditors would assist in facilitating the inventory or and sale of the wine, a negotiated surcharge of $44,970.85 against the Creditors’ secured claim, and other agreements with Dr. Melody Larkin regarding her claim. In addition, the settlement provided that the Debtor would have an allowed claim of $6,000 in the Professional Chefs, Inc. bankruptcy case. The Trustee eventually sold the Debtor’s wine inventory at an auction that yielded $315,582.68 for the Debtor’s estate. Applicant, after efforts to auction the Debtor’s real property were unsuccessful, also negotiated with the Creditors for them to credit bid a total of $43,666.08 (after reductions for taxes due on the real property) for the property and a vehicle owned by Debtor. Applicant seeks fees of $33,129.50 and costs of $800.57 associated with this category.
Turning next to the KHN adversary proceeding (Adv. Pro. No. 06-5828), Applicant’s services included, but were not limited to, filing the complaint, seeking a default judgment, obtaining an adjournment of the trial, seeking to have certain subpoenas quashed, and representing the Trustee at the three day trial. Applicant also filed a post-trial Finding of Facts and Conclusions of Law. The adversary proceeding sought damages against KHN Enterprises, LLC’s for its alleged breach of the Management Agreement between
The next category is the Stetson Litigation. This category comprises Applicant’s services in both this bankruptcy case as well as the separate Chapter 13 bankruptcy case of Joseph P. Stetson and Rosemary A. Stetson (Case no. 07-22558). Applicant’s services included obtaining a 2004 Exam of Mr. Stetson, seeking to vacate an earlier settlement agreement entered into between Mr. Stetson and the Debtor’s Chapter 11 Unsecured Creditors Committee, and filing a proof of claim in the Stetsons’ case. Applicant also commenced a non-dischargeability action against Mr. Stetson and defended against a motion for sanctions (AP No. 07-2121, Case No. 07-22558), commenced a fraudulent conveyance action against Mr. Stetson and Mr. Frederick Stetson seeking the return of $9,000 of Debtor’s funds alleged used by the defendants to purchase, maintain, and insure a pick-up truck (AP No. 07-6238, Case No. 06-50873), and ultimately negotiated a global settlement of all claims and issues involving the Stetsons. That settlement entitled the Trustee to an allowed priority claim of $5,000 in the Stetsons’ case as well as dismissed all claims in the adversary proceedings. Applicant seeks fees of $31,507.00 and costs of $800.57 in connection with its services provided to the Trustee in this category.
The final category includes numerous other adversary proceedings commenced by Applicant on behalf of the Trastee. These proceedings were preference actions brought against various entities. Applicant also sent demand letters to other creditors and settled with one creditor without having to initiate an adversary proceeding. By the Court’s calculation, these adversary proceedings and demand letters sought the return of a total of $132,227.43. Many of the proceedings were unsuccessful due to the creditors’ assertion of a statute of limitations defense. However, Applicant’s services resulted in a total of $42,307 being returned to Debtor’s estate. Applicant seeks fees of $9,456.00 and costs of $800.57 for its services related to these adversary proceedings.
The Creditors object to Applicant’s Application generally on the grounds that the fees “are excessive, unreasonable, and unwarranted” as well as contending that “much of the work performed did not benefit the estate.... ” (Creditors’ Objection, p. 1, ¶ 2). Specifically, the Creditors argued the Trustee’s pursuit of the KHN adversary proceeding “was unreasonable” because KHN lacked assets and because KHN’s principal could not be held personally liable.
(Id.,
¶ 2). The Creditors also take issue with Applicant’s services provided in connection with the Stetson litigation because Applicant billed over $30,000 but only obtained a $5,000 benefit for the estate. The Creditors further question Applicant’s fees for its services in the other adversary proceeding. They point to one adversary proceeding brought against the Darioush Khaledi Winery (AP No. 07-6247) where Applicant’s fees amounted to “approximately $3,500” but “the gross recovery was only $2,000.” (Creditors’ Objection, p. 2, ¶ 6). Finally, the Creditors contended the Application is “disorganized
Applicant’s Response to the Creditors’ Objection contends that the Creditors “urged” the Trustee to pursue the KHN and Stetson litigations. (Applicant’s Response, p. 5, ¶ 19). Applicant further alleges it, along with the Trustee, “consulted with” the Creditors and that the Creditors offered “further arguments” for inclusion in Applicant’s post-trial briefing. In addition, Applicant argues the reason many of the preference actions were unsuccessful was due to the Chapter 11 Trustee’s failure to timely pursue these actions. Finally, Applicant notes that due to the remaining claims in relation to the amount left in the estate it will not receive all of its requested fees even if the Court should approve its Application. In what regard the following is to be noted.
From the figures presented to the Court, it is apparent that the Debtor’s estate is administratively insolvent, i.e.: there clearly are insufficient funds remaining to pay all the administrative claimants if full, and therefore, the administrative claimants will be forced to accept whatever remains to be distributed. The amounts awarded to Applicant will thus affect the percentage of its recovery it will receive.
IV. Discussion
A Fee Application&emdash;General Principles
Applicant seeks a total of $113,627.06 in fees and costs for services rendered as counsel for the Trustee, allowable as an administrative expense pursuant to §§ 330 and 331.
“The payment of attorneys who are appointed pursuant to 11 U.S.C. § 327 is governed by 11 U.S.C. § 330[.]”
Dery v. Cumberland Casualty & Surety Co. (In re 5900 Associates, Inc.),
“The burden of proof as to entitlement to and reasonableness of a fee request is upon the moving party.”
In re Kieffer,
“The Sixth Circuit Court of Appeals has directed that bankruptcy courts should use the lodestar method in determining reasonable attorney fees under § 330(a) of the Bankruptcy Code.”
In re Williams,
The focus of the Creditors’ objection centers on the second step in the lodestar analysis, the reasonableness of the hours rendered by Applicant. The Creditors, as noted earlier, contest the overall reasonableness of the hours expended arguing the number of hours is excessive, unwarranted, and provided no benefit to the estate. As examples of a lack of benefit, the Creditors point to the KHN adversary proceeding and Stetson Litigation. Applicant seeks over $61,000 in fees and costs for services rendered in connection with those proceedings, which resulted in the Debtor’s estate losing $5,000 in the KHN proceeding but obtaining a $5,000 allowed claim in the Stetson Chapter 13 case for a net benefit of $0.00 to the Debtor’s estate. Applicant responds that the Creditors “consistently urged the Trustee to continue” the KHN litigation and that the filing of a Chapter 13 case by Mr. Stetson necessitated the additional adversary proceedings. At the September 30, 2010, Fee Application hearing, the Court asked the Creditors to identify specific portions of the fees and costs that were being contested. The Creditors stated that although they did not have an exact dollar figure they were contesting, they believed the circumstances warranted a global reduction of approximately $45,000. Mindful of the Court’s “duty to independently examine the reasonableness of the requested fees[,’]”
In re Williams,
For Applicant’s hours to be reasonably expended, “at a minimum the attorney’s time must relate to a service that is reasonably likely to benefit the estate or necessary to the administration of the bankruptcy case.”
Boyd v. Engman,
When evaluating the benefit to the estate, “courts objectively consider whether the services rendered were reasonably likely to benefit the estate from the perspective of the time when such services were rendered.”
In re Value City Holdings, Inc.,
1. General and Administrative fees
The amount of $8,363.78 ($7,772.50 in fees and $591.28 in costs) is involved in this category. The main items Applicant includes in this category are for its services preparing ex parte applications to employ professionals, such as itself, to assist the Trustee and responding to inquiries from interested parties and creditors. However, “[t]he trustee’s attorney is not entitled to professional compensation for performing the statutory duties imposed on the trustee by 11 U.S.C. § 704.”
In re Butterbaugh,
Many courts hold that “the preparation of an application for the employment of a professional is a duty generally performed by a trustee -without the assistance of an attorney.”
In re Virissi-mo,
Furthermore, courts have denied requests for compensation by a trustee’s counsel for time “entries relating to routine telephone calls and correspondence with information seekers.”
In re Butterbaugh,
2. Asset Analysis and Recovery Services
In the Asset Analysis and Recovery category, Applicant seeks fees of $33,129.50 and costs of $800.57. Applicant’s services in this category focused primarily on negotiating a global settlement regarding secured claims asserted by the Creditors and Dr. Larkin in the Debt- or’s wine inventory. Another aspect of the negotiations was the June 4, 2007, Order Granting Motion for Authority to Compromise specifying how the Trustee would distribute the secured claims as well as ordering that the estate would retain $44,970.85 in deposited funds free of any claims by the Creditors. In addition, the Creditors, in return for compensation, also agreed to assist the Trustee in selling the Debtor’s wine inventory and overseeing the day to day operations of the Debtor. The Trustee eventually sold the wine inventory at auction, which resulted in $315,582.68 being added to the Debtor’s estate. Applicant also negotiated with the Creditors to obtain a credit bid for the Debtor’s real property that was significantly higher that the other bids received by the real estate broker. This resulted in an additional $43,666.08 being added to the Debtor’s estate.
The central inquiry is whether Applicant services were “reasonably likely to benefit the estate or necessary to the administra
8. KHN adversary proceeding and the Stetson Litigation Services
Applicant seeks fees of $27,968.50 and costs of $800.57 for services rendered in connection with the KHN adversary proceeding along with fees of $31,507.00 and costs of $800.57 related to the Stetson Litigation. The Court address these two categories jointly because these are the categories the Creditors specifically argue yielded no benefit the Debtor’s estate. As noted earlier, the KHN adversary proceeding resulted in the Debtor’s estate having to return $5,000 to KHN and the Stetson Litigation yielded a $5,000 allowed claim for the Debtor’s estate in Mr. Stetson bankruptcy case. Applicant responds to the Creditors’ contentions arguing that the Creditors “urged the Trustee to pursue the actions against KHN and Joseph Stetson.” At the March 24, 2011, hearing on the Application and Surcharge Motion, Applicant further argued that the Creditors never informed Applicant that they thought the KHN adversary proceeding was unwarranted. Applicant claimed at the hearing that if it knew that information it would not have initiated the action against KHN. Regarding the Stetson litigation, and in particular the pick-up truck at issue therein, Applicant stated at the March 24 hearing that the truck was something the Creditors were “very interested in,” “asked” Applicant “to proceed,” and “continually and repeatedly asked the Trustee” about the truck. Applicant further stated that the Stetson litigation resulted in the recovery of some portion of the Debtor’s wine inventory that Mr. Stetson possessed.
As is noted in other fee application cases, “[t]he issue in this case ... is whether [Applicant] has shown that the services it provided were of a quality and quantity that would entitle it to the compensation requested under a lodestar analysis, considering the likelihood of the result obtained and the time expended.”
In re Unitcast,
Furthermore, courts have recognized that counsel for the trustee has a fiduciary duty to realistically weigh the maximum possible success of any litigation against the costs to be incurred pursuing the litigation. “A lawyer hired by a trustee in bankruptcy to do legal work for the estate, like the trustee himself, is a fiducia
Courts also routinely find that this fiduciary duty requires counsel for a trustee to discontinue litigation when it becomes apparent that the fees charged will outpace the maximum possible recovery. “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.”
In re Allied Computer,
In the facts and circumstances of this case, the maximum possible recovery from the KHN litigation, based on the complaint filed in that proceeding, was approximately $30,000 (AP No. 06-5828). Yet, Applicant expended nearly $28,000 in an attempt to recoup the $30,000 for the estate, and actually ended up losing $5,000. Whether from an initial cost-benefit analysis or at some point during the litigation process, a reasonable cost-benefit analysis at some point or points would have indicated that its fees and costs were quickly rising to a level very near the maximum possible recovery. “Once it becomes reasonably obvious that the prospective costs of commencing or continuing litigation will exceed any benefit to the estate, the attorney is duty bound to abandon the claim.”
In re Keene Corp.,
As for the Stetson Litigation, the complaint there sought to recover alleged fraudulent conveyances and the turnover
There was some evidentiary indication that Applicant was so aggressively pursuing the adversary proceedings at the urging of the Creditors, thus possibly implying that Trustee or Applicant, or both, may not have been exercising independent, professional judgment as opposed to succumbing to pressure from creditors. “Many attorneys have had to tell clients that a case — albeit a solid case on the law and facts — should not be pursued because the potential costs exceed any reasonably-expected recovery. Trustees must have that same heart-to-heart talk with their attorneys — or themselves — before litigation is undertaken on behalf of a bankruptcy estate.”
In re Minich,
Even if the fees and costs did not significantly exceed the reasonably obvious maximum recoveries in these two categories, Applicant’s Application does not evidence any “billing judgment.” “Counsel for a chapter 7 trustee are expected to exercise the same manner and type of ‘billing judgment’ that they would exercise for private clients.”
In re Kusler,
U. Other Adversary Proceedings Services
In this final category, Applicant fees of $9,456.00 and costs of $800.57 for its services related to the various preference actions. As noted earlier, Applicant endeavored to return of a total of $132,227.43 to the Debtor’s estate through these actions. Applicant’s services resulted in obtaining a total of $42,307 being recouped for the benefit of the Debtor’s estate. “[T]here 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[J”
In re Allied Computer,
In summary, the Court acknowledges the “inherent tension, but not a proscribed conflict, between the extant system of compensation for professional persons who seek fees from the estate for their services and the economic interests of other creditors and parties in interest who occupy a lower rung on the priority ladder set by 11 U.S.C. § 726.”
In re Eckert,
B. Surcharge Motion
The Trustee seeks “a surchargef, pursuant to 11 U.S.C. § 506(c),] in the amount of $21,103.02 for the reasonable and necessary costs of preserving, recovering, and disposing of the property securing the claims of’ the Creditors. (Trustee’s Surcharge Motion, p. 1, ¶ 4). The $21,103.02 is exactly what is available to be paid to secured creditors from what remains for distribution from the Debtor’s estate, after deducting the amounts recovered by the Trustee in preference actions and the surcharge previously agreed to by the Creditors.
The Trustee focuses on what she characterizes as the Creditors’ continual and consistent urging for the Trustee to pursue the various adversary proceedings against KHN and the Stetsons. (Surcharge Motion, p. 4, ¶¶ 21, 23). The Trustee’s essential argument is that the Creditors “knew or should have known that a further surcharge was necessary for the Trustee and counsel to pursue” the KHN adversary proceeding and Stetson Litigation, “whether the surcharge came from the recoveries in those [proceedings] or the other assets of the Estate.” (Surcharge Motion, p. 8, ¶ 44; Trustee’s Reply, p. 4, ¶ 20). To support the motion, the Trustee relies on
Daniel v. AMCI, Inc. (In re Ferncrest),
The Creditors object to the surcharge contending that while they may have been involved in the KHN proceedings and “encouraged” the Stetson litigation, they did not have the authority to direct the Trustee’s actions. (Creditors’ Response to Surcharge Motion, p. 2, ¶¶ 21-23). Further, the Creditors argued at the March 24, 2011, hearing that In re Ferncrest was distinguishable on the grounds that in that case the services directly benefitted the creditor. They argue that here, in contrast to In re Ferncrest, there was no benefit and the Trustee is merely trying to surcharge them personally for the fees incurred in the adversary proceedings.
Section § 506(c) provides that “[t]he trustee may recover from property securing an allowed secured claim the reasonable, necessary costs and expenses of
preserving, or disposing of,
such property to the extent of any benefit to the holder of such claim.” (emphasis added). “Section 506(c) is the statutory basis for preventing a windfall to a secured creditor.”
In re Computer Systems,
“[I]n order to prevail on a § 506(c) claim, the claimant bears the burden of proving that the costs were reasonable, necessary, and a benefit to the secured party.”
In re Ferncrest,
“While a court may imply a secured party’s consent from the circumstances of a case, a finding of consent ‘is not to be lightly inferred.’ ”
In re Ferncrest,
The Court finds that the Trustee has not proven express or implied consent. The Court understands the Trustee’s motion as resting primarily on this alternative theory. The Trustee’s argument is that the Creditors urged or encouraged the various proceedings. But as the case law set forth above clearly mandates, “consent should not be inferred merely from the fact that the secured party cooperated with the debtor.”
In re Ferncrest,
In addition, the Trustee has not met all three elements required under § 506(c) where consent is absent. First, the Court finds a lack of necessity related to the collateral sought to be surcharged. In order for the Creditors to be surcharged, the Trustee must prove “[t]he cost was necessary in
preserving or disposing of the collateral
[.]”
In re Daily Medical Equipment, Inc.,
Second, the Trustee failed to show any benefit to the Creditors. “The benefit element is primary in importance as well as the most difficult to prove.”
In re Daily Medical Equipment, Inc.,
C. Sanctions Motion
The final matter before the Court is the Creditors’ Sanctions motion. The Creditors argue the Trustee’s Surcharge Motion violated the parties’ stipulation and Order entered by the Court on June 4, 2007. Specifically, the Creditors argue the Surcharge Motion violated the June 4, 2007, Order’s language that “the Trustee will agree to forego further legal actions challenging the validity of the McLeans’ interest in the Estate.” The Creditors further argue that the Trustee’s Surcharge Motion lacks a basis in law or a non-frivolous argument that their knowledge, encouragement, or assistance of the Trustee’s actions warranted a surcharge.
The Trustee’s objects to the imposition of sanctions arguing, in essence, that the Surcharge Motion had a basis in law and was not frivolous in light of the fact that this Court took the matter under advisement. The Trustee also asserts that the Creditors waived any argument for sanctions by failing to raise the arguments at the hearing on the Surcharge Motion.
“Generally, an attorney is subject to Rule 9011 sanctions if, after the movant makes a reasonable inquiry prior to filing, the motion was not well grounded in fact or warranted by existing law or a good faith argument for the extension or modification, or reversal of existing law.”
Mapother & Mapother, P.S. C. v. Cooper (In re Downs),
“A court is given discretion in deciding whether it is appropriate to impose sanctions[.]”
Heavrin v. Schilling (In re Triple S Restaurants, Inc.),
The Court does not agree that sanctions are warranted given the facts and circumstances of this case. The Trustee’s Surcharge Motion was premised primarily on the theory of implied consent by the Creditors. The Creditors in fact acknowledged that they encouraged to some extent or were heavily involved in the Trustee’s pursuit of the proceedings. “Courts have concluded that a legal position is unwarranted&emdash;under Rule 9011&emdash; only if it has no chance of success under existing precedent.”
In re Dunn,
V. Conclusions
The Court will allow fees and costs in the total amount of $63,879.06, but disallows the remainder of the fees ($49,748) requested in the Application 1 The Court also denies the Trustee’s Surcharge Motion. Finally, the Court denies the Creditors’ motion for sanctions.
The Court will enter an appropriate order.
Notes
. Total fees and expenses sought by Applicant:
Fees $109,833.50 Costs $ 3,793.56 $113,627.06
CATEGORY FEES SOUGHT FEES AWARDED COSTS SOUGHT COSTS AWARDED
General & $ 7,772.50 $0 $ 591.28 $ 591.28
Administrative_
Asset Analysis & $ 33,129.50 $33,129.50 $ 800.57 $ 800.57
Recovery_
KHN Adv. Pro._$ 27,968.50_$10,000.00_$ 800.57_$ 800.57
Stetson Litigation $ 31,507,00_$ 7,500.00_$ 800.57_$ 800.57
Other Adv. Pros._$ 9,456,00_$ 9,456_$ 800.57_$ 800.57
TOTALS$109,833.50$60,085.50$3,793.56$3,793.56