ZOLFO, COOPER & CO., Appellant v. SUNBEAM-OSTER COMPANY, INC.
No. 94-3271
United States Court of Appeals for the Third Circuit
March 14, 1995
On Appeal from the United States District Court for the Western District of Pennsylvania (D.C. Civil Action No. 91-cv-01665)
DAVID F. McGONIGLE, ESQUIRE
Kirkpatrick & Lockhart
1500 Oliver Building
Pittsburgh, Pennsylvania 15222
Attorneys for Appellant
DENNIS J. LEWIS, ESQUIRE (ARGUED)
LAURA A. MEADEN, ESQUIRE
Cohen & Grigsby
625 Liberty Avenue
2900 CNG Tower
Pittsburgh, Pennsylvania 15222-3115
Attorneys for Appellee
Before: SCIRICA, LEWIS and RONEY*, Circuit Judges
(Filed March 14, 1995)
SCIRICA, Circuit Judge.
This is an appeal from the bankruptcy court‘s award, pursuant to
I.
On February 20, 1988, the debtors filed petitions for bankruptcy under Chapter 11 of the Bankruptcy Code. On July 12, 1990, the bankruptcy court confirmed the debtors’ disclosure statement and plan for reorganization, and in September 1990 the plan was consummated. As a result, Sunbeam-Oster Company acquired all the assets and liabilities of the debtors.
At the outset of the bankruptcy process the debtors filed motions for authorization to employ financial and
On December 14, 1989, the bankruptcy court issued the first of many opinions regarding fee applications, in this case a decision on the fee requests of four law firms. In its opinion, the bankruptcy court stated, “With certain exceptions, we find the hourly rates requested to be too high. They depart from the cost of comparable services in Western Pennsylvania.” In re Allegheny Int‘l, Inc., No. 88-448, slip op. at 4 (Bankr. W.D. Pa. Dec. 14, 1989) (“December 14, 1989, Opinion“). The court noted its dismay over the behavior of the lawyers who “reinvented the wheel several times” and were parties to “greed and personality clashes . . . .” Id. at 5.
The court turned to consider the “hourly rates in our local bankruptcy court marketplace.” Id. (quoting In re Shaffer-Gordon Assocs., Inc., 68 B.R. 344, 350 (Bankr. E.D. Pa. 1986)). It determined “our experience tells us that the market rate in Western Pennsylvania for bankruptcy counsel of high caliber is $150 per hour. We routinely observe quality bankruptcy work billed at that rate in chapter 11 cases by partners, and lesser amounts by associates.” Id. at 5-6.
The bankruptcy court then stated it recognized the difficulty, complexity, and size of this particular case, and announced it would therefore “allow rates higher than the
In orders and memorandum opinions dated August 21, 1990, and December 20, 1990, the bankruptcy court addressed Zolfo Cooper‘s applications for interim compensation for the periods February 20, 1988, to February 28, 1989, and March 1, 1989, to September 15, 1990, respectively. On April 30, 1991, the bankruptcy court issued an order regarding Zolfo Cooper‘s application for compensation for services from September 16, 1990, to December 31, 1990, for all previously disallowed fees and expenses, and for premium compensation in the amount of $1.1 million. The bankruptcy court denied this last application in its entirety.
In the bankruptcy court‘s memorandum opinion of August 21, 1990, it incorporated by reference the December 14, 1989, opinion described above. The court explained it was capping Zolfo Cooper‘s fees at an hourly rate of $225 per hour in part because “almost all of the work done by this applicant was done by highly paid personnel; there were virtually no lower paid personnel rendering services. Moreover, the court is concerned
Zolfo Cooper filed a motion for reconsideration and a request for clarification. The bankruptcy court denied the motion for reconsideration on August 16, 1991, and expressly reaffirmed its earlier orders and opinions. The August 16, 1991, order also incorporated by reference a separate memorandum opinion of the same date which stated, “The rates [we] found to be the costs of comparable services in non bankruptcy situations in Western Pennsylvania may not be the rates which are prevalent in other metropolitan areas or which may have become comparable nationally in large Chapter 11 cases.” In re Allegheny Int‘l, Inc., No. 88-448, slip op. at 5 (Bankr. W.D. Pa. Aug. 16, 1991) (“August 16, 1991, Opinion“). The bankruptcy court then stated that Japonica Partners, who ultimately took control of the debtors through Sunbeam-Oster,2 had voluntarily paid higher rates
Zolfo Cooper appealed the bankruptcy court‘s order of August 16, 1991, to the district court, which affirmed. This appeal followed.
II.
In our review of the bankruptcy court‘s factual findings we, like the district court, review for clear error. Resyn Corp. v. United States, 851 F.2d 660, 664 (3d Cir. 1988). Our review of legal precepts is plenary. Id. (quoting Universal Minerals, Inc. v. C.A. Hughes & Co., 669 F.2d 98, 102 (3d Cir. 1981)). Since we are in as good a position to review the bankruptcy court‘s decision as the district court was, we will review the bankruptcy court‘s findings by the standards the district court would apply. Universal Minerals, 669 F.2d at 102. Fee awards are reviewed for an abuse of discretion, which can occur “if the judge fails to apply the proper legal standard or to follow proper procedures in making the determination, or bases
Jurisdiction in the bankruptcy court was proper under
III.
A.
Zolfo Cooper contends the bankruptcy court erred in setting a cap on the rates charged by four law firms in its December 14, 1989, Opinion. The bankruptcy court incorporated the December 14, 1989, Opinion in its August 21, 1990, Opinion, in setting a maximum rate on Zolfo Cooper‘s hourly fees. Zolfo Cooper contends the bankruptcy court improperly ignored evidence of the hourly rate which Zolfo Cooper commands in the national market for its services. Instead, Zolfo Cooper asserts, the bankruptcy court looked to the local market for professional services and applied its own notion of the proper hourly rate.
Zolfo Cooper asserts the bankruptcy court‘s fee decisions misapply the law, pointing out that the bankruptcy court acknowledged the Allegheny International bankruptcy was “national in scope.” December 14, 1989, Opinion at 11. Zolfo Cooper argues this warranted compensation at higher rates than
The question of what fees should be awarded to professionals hired to assist with a bankruptcy or management of a bankrupt estate is governed by
(a) After notice to any parties in interest and to the United States trustee and a hearing, and subject to sections 326, 328, and 329 of this title, the court may award to a trustee, to an examiner, to a professional person employed under section 327 or 1103 of this title, or to the debtor‘s attorney--
(1) reasonable compensation for actual, necessary services rendered by such trustee, examiner, professional person, or attorney, as the case may be, and by any paraprofessional persons employed by such trustee, professional person, or attorney, as the case may be, based on the nature, the extent, and the value of such services, the time spent on such services, and the cost of comparable services other than in a case under this title; and
(2) reimbursement for actual, necessary expenses.
Recently we issued a comprehensive opinion interpreting this section. In re Busy Beaver Bldg. Ctrs., Inc., 19 F.3d 833 (3d Cir. 1994). In Busy Beaver, we addressed whether certain paralegal expenses were compensable under
We recognized in Busy Beaver that
On the other hand, we also noted that reliance on the market is tempered because “the court will, in practical terms, act as a surrogate for the estate, reviewing the fee application much as a sophisticated non-bankruptcy client would review a [professional] bill.” Id. And we observed that “certainly a bankruptcy judge‘s experience with fee petitions and his or her expert judgment pertaining to appropriate billing practices, founded on an understanding of the legal profession, will be the starting point for any analysis.” Id. at 854.
In announcing the market-driven approach, Busy Beaver cited favorably to In re Patronek, 121 B.R. 728 (Bankr. E.D. Pa. 1990), which had relied on market information to set fees for purposes of
But in Busy Beaver we also added that where evidence proves a market rate that directly contradicts the court‘s judgment, the market rate must take precedence. 19 F.3d at 854. Significantly, however, we held the bankruptcy court may discount evidence presented by the fee applicant, since courts “are themselves experts on the value of services rendered in a bankruptcy proceeding and are not bound by the evidence offered.” Id. (quoting York Int‘l Bldg., Inc. v. Chaney (In re York Int‘l Bldg., Inc.), 527 F.2d 1061, 1068 (9th Cir. 1975)). We also stated, “[T]he court should to the extent practicable make findings of fact and provide reasoned explanations in the record to facilitate review.” Id. at 854.
Busy Beaver was decided after the bankruptcy proceedings were completed in this case, and therefore the bankruptcy court did not have the benefit of its guidance. Yet Busy Beaver is controlling even though it was decided after the bankruptcy court‘s opinions. See Gulf Offshore Co. v. Mobil Oil Corp., 453 U.S. 473, 486 n.16 (1981) (stating “[a]n appellate court must apply the law in effect at the time it renders its decision” (citation omitted)); Ziffrin, Inc. v. United States, 318 U.S. 73, 78 (1943) (noting “[a] change in the law between a
In its December 14, 1989, Opinion, the bankruptcy court looked to In re Fine Paper Antitrust Litigation, 751 F.2d 562 (3d Cir. 1984), in which we had explained that “[t]he value of an attorney‘s time generally is reflected in his normal billing rate.” Id. at 583 (quoting Lindy Bros. Builders, Inc. v. American Radiator & Standard Sanitary Corp., 487 F.2d 161, 167 (3d Cir. 1973)). The bankruptcy court followed this standard. At the final hearing on fee applications, the bankruptcy court noted its strong reliance on the market for professional services in setting the fee allowances: “[W]e used . . . as best we could the actual fees being paid by the debtor for the previous two years with some minor modifications as to what they were paying the lawyers over that time period or something close to that, so as to somehow attempt to get a good picture of what the market was for a company of this size and for a company with these kinds of problems.” J. App. at 1019.
Zolfo Cooper argues that “in large bankruptcy cases, like Allegheny International, professionals with national practices should receive compensation at their normal hourly rates, even if that rate is much greater than the local rate.”
While in Busy Beaver we cited approvingly to cases in which out-of-state firms appropriately received higher rates in difficult cases, we also observed that “the reasonable hourly rate has a cap based on the expected and actual complexity of the case, a cap which, while flexible, should stave off clear abuses [by fee applicants].” 19 F.3d at 856 n.35. We noted that the court should review a fee application to “ensure the applicant exercises the same ‘billing judgment’ as do non-bankruptcy [professionals] . . . .” Id. at 856.4
The bankruptcy court looked to the evidence of market rates before it and adjusted the rates according to its experience and the nature, extent, and value of the services. The court explained what the local bankruptcy rates were and why the professionals (including Zolfo Cooper) deserved higher rates
The baseline rule is for firms to receive their customary rates. Zolfo Cooper cites to three record items which it claims established the rates it customarily charges: (1) its affidavit supplied as part of the debtors’ motion to retain Zolfo Cooper and other professionals; (2) a retention letter from Zolfo Cooper to Allegheny International for services to be performed before the bankruptcy filing; and (3) evidence of rates paid by Sunbeam-Oster to professionals retained by it and Japonica Partners (which controls Sunbeam-Oster). J. App. at 14, 32-35, 692-735.
In another appeal treating the fee decisions by the bankruptcy court in this case, Fulbright & Jaworski v. Sunbeam-Oster Co. (In re Allegheny Int‘l, Inc.), 139 B.R. 336, 341 (W.D. Pa. 1992), the district court assessed how the bankruptcy court reached its conclusions, and found “that the bankruptcy court properly considered the fact that New York market rates are higher than those of western Pennsylvania, and adjusted [Fulbright & Jaworski‘s] fee award according to other significant factors.” Cf. In re Allegheny Int‘l (Wells Fargo), 131 B.R. 24, 31 (W.D. Pa. 1991) (finding the bankruptcy court‘s reduction of fees to New York law firm Paul Weiss erroneous because the sole basis for reduction was that Paul Weiss should be subject to the cap the court set in its December 14, 1989, opinion).
Zolfo Cooper‘s evidence provides only a range of fees. The bankruptcy court found Zolfo Cooper was billing excessively in the high end of that range and capped the fees accordingly. See Ursic v. Bethlehem Mines, 719 F.2d 670, 677 (3d Cir. 1983) (observing that “[r]outine tasks, if performed by senior partners in large firms, should not be billed at their usual rates. A Michelangelo should not charge Sistine Chapel rates for painting a farmer‘s barn“). The court explained why it was capping the rates for Zolfo Cooper below the New York rates it requested, observing Zolfo Cooper had duplicated effort, used too many high-level personnel, and submitted an incomplete fee application.6
We believe the bankruptcy court erred in taking the market rate for services in Western Pennsylvania as a starting point. This is not the appropriate starting point for the determination of the market in which Zolfo Cooper practices. The idea that a firm should be restricted to the hourly rate typical in the locale of the case “is unduly parochial particularly in this age of national and regional law firms working on larger more complex bankruptcy cases of more than local import.” In re Robertson Cos., 123 B.R. 616, 619 (Bankr. D.N.D. 1990). The bankruptcy court here should have looked first to Zolfo Cooper‘s customary market (New York) and then made reductions based on the other factors.7 But this error does not require reversal because the bankruptcy court achieved substantially the same result.
The bankruptcy court cut Zolfo Cooper‘s total compensation request approximately twelve percent. When faced with a reduction of ten percent in a similar case, we stated that “[n]o court, viewing a record of this magnitude from the distance inherent in appellate review, could assess the reasonability of a reduction as slight as ten percent with flawless precision.” Daggett v. Kimmelman, 811 F.2d 793, 798 (3d Cir. 1987). We
B.
The bankruptcy court did not specifically rule on Zolfo Cooper‘s fee applications until its August 21, 1990, Opinion. This, Zolfo Cooper argues, created reversible error by ignoring the command in Busy Beaver that the decision whether to retain “nationally renowned [professional firms],” with their “lofty fees,” should be made “as early as practical, preferably before the debtor retains the professional.” 19 F.3d at 856 n.35. Zolfo Cooper had worked since February 1988, and contends it was unfairly prejudiced by the delay. Zolfo Cooper also asserts
Bankruptcy courts should, as we noted in Busy Beaver,
It is a separate question whether the bankruptcy court could, consistent with
If the order does not expressly and unambiguously state specific terms and conditions (e.g. specific hourly rates or contingency fee arrangements) that are being approved pursuant to the first sentence of section 328(a), then the terms and conditions are merely those that apply in the absence of specific agreement. That leaves the court free to apply lodestar rates unfettered by the strictures of the second sentence of section 328(a) . . . .
In the present case, the bankruptcy court order authorizing Zolfo Cooper‘s retention stated that “debtors in possession[] be and hereby are authorized to retain the firm of [Zolfo, Cooper & Co.] to perform the services as set forth in the foregoing Motion and Affidavit of Frank John Zolfo.” In re Allegheny Int‘l, Inc., No. 88-448 (Bankr. W.D. Pa. Feb. 20, 1988) (order authorizing retention of Zolfo Cooper). This language only established the nature and range of services. It cannot bind the court to particular terms and conditions of compensation.
C.
Finally, Zolfo Cooper argues the bankruptcy court erred by not properly taking into account its supplemental applications for expenses, which it contends corrected any deficiencies in its
The bankruptcy court refused to reimburse Zolfo Cooper for these expenses, explaining in its opinion of August 21, 1990, that they were insufficiently documented. Zolfo Cooper contends it supplemented the documentation three times and requested the court review the supplemental documentation. Zolfo Cooper argues the bankruptcy court improperly failed to acknowledge or comment upon the supplemental documentation.
When a bankruptcy court denies compensation to an applicant who has attempted to comply in good faith with specificity requirements of the bankruptcy rules, the court should allow time to supplement the application. The court also “should notify the applicant of its particular reasons for denying the fees, and . . . allow the professional the occasion to defend his or her fee application with legal arguments and/or evidence (of market practices, etc.) at a hearing.” Busy Beaver, 19 F.3d at 847.
In In re Four Star Terminals, Inc., 42 B.R. 419, 437-38 (Bankr. D. Alaska 1984), the court denied expense requests that were improperly documented but stated the applicant could resubmit these expenses with proper documentation in a later application. Our statements in Busy Beaver support this approach. Absent a lack of good faith on the part of the applicant, a court should allow the applicant a chance to cure defects in its original expense documentation. See Busy Beaver, 19 F.3d at 846-47.
The bankruptcy court continued in subsequent rulings to disallow these expenses without comment, prompting a letter from Zolfo Cooper‘s counsel dated August 30, 1991, which noted Zolfo Cooper had made “considerable efforts to clarify the documentation of its expenses,” and requested the court clarify that it had examined the supporting documentation. J. App. at 916. Zolfo Cooper stated it was raising the issue “of the Unpaid Expenses not to cause the Court to revisit a matter that has already been decided, but merely to confirm that it indeed has been decided . . . .” Id.
The bankruptcy court responded “[t]he portion of the August 21, 1990 Opinion clearly states that the expenses which were not properly documented were disallowed. The Court11
The bankruptcy court provided a thorough analysis of Zolfo Cooper‘s fee application in its August 21, 1990, Opinion, in which it granted most of Zolfo Cooper‘s requests even though it found “[n]one of the expenses listed in the petitions are properly documented.” August 21, 1990, Opinion at 6. Its September 5, 1991, Order might have discussed more explicitly its consideration of the supplemental materials, but the context of the September 5, 1991, Order makes clear that the court considered the materials and found them wanting. The bankruptcy court answered the question Zolfo Cooper asked--whether the court had reached a decision regarding fees. This comports with the proper standard, which requires the court to consider supplemental materials where the initial application was in good faith. Here, the bankruptcy court considered the supplemental materials even though language in its August 21, 1990, Opinion suggests Zolfo Cooper‘s original request might not have met the good faith standard. We are satisfied that the bankruptcy court
IV.
For the foregoing reasons, we will affirm the district court.
Notes
Id. at 1151.A judge who departs from this presumptive rate must have some reason other than the ability to identify a different average rate in the community. A judge might say, for example, that the lawyers did not display the excellence, or achieve the time savings, implied by their higher rates. A judge might conclude that the plaintiff did not need top-flight counsel in a no-brainer case.
The trustee . . . with the court‘s approval, may employ or authorize the employment of a professional person . . . on any reasonable terms and conditions of employment . . . . Notwithstanding such terms and conditions, the court may allow compensation different from the compensation provided under such terms and conditions after the conclusion of such employment, if such terms and conditions prove to have been improvident in light of developments not capable of being anticipated at the time of the fixing of such terms and conditions.
The bankruptcy court‘s December 14, 1989, Opinion was thus not necessary to put Zolfo Cooper on notice of what was required. Second, Zolfo Cooper had eight months after December 14, 1989, before the bankruptcy court ruled on its first fee applications. This period was clearly sufficient for Zolfo Cooper to supplement its application before the bankruptcy court ruled on its application.Unless otherwise ordered, no compensation or expenses will be allowed to any professional for any service rendered in any case unless an application for fees and expenses is filed which provides the following.
. . . .
6. An itemization of the expenses for which reimbursement is requested.