On-Site Fuel Service, Inc.
Judge Neil P. Olack
United States Bankruptcy Judge
Date Signed: February 26, 2021
The Order of the Court is set forth below. The docket reflects the date entered.
MEMORANDUM OPINION AND ORDER APPROVING AMENDED FIRST APPLICATION FOR ALLOWANCE OF COMPENSATION FILED BY LISTON & DEAS, PLLC FOR SERVICES RELATED TO CLAIMS AGAINST CAPITALA/HARBERT
This matter came before the Court for a telephonic hearing on February 1, 2021 (the “Hearing“), on the Amended First Application for Allowance of Compensation Filed by Liston & Deas, PLLC for Services Related to Claims Against Capitala/Harbert (the “L&D Fee Application“) (Bankr. Dkt. 409)1 filed by Liston & Deas,
Inc. (“On-Site“); the United States Trustee‘s Objection to Amended First Application for Allowance of Compensation Filed by Liston & Deas, PLLC for Services Related to Claims Against Capitala/Harbert (the “UST Objection“) (Bankr. Dkt. 419) filed by David W. Asbach, Acting U.S. Trustee for Region 5 (“UST“); the letter response (the “Griffin Objection“) (Bankr. Dkt. 422) filed by Andrea K. Griffin (“Griffin“), acting pro se (without representation of counsel); and the Liston & Deas PLLC‘s Reply to Objections to Amended First Application for Allowance of Compensation Filed by United States Trustee and Andrea Griffin (the “L&D Reply“) (Bankr. Dkt. 427) filed by L&D in the Bankruptcy Case. Three (3) exhibits are attached to the L&D Fee Application: the Joint Venture Co-Counsel Agreement (the “JV Agreement“) (Bankr. Dkt. 409-1) signed by L&D, Mitchell, McNutt & Sams (“MMS“), and the Trustee on October 28, 2019; an itemization of hours billed by L&D from December 2, 2019 through November 13, 2020 (the “Fee Itemization“) (Bankr. Dkt. 409-2); and an itemization of expenses incurred by L&D during the same time period (the “Itemization of Expenses“) (Bankr. Dkt. 409-3). At the Hearing, William L. Liston, III represented L&D; Donald Andrew Phillips represented MMS; the Trustee, a licensed attorney, represented herself; Christopher J. Steiskal, Sr. represented the UST; Griffin represented himself; and E. Barney Robinson III represented Harbert Mezzanine Partners III SBIC, L.P. (“Harbert“) and John C. Harrison (“Harrison“).
A component of the fees sought by L&D in the L&D Fee Application is a contingent fee based on the amount of funds saved On-Site‘s bankruptcy estate. The Court instructed L&D and the UST to file letter briefs addressing whether it is proper for an attorney retained under
Jurisdiction
The Court has jurisdiction over the parties to and the subject matter of this matter pursuant to
Facts2
On October 30, 2018, Mansfield Oil Company of Gainesville, Inc. (“Mansfield“) filed a chapter 7 involuntary petition (the “Involuntary Petition“) (Bankr. Dkt. 1) against On-Site, a fuel-supply business. The Involuntary Petition was contested and litigated for several months. After a trial, the Court entered the Order for Relief (the “Order for Relief“) (Bankr. Dkt. 159) on May 24, 2019, and Stephen Smith was appointed the chapter 7 trustee. He resigned on September 13, 2019, and the
Capitala Finance Corp., Capitala South Partners Fund II, L.P., Capitala South Partners SBIC Fund III, L.P., and Harbert (collectively, “Capitala/Harbert“) filed proofs of claim 49, 50, 51 and 54 (Claim #49-51, 54) asserting a total principal debt of $17,044,999.85 incurred by On-Site under various Senior Subordinated Secured Notes. Capitala/Harbert alleged a perfected security interest in substantially all of the assets of On-Site. John F. McGlinn (“McGlinn“) and Harrison each filed a proof of claim (Claim #52, 55) asserting unsecured claims in an unknown amount for indemnification and contribution based on their respective rights as members of On-Site‘s board of directors.
On November 27, 2019, the Court entered the Order (the “Retention Order“) (Bankr. Dkt. 287) granting the application of the Trustee to employ L&D as special counsel “to pursue generally all Causes of Action related to equitable and tort theories” in accordance with the JV Agreement. The Retention Order provided that L&D would be entitled to receive compensation and reimbursement of expenses “only after notice and a hearing as contemplated by [11 U.S.C.] § 330, Bankruptcy Rule 2016, and any other applicable or related statutes and rules.” (Bankr. Dkt. 287 at 3).
The JV Agreement sets forth a hybrid or blended-fee structure. Compensation for legal fees are paid at a reduced hourly rate of $150.00 and “a contingency fee of 27.5% of all sums recovered on behalf of the estate, provided that funds are available to pay the accrued hourly rates set forth in the preceding clause.” (Bankr. Dkt. 409-1 ¶ 4). If no funds are available to pay the accrued hourly billings, then L&D and MMS shall receive “from any funds recovered on behalf of the estate” a forty percent (40%) contingent fee. (Bankr. Dkt. 409-1 ¶ 4). L&D and MMS agreed to divide any contingent fees sixty percent (60%) to L&D and forty percent (40%) to MMS. (Bankr. Dkt. 409-1 ¶ 7). The JV Agreement also provides for reimbursement of all actual and necessary expenses. Notwithstanding these provisions, the Trustee agreed to pay L&D and MMS an hourly rate of $350.00 plus expenses from the date of the Order for Relief entered on May 24, 2019 through the date of the JV Agreement signed on November 28, 2019. (Bankr. Dkt. 409-1 ¶ 4).
Trustee Adversary
On February 3, 2020, L&D initiated an adversary proceeding on behalf of the Trustee against Capitala/Harbert for equitable subordination pursuant to
With the Court‘s permission, the Trustee filed the First Amended Complaint
The Trustee alleged that during discussions with Mansfield concerning the proposed strategic alliance, On-Site disclosed 2017 financial statements that reflected positive EBITDA of approximately $300,000.00 per month. (Tr. Adv. Dkt. 27 ¶ 31). Also, McGlinn, or others under his direction, allegedly prepared On-Site‘s 2018 budget forecasting positive EBITDA of approximately $4.3 million. The Trustee asserted that this information was materially inaccurate. (Tr. Adv. Dkt. 27 ¶ 32). Mansfield and On-Site signed the Strategic Alliance and Acquisition Option Agreement (the “SAA“) on April 12, 2018. Under the SAA, Mansfield became the exclusive supplier of fuel to On-Site and assumed the responsibility of billing On-Site‘s customers.
At some point, McGlinn informed Mansfield that On-Site‘s lender, PNC Financial Services Group, Inc. (“PNC Bank“), would not agree to the strategic alliance unless On-Site paid off its debt to PNC Bank. (Tr. Adv. Dkt. 27 ¶ 35). Mansfield thereafter agreed to loan On-Site $4.8 million for this purpose. The resolution of PNC Bank‘s objection allowed the strategic alliance to become effective on that same date. The Trustee contends that McGlinn persuaded Mansfield to enter into the loan by representing that On-Site anticipated receipt of $6 million “in collectable cash inflows in the near term” when McGlinn knew that On-Site was financially unstable. (Tr. Adv. Dkt. 27 ¶ 35; Tr. Adv. Dkt. 27-3, Ex. 3).
The Trustee alleged that through early September 2018, McGlinn and On-Site‘s executive officers continued to assure Mansfield of On-Site‘s financial stability and ability to perform, even though they purportedly were cognizant of On-Site‘s rapidly deteriorating financial condition. (Tr. Adv. Dkt. 27 ¶ 38; Tr. Adv. Dkt. 27-4 to 27-8, Exs. 4-8). According to the Trustee, On-Site then breached the SAA by failing to pay fully its debt to Mansfield, including repayment of the $4.8 million loan to On-Site to payoff PNC Bank. (Tr. Adv. Dkt. 27 ¶ 41). The Trustee contended that at this time On-Site owed Mansfield approximately $5,892,161.00 with no ability to repay the debt. (Tr. Adv. Dkt. 27 ¶ 42).
A meeting was held on October 4, 2018 to discuss On-Site‘s alleged breach. The Trustee asserted that at the meeting, McGlinn and On-Site‘s executives presented information reflecting a financial performance that sharply deviated from On-Site‘s prior representations to Mansfield,
According to the Trustee, McGlinn closed On-Site on October 22, 2018 and disposed of On-Site‘s assets in a “fire sale” on October 31, 2018 in a manner that minimized their value and that placed the interests of Capitala/Harbert above the interests of On-Site‘s other creditors. (Tr. Adv. Dkt. 27 ¶ 47). The Trustee alleged that McGlinn‘s actions constituted a breach of his duties of care, loyalty, and fair dealing. (Tr. Adv. Dkt. 27 ¶ 48; Tr. Adv. Dkt. 27-1, Ex. 1; Tr. Adv. Dkt. 27-10, Ex. 10; Tr. Adv. Dkt. 27 ¶ 58). As relief, the Trustee asked the Court to subordinate the bankruptcy claims of Capitala/Harbert against On-Site to the level of equity.
Settlement of Trustee Adversary
The Trustee‘s equitable subordination claim against Capitala/Harbert was settled and resolved, with the settlement approved by the Court on November 6, 2020. (Bankr. Dkt. 384). Pursuant to the settlement, Capitala/Harbert, McGlinn, and Harrison agreed to contractually subordinate their claims against On-Site‘s bankruptcy estate to the allowed claims of all other creditors with respect to the estate funds held by the Trustee (the “Estate Funds“) in the then current amount of $432,321.93 and to certain “estate claims.” (Bankr. Dkt. 372-1 at 1-2). For purposes of the settlement, “estate claims” are defined as including commercial tort claims, actions brought under chapter 5 of the Code, any monies owed to or held for On-Site by any insurer, lessor, or any state or federal government agency or authority, and fifty percent (50%) of the net recovery from the collection of On-Site‘s accounts receivable. (Bankr. Dkt. 372-1 at 2). The Trustee assigned to Capitala/Harbert the estate‘s interest in any accounts receivable and agreed that any net recoveries by Capitala/Harbert would be split equally between the estate and Capitala/Harbert. (Bankr. Dkt. 372-1 at 4). The alleged claims of Capitala/Harbert against Mansfield or any of its officers, directors, or employees, however, are not contractually subordinated. No objection to the settlement was filed.
L&D Fee Application
L&D filed the L&D Fee Application seeking compensation for legal services performed by William Liston, III (“Liston“) and Lawrence Deas (“Deas“) from December 2, 2019 to November 13, 2020 related solely to the Trustee‘s equitable subordination claim against Capitala/Harbert. The L&D Fee Application is the first fee application filed by L&D, and “[n]either L&D nor MMS contemplate[s] filing any additional applications for compensation related to the claims asserted in the adversary against Capitala/Harbert.” (Bankr. Dkt. 409-1 ¶ 7).
The Fee Itemization shows that Liston and Deas expended 391.6 hours in pursuing the Trustee‘s claim against Capitala/Harbert resulting in total fees of $58,740.00 based on a reduced hourly rate of $150.00. The Expense Itemization indicates that L&D expended $10,121.90 in expenses for which L&D seeks reimbursement pursuant to the JV Agreement.
Griffin Objection
In the Griffin Objection, Griffin contests payment of any compensation to L&D or to any other persons or firms “whereby my name is attached” and requests that his name be removed “from any further mailing correspondence.” (Bankr. Dkt. 422). Griffin stated at the Hearing that he is a former employee of On-Site and that he filed the Griffin Objection because he did not want to pay any fees and expenses. After being informed that approval of the L&D Fee Application would not render him personally liable for payment of any of the fees or expenses, Griffin asked for permission to withdraw the Griffin Objection. He specifically requested that he continue receiving notices in the Bankruptcy Case.
UST Objection & UST Letter Brief
In the UST Objection, the UST contends that the request for $97,953.81 in contingency-based compensation does not comply with the terms of the Retention Order or, more specifically, the JV Agreement because the Estate Funds are not “sums recovered.” (Bankr. Dkt. 419 at 3). The UST does not argue that the reduced hourly fees of $58,740.00 are unreasonable, either as to the time expended by L&D or the billing rate charged, and the UST does not contest the amount of expenses.
The UST Objection was unclear as to whether the UST disputed both the meaning of “sums recovered” in the JV Agreement and the validity of reverse contingent fees. At the Hearing, the UST clarified that he objected to the L&D Fee Application on both grounds. He argued that “sums recovered” was not defined in the JV Agreement to include amounts saved the estate and, moreover, that contingent fees are permissible only when based on new funds paid into the estate. The UST Letter Brief, however, addresses only the plain meaning of “sums recovered.” (Bankr. Dkt. 446). When questioned at the Hearing, the UST opposed a quantum meruit recovery of fees based on the time expended at L&D‘s customary billing rate.
L&D Reply & L&D Letter Brief
L&D describes the UST‘s construction of “sums recovered” in the JV Agreement as “hyper-technical.” (Bankr. Dkt. 427 at 1). L&D maintains that the UST‘s argument fails to consider other ordinary meanings of the term “recover” and ignores the benefit to the bankruptcy estate resulting from the contractual subordination of the claims of Capitala/Harbert. The satisfaction of Capitala/Harbert‘s lien, according to L&D, would have exhausted all of the Estate Funds. In the L&D Letter Brief, L&D reiterates its request for reverse contingent fees of $97,953.81. In the alternative, L&D requests that the Court enhance the reduced hourly rate of $150.00 and award compensation for the time L&D expended in prosecuting the equitable subordination claim at the market rate.
Hearing
At the Hearing, the Trustee testified in full support of payment of the fees and
Discussion
A. Reverse Contingent Fee
The parties have not found any controlling authority in the Fifth Circuit that addresses reverse contingent fees for legal services that benefit a bankruptcy estate through the equitable subordination of claims. Both L&D and the UST point to Adam v. Weinman (In re Adam Aircraft Industries, Inc.), 532 B.R. 814 (D. Colo. 2015) (Adam Aircraft II), a non-binding decision from the U.S. District Court for the District of Colorado (“District Court“). Because the facts are analogous, Adam Aircraft II merits discussion.
Adam Aircraft Industries, Inc., (“Adam Aircraft“), a manufacturer of small aircraft, filed a chapter 7 petition for relief. Morgan Stanley Senior Funding, Inc. and Morgan Stanley & Co., LLC, on behalf of themselves and a consortium of other lenders (collectively, “Morgan Stanley“) asserted secured claims totaling $56,576,505.84. The chapter 7 trustee sold the assets of the estate for $10 million and entered into a stipulation with Morgan Stanley, approved by the bankruptcy court, regarding the division and interim distribution of the sale proceeds. They agreed that $2,681,083.00 would be reserved for the holders of disputed competing liens. After deducting certain other amounts, they agreed to divide the remaining sale proceeds 91% to Morgan Stanley and 9% to the estate. Pursuant to that stipulation, the chapter 7 trustee distributed $5,826,837.30 of the sale proceeds to Morgan Stanley and retained $581,255.45 for the estate free of any liens.
Later, the chapter 7 trustee suspected that Morgan Stanley‘s actions shortly before the bankruptcy filing may have caused Adam Aircraft‘s sudden financial decline and retained the law firm of Allen & Vellone as special counsel to investigate Morgan Stanley‘s pre-petition conduct. Compensation for this representation was to be based upon the firm‘s hourly rate of $375.00 for Patrick D. Vellone (“Vellone“). Id. at 816. The firm concluded from its investigation that the estate had viable causes of action against Morgan Stanley but declined the trustee‘s request to pursue the litigation solely on a contingent fee basis. Ultimately, the trustee negotiated a
The Modified Contingency Fee Agreement provided for compensation at an hourly rate of 75% of the firm‘s normal hourly rate plus a contingent fee of fifteen percent (15%) of any “gross amount recovered” by the firm on behalf of the estate. The phrase “gross amount recovered” was defined in the Modified Contingency Fee Agreement as “the total amount recovered before any subtraction of expenses and disbursements, including . . . any reduction in the Client‘s liability to the Defendants under the Bankruptcy Code.” Id. at 816.
Allen & Vellone initiated an adversary proceeding on behalf of the trustee seeking equitable subordination or disallowance of Morgan Stanley‘s secured and unsecured claims and remission to the estate of approximately $36 million that Morgan Stanley had been paid on the loan. Id. at 817. Morgan Stanley filed a motion to dismiss for failure to state a claim, which the bankruptcy court denied. Without engaging in any formal discovery, Allen & Vellone negotiated a settlement in which Morgan Stanley agreed to assign its secured claims to the trustee and subordinate its unsecured claims to those of all other creditors.
The trustee estimated that the value of the settlement to the estate was at least $3,097,952.99. Id. at 818. The assignment of Morgan Stanley‘s secured claim saved the estate $1,794,535.72, which the trustee calculated by deducting $709,065.72 (the amount of a competing lien) from $2,681,083.00 (the reserved sale proceeds) and multiplying the difference by 91% ($1,794,535.82 = ($2,681,083.00 – $709,065.72) × 0.91). The subordination of Morgan Stanley‘s unsecured claim of approximately $50.7 million saved the estate $1,303,417.27. The trustee estimated that all unsecured claims totaled $111 million and that Morgan Stanley‘s unsecured claim constituted 45.72% of that total. Thus, Morgan Stanley had a 45.72% interest in unencumbered funds of $2,850,868.92.6 According to the trustee, the total savings to the estate was $3,097,952.99, the sum of $1,794,535.72 and $1,303,417.27.
Allen & Vellone filed a fee application seeking approval of $538,085.95 in attorney‘s fees and $10,154.82 in costs. The hourly component of the requested fee award was $73,086.37, and the contingent-fee component was $464,996.58 or fifteen percent (15%) of $3,099,977.22,7 the amount of the “gross amount recovered” in the form of a reduction in the estate‘s liability. Id. at 818-19.
George F. Adam (“Adam“), the founder of Adam Aircraft and its largest shareholder, objected to the contingent-fee portion of the fee application. He argued that the settlement did not benefit the estate. Allen & Vellone, in turn, argued that the contingent fee was permissible “despite the fact cash was not recovered” since “[p]rior to the settlement agreement the trustee would have been required to turn over to Morgan Stanley all of the money in the estate‘s account.” Adam v. Weinman (In re Adam Aircraft Indus., Inc.), No 08-1151, 2013 WL 414213, *2-3 (Bankr. Colo. Feb. 1, 2013).
The bankruptcy court found that under
Adam appealed the bankruptcy court‘s decision to award fees based on the contingent fee arrangement. The District Court noted that after the bankruptcy court issued its decision, the Tenth Circuit Court of Appeals in In re Market Center East Retail Prop., Inc., 730 F.3d 1239, 1244-45 (10th Cir. 2013), overturned the BAP‘s decision. See Adam v. Weinman (In re Adam Aircraft Indus., Inc.), No. 13-cv-01235, 2014 WL 1133232 (D. Colo. Mar. 21, 2014) (Adam Aircraft I). The District Court remanded to the bankruptcy court for an analysis of the reasonableness of the requested attorney‘s fees under
On remand, the bankruptcy court analyzed the fee application under the criteria set forth in
In rejecting Adam‘s arguments, the District Court relied on testimony by Vellone and the trustee. Id. at 819. Vellone testified that most lender liability cases are resolved by a reduction in claims and do not involve cash payments by the lender. The trustee testified that his expectation in filing the lawsuit was that it would result in a release of Morgan Stanley‘s lien on the estate funds, and he never envisioned that Morgan Stanley would actually write a check of any amount to the bankruptcy estate. The District Court placed importance on the fact that the trustee, rather than Allen & Vellone, proposed the employment on a contingency basis but Allen & Vellone was unwilling to undertake the risk of equitable subordination litigation on a pure contingent-fee basis. Instead, Allen & Vellone proposed that a reduced-rate hourly component be included in the Modified Contingency Fee Agreement.
The District Court rejected Adam‘s argument that the law of Colorado applied because the award of professional fees in bankruptcy proceedings are governed by federal, not state law. Id. at 825 (citing In re 5900 Assocs., Inc., 486 F.3d 326, 329 (6th Cir. 2006)). Nevertheless, the District Court found that Colorado law would authorize a contingent fee based on a reduction of liability, given that Colorado‘s Contingent Fee Rules define a “contingent fee agreement” as one “under which compensation is to be contingent . . . upon the successful accomplishment or disposition of the subject matter of the agreement.” Id. Thus, under Colorado law, “[t]he clear inference is that contingent fees are not necessarily based on ‘amounts collected’ by the attorney.” Id.
The District Court cited the “reduction of liability” language in the Modified Fee Agreement and the bankruptcy court‘s ultimate authority to determine a reasonable fee under
The UST points out, and L&D admits, that the facts in Adam Aircraft II are not wholly analogous to those presented here. (Bankr. Dkt. 442 at 5; Bankr. Dkt. 446 at 4). Unlike the Modified Contingency Fee Agreement in Adam Aircraft II, the JV Agreement does not refer to a “reduction of liability” or expound upon the meaning of “sums recovered.” The UST questions whether the parties intended to enter into a reverse contingent fee arrangement.
L&D recognizes the absence of a definition of “sums recovered” in the JV Agreement but argues that the ordinary meaning of “recover” is broad enough to include more than just the receipt of cash.8 (Bankr. Dkt. 442 at 5). L&D cites the Merriam-Webster Dictionary for its alternative definitions of “recover” and, in particular, relies upon the definition, “to save from loss and restore to usefulness.” (Bankr. Dkt. 442); see Recover, Merriam-Webster.com, http://merriam-webster.com/dictionary/recover (last visited Feb. 23, 2021). L&D also cites numerous decisions where courts have adopted other dictionary
The Trustee‘s testimony at the Hearing demonstrates that the settlement was the equivalent of the Trustee paying Capitala/Harbert the Estate Funds on which Capitala/Harbert asserted a lien and Capitala/Harbert, in turn, writing a check to the Trustee in the same amount.9 The Court
agrees with L&D that a fair reading of the JV Agreement is that the phrase “sums recovered” includes more than the influx of new money and applies to the Estate Funds. ANTONIN SCALIA & BRYAN A. GARNER, READING LAW: THE INTERPRETATION OF LEGAL TEXTS 101-106 (2012). After all, the only form of relief sought against Capitala/Harbert in the Trustee Adversary was the equitable subordination of their claims and a declaratory judgment. Why then would L&D agree to a contingent fee based solely on the influx of new money into the estate? Moreover, to adopt the UST‘s analysis would conflict not only with L&D‘s understanding of the JV Agreement but also with the Trustee‘s. Neither L&D nor the Trustee read any ambiguity into the phrase “sums recovered” from the inception of the fee arrangement. As L&D makes clear, “[t]he reality is that without a contingency fee component in the JV Agreement, L&D would not have undertaken employment by the Trustee.” (Bankr. Dkt. 442 at 7). Having determined that the JV Agreement provides for the potential of a reverse contingent fee, the Court turns to the next issue raised by the UST at the Hearing, the validity per se of reverse contingent fees.
Even assuming state law applies, Mississippi has no counterpart to the Colorado Contingent Fee Rules discussed by the District Court in Adam Aircraft II. The Court notes that Rule 1.5 of the Mississippi Rules of Professional Conduct (“Rule 1.5“) provides that “[a] fee may be contingent on the outcome of the matter for which the service is rendered, except in a matter in which a contingent fee is prohibited by paragraph (d) or other law.” MISS. R. PROF‘L CONDUCT 1.5(c). Rule 1.5(d) prohibits contingent fees in domestic relations and criminal matters. There is no express prohibition in Rule 1.5, however, against reverse contingent fees.
Rule 1.5 is substantially identical to Rule 1.5 of the Model Rules of Professional Conduct (“Model Rule 1.5“) drafted by the American Bar Association (“ABA“). In 1993, the ABA Committee on Ethics and Professional Responsibility (the “ABA Committee“) issued a formal opinion concluding that Model Rule 1.5 does not prohibit reverse contingent fees in civil cases based on the amount of money saved the client, “provided the amount saved is reasonably
B. Standard for Awarding Compensation
Under
- the time spent on such services;
- the rates charged for such services;
- 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;
- 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;
- with respect to a professional person, whether the person is board certified or otherwise has demonstrated skill and experience in the bankruptcy field; and
- whether the compensation is reasonable based on the customary compensation charged by comparably skilled practitioners in cases other than cases under this title.
If a court awards professional compensation under
In assessing fee applications, the Fifth Circuit has held that courts should apply the lodestar method in concert with the Johnson factors.10 CRG Partners Grp., LLC v. Neary (In re Pilgrim‘s Pride Corp.), 690 F.3d 650, 655-56 (5th Cir. 2012). Under the lodestar method, a court first determines the compensable hours billed and then calculates a reasonable hourly rate for the
compensable services. Black v. SettlePou, P.C., 732 F.3d 492, 502 (5th Cir. 2013). The resulting sums are multiplied to arrive at the lodestar amount. Pilgrim‘s Pride Corp., 690 F.3d at 655. In Perdue v. Kenny ex rel. Winn, 559 U.S. 542, 551 (2010), the U.S. Supreme Court emphasized the importance of the lodestar approach for calculating the reasonableness of professional fees. These holdings create a framework under which a bankruptcy court determines the proper compensation of professionals employed by the estate: the lodestar method,
C. Reasonableness & Necessity of L&D‘s Fees
1. Lodestar Calculation
a. Reasonable Hours Expended
L&D billed 391.6 hours for service rendered by Liston and Deas from December 2, 2019 to November 13, 2020. Before initiating the Trustee Adversary, L&D‘s primary task was reviewing voluminous documents and researching potential claims against Capitala/Harbert. After the initiation of the Trustee Adversary, L&D engaged in discovery, including at least twelve (12) depositions, some of which took place over several days. L&D also responded to a motion for derivative standing and pursued a partial summary judgment motion. L&D additionally attended several hearings and status conferences. The Court finds that the hours expended by L&D were reasonable. The UST does not argue otherwise.
b. Prevailing Hourly Rate in the Community for Similar Work
It is well settled that “reasonable” hourly rates “are to be calculated according to the prevailing market rate in the relevant community.” Blum v. Stenson, 465 U.S. 886, 896 (1984). The Fifth Circuit has interpreted “relevant community” to mean that courts must consider the customary fee for similar work “in the community.” McClain v. Lufkin Indus., Inc., 649 F.3d 374, 381 (5th Cir. 2011). In determining the reasonableness of hourly rates, a court relies on evidence submitted by the applicant as to the rates it customarily charges and the court‘s own knowledge of comparable rates charged by lawyers.
In this district, courts have approved hourly billing rates up to $400.00. See United States ex rel. Rigsby v. State Farm Fire & Cas. Co., 1:06CV433-HSO-RHW, 2014 WL 691500, at *5 (S.D. Miss. Feb. 21, 2014). Moreover, this Court has approved a billing rate of $450.00 per hour in In re Natchez Reg‘l Med. Ctr., No. 14-01048-NPO, Dkt. 349 (Bankr. S.D. Miss. July 22, 2014). A billing rate of $440.00 per hour also was approved in In re Simply Wheelz LLC, No. 13-03332-EE, Dkt. 632 (Bankr. S.D. Miss. Aug. 7, 2014). The Court finds that the hourly
Having determined the lodestar, the Court next considers whether the amount requires an upward or downward adjustment based upon the factors set forth in
2. § 330(a) Factors
a. Whether Services Were Necessary or Beneficial
In the Fifth Circuit, the seminal case on the issue of whether professional fees should be considered necessary or beneficial to the administration of the estate is Barron & Newburger, P.C. v. Tex. Skyline, Ltd. (In re Woerner), 783 F.3d 266 (5th Cir. 2015). The Woerner Court reviewed the text of
L&D‘s services resulted in a settlement under which the claims of Capitala/Harbert, McGlinn, and Harbert are subordinated to the allowed claims of all other creditors with respect to the Estate Funds and certain estate claims. Prior to the settlement, the Estate Funds constituted the cash collateral of Capitala/Harbert, and Capitala/Harbert had not given their consent to its use for any purpose. (Bankr. Dkt. 297). This settlement made the Estate Funds available for distribution to other creditors and for other needs of the estate. L&D‘s services, therefore, substantially benefitted the estate.
The Court notes that there are no billing entries for time expended on pursuing the Trustee‘s Motion to Disqualify K&L Gates, LLP as Counsel for Capitala Defendants (Tr. Adv. Dkt. 190), which the Court ultimately denied. (Tr. Adv. Dkt. 352). That the Trustee was ultimately unsuccessful in seeking to have K&L Gates, LLP disqualified does not necessarily mean that the legal services provided by L&D were unnecessary or unreasonable at the time they were rendered. Woerner, 783 F.3d at 270.
b. Whether Services Were Performed Within a Reasonable Amount of Time
The equitable subordination claim required the Trustee to prove that Capitala/Harbert engaged in inequitable conduct that harmed creditors of the bankruptcy estate or that conferred an unfair advantage on Capitala/Harbert. Mobile Steel Co., 563 F.2d at 700. Such proof involved unwinding complex financial transactions and the actions of individuals acting in different corporate capacities. The lawsuit raised many issues that required extensive legal research. The Court finds that the services were performed in a reasonable time given the amount of investigation and research required.
c. Whether L&D Demonstrated Skill & Experience in the Bankruptcy Field
No evidence was presented to the Court that Liston and/or Deas are board certified in bankruptcy. Liston and Deas have appeared on many occasions in other proceedings and cases before this Court and other bankruptcy courts. They have demonstrated skill, experience, and professionalism on such occasions.
d. Whether Compensation is Reasonable Based on Customary Compensation Charged by Comparably Skilled Practitioners in Non-bankruptcy Cases
This criterion, together with the similar sixth factor set forth in Johnson, requires the Court to consider the blended-fee structure. The District Court in Adam Aircraft II approved a hybrid combination of a reduced hourly fee and a reduced contingency fee based, in part, on its finding that the fee arrangement was customary in lender liability cases. The Court agrees with that finding. For example, the Fifth Circuit in Campbell Harrison & Dagley, L.L.P. v. Hill, 782 F.3d 240 (5th Cir. 2015), upheld an arbitration award approving a fee agreement that combined a high hourly-rate fee with a low-percentage contingent fee. Id.; see also Fluorine On Call, Ltd. v. Fluorogas Ltd., 380 F.3d 849 (5th Cir. 2004). Other jurisdictions have recognized fee contracts that combine both reduced hourly fees and a reduced contingent fee. See, e.g., In re Hart Oil & Gas, Inc., No. 12-13558, 2016 WL 7377049 (Bankr. D.N.M. Dec. 7, 2016); Marketfare Annunciation, LLC v. United Fire & Cas. Co., 06-7237, 2019 WL 3672758 (E.D. La. Oct. 30, 2009); Arnal v Travelers Prop. Cas. Ins. Co., 2:04-cv-1563, 2007 WL 1412492 (D. Ariz. May 14, 2007); Gibson v. Epting, 827 S.E.2d 178 (S.C. Ct. App. 2019); Storino, Ramello & Durkin v. Rackow, 45 N.E.3d 307 (Ill. Ct. App. 2015); Cotchett, Pitre & McCarthy v. Universal Paragon Corp., 114 Cal. Rptr. 3d 781 (Cal. Ct. App. 2010); Chapman v. Hootman, 999 S.W.2d 118 (Tex. Ct. App. 1999); State v Cacioppo, 813 P.2d 679 (Alaska 1991); Kramer v. Fallert, 628 S.W.2d 671 (Mo. Ct. App. 1981).
A hybrid fee structure alleviates the all-or-nothing risk of a straight contingent fee and allows clients to attract a broader range of counsel. Where the potential of recovery is doubtful, some counsel will not accept employment on a straight contingency basis. Adding a reduced hourly rate to the possibility of a contingent fee may render the arrangement more acceptable to both the law firm and its client. This is the scenario that led to the JV Agreement.
The Trustee testified at the Hearing that she asked L&D to represent her on a contingent-fee basis but L&D declined to accept the full risk of pursuing complex
The blended-fee arrangement results in total fees of $156,693.81. In comparison, the total fees for the same number of hours expended at Liston‘s and Deas’ customary billing rate of $350.00 results in fees of $137,060.00, a difference of only $19,633.81. The Court finds that this difference is a reasonable reward for accepting some of the risk of nonpayment.
An aspect of the UST‘s opposition to reverse contingent fees is the ability to calculate the reduction or savings. Indeed, as noted previously, the ABA Committee echoed the UST‘s concern when it opined that reverse contingent fees do not violate Model Rule 1.5 as long as the amount saved the client is reasonably determinable. See supra at 19. The L&D Fee Application explained the specific method used by L&D to calculate the contingency fee component of the total fees requested. L&D applied the reduced contingent fee of 27.5% to $356,195.69, the amount of the Estate Funds held by the Trustee subject to Capitala/Harbert‘s lien as of the date of the Hearing. This method mirrors the one used by Allen & Vellone in Adam Aircraft II. As in that matter, the cash in deposit in the account was preserved for distribution to creditors other than the litigants as a result of the settlement. Under these circumstances where the Trustee fully and affirmatively supports the fee request and where the method used to calculate the amount of the savings to the estate is reasonable, the Court finds that the blended-fee structure resulting in $156,693.81 in fees is reasonable when compared to similar compensation in bankruptcy and non-bankruptcy matters.
3. Johnson Factors
The Johnson factors overlap with the factors under
a. Preclusion of Other Employment
As to the fourth Johnson factor, there is no evidence in the record as to how many cases L&D may have had to turn down to perform the necessary work in the Trustee Adversary. Such information is not usually provided as part of a fee application.
b. Time Limitations Imposed by the Client or Circumstances
The consolidation of the Trustee Adversary and the Mansfield Adversary for discovery and trial purposes required L&D to perform services in a prompt manner to protect the estate‘s interest. There was no emergency otherwise that would weigh in favor of awarding additional fees under this seventh Johnson factor.
c. Undesirability of the Case
This tenth Johnson factor was mentioned briefly in the discussion under
d. Nature & Length of the Professional Relationship with the Client
There is no evidence in the record about the Trustee‘s previous employment of L&D.
4. Summary
The Court finds that the JV Agreement combines a reduced hourly fee and the potential for a straight or reverse contingent fee at lower percentage rate. The Court rejects the UST‘s argument at the Hearing that reverse contingent fees are per se invalid. The Court further finds that the total fees, both hourly and contingency-based, are reasonable under
D. Expenses
L&D requests the reimbursement of its expenses of $10,121.90. (Bankr. Dkt. 409-3). These expenses consist of deposition and postage costs. The UST does not challenge the reasonableness of these expenses. The Court finds that L&D may recover $10,121.90 in requested expenses.
Conclusion
For the above reasons, the Court finds that the Griffin Objection should be withdrawn, the UST Objection should be overruled, and the L&D Fee Application should be approved.
IT IS, THEREFORE, ORDERED that the Griffin Objection is hereby withdrawn.
IT IS FURTHER ORDERED that the UST Objection is hereby overruled.
IT IS FURTHER ORDERED that the L&D Fee Application is hereby approved. L&D is hereby awarded fees in the aggregate amount of $156,693.81, which consists of hourly fees of $58,740.00 and contingent fees of $97,953.81. L&D‘s payment of forty percent (40%) of any contingent fees that L&D may receive to MMS is hereby approved. L&D also is hereby awarded reimbursement of necessary and reasonable expenses of $10,121.90.
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