Opinion
Case No. 95-11924-AM (Jointly Administered)
November 21, 1995
Thomas P. Gorman, Esquire, Tyler, Bartl, Burke and Albert, P.L.C., Alexandria, VA, for the debtors in possession
MEMORANDUM OPINION AND ORDER
This matter was heard in open court on October 24 and November 7, 1995, on the motion of Thomas P. Gorman and the law firm of Tyler, Bartl, Burke, and Albert, P.L.C. for approval and payment of interim compensation as counsel for Robert and Marilyn DeLuca, the debtors in possession in one of these 14 jointly administered cases. The only objection was that of the United States Trustee filed October 20, 1995. At the hearing on October 24, 1995, the court continued the matter so that application could be supplemented in order to address the issues raised by the United States Trustee. The applicant did not do so but instead chose to file on November 6, 1995, a response to the United States Trustee's objection in effect, as the applicant stated at oral argument, "drawing a line in the sand" and asserting that the fee application was sufficient as it was. After hearing the contentions of the parties, the court took the matter under advisement. For the reasons set forth in this opinion, the application will be denied without prejudice to the submission of an amended application.
Facts
The debtors, who are real estate developers, filed a voluntary chapter 11 petition in this court on May 5, 1995. Within a short period of their own filing, they also caused chapter 11 petitions to be filed on behalf of thirteen real estate partnerships or limited liability companies that they own or control ("the DeLuca entities'). The DeLuca entities are separately represented by Kevin M. O'Donnell, Esquire. A chapter 11 trustee has been appointed for ten of the DeLuca entities. Mr. and Mrs. DeLuca and three of the DeLuca entities remain in possession of their estates as debtors in possession. A joint plan of reorganization was filed on October 18, 1995, with respect to Mr. and Mrs. DeLuca's case and ten of the DeLuca entities, and a creditor has filed a competing plan in the case of one of the DeLuca entities.
The employment of Mr. Gorman and the law firm of Tyler, Bartl, Burke Albert, P.L.C. as counsel to Mr. and Mrs. DeLuca as debtors in possession was approved by this court by order dated June 26, 1995. A prior application for approval and payment of interim compensation and reimbursement of expenses in the amount of $26,901.12 for the period April 25, 1995 through July 6, 1995 was not objected to and was approved by this court on August 22, 1995.
The present application covers the period from July 6, 1995 through September 30, 1995 and seeks compensation of $28,861.25 for professional services and reimbursement of expenses in the amount of $910.72. The application itself is a two-page pleading setting forth the date of the order approving the applicant's employment, the prior compensation awarded, the status of the retainer, and, in a summary and somewhat perfunctory fashion the general nature of the professional services for which compensation is sought. Attached to the application as an exhibit is a 33-page itemization of services performed in chronological order. For each discrete activity (telephone call, meeting, court appearance, and so on) the date, time expended in 3 minute (0.05 hour) increments, and persons involved are set forth. No attempt is made, however, to organize the time entries by subject matter or project, and a large number of the time entries, particularly those involving telephone calls and meetings, do not indicate the subject matter. Other entries, however (typically those involving the drafting of pleadings or court appearances) do describe the subject matter with reasonable particularity. No attempt is made in the fee application itself to discuss the history or status of the debtors' chapter 11 case or the financial condition of the debtor.
These are stated to be as follows:
"(a) Consulting with Debtors, parties in interest and their counsel;
(b) Representation of Debtors at miscellaneous hearings;
(c) Review and analysis of various pleadings, proofs of claim and correspondence.
(d) Miscellaneous matters as are more fully set forth in the attached billing."
The objections of the United States Trustee are that the application makes "no attempt to demonstrate benefit to the estate" and does not comply with the "Guidelines for Reviewing Applications for Compensation and Reimbursement of Expenses filed under 11 U.S.C. § 330" promulgated by the United States Trustee on March 22, 1995. The applicant responds that the present application is identical in form to the prior application which was not objected to (and which, indeed, the United States Trustee endorsed the order approving); is similar to applications he has routinely filed and had approved over the past several years; that the Guidelines have never been properly promulgated or publicized; that to provide greater specificity as to the subject matter of the various discussions, meetings, and telephone calls would reveal matters protected by the attorney-client or attorney work-product privilege; and that the United States Trustee's office has unfairly singled him out because he represents "unpopular" clients.
Discussion and Conclusions of Law A.
This court has jurisdiction of this controversy under 28 U.S.C. § 1334 and 157(a) and the general order of reference entered by the United States District Court for the Eastern District of Virginia on August 15, 1984. This is a core proceeding under 28 U.S.C. § 157(b)(2)(A) and (B).
B.
As one court has aptly observed, "Few rulings in a bankruptcy case generate more outrage from the public, anxiety among attorneys, and tribulation for judges than the compensation of officers of an estate pursuant to 11 U.S.C. § 330." In re CF I Fabricators of Utah, Inc., 131 B.R. 474, 480 (Bankr.D.Utah 1991). Under § 1107, Bankruptcy Code, a debtor in possession in a chapter 11 case has the rights and powers, and is required to perform the functions and duties, of an operating trustee. Under § 327, Bankruptcy Code, these rights include the employment, with court approval, of professionals, including attorneys. Compensation of such professionals is governed by § 330(a), Bankruptcy Code ("Compensation of Officers"), which grants the bankruptcy court the authority to award such professionals, "[a]fter notice to the parties in interest and the United States trustee, and a hearing . . . reasonable compensation for actual, necessary services rendered by the . . . professional person . . .; and reimbursement for actual, necessary expenses." The statute, as amended by the Bankruptcy Reform Act of 1994, further provides:
P.L. 103-394, 108 Stat. 4106 (1994). The amendments to § 330, Bankruptcy Code, apply to cases filed after October 22, 1994.
(3)In determining the amount of reasonable compensation to be awarded, the court shall consider the nature, the extent, and the value of such services, taking into account all relevant factors, including
(A) the time spent on such services;
(B) the rates charged for such services;
(C) 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;
(D) whether the services were performed within a reasonable amount of time commensurate with the complexity, importance, and nature of the problem, issue, or tasks addressed; and
(E) whether the compensation is reasonable based on the customary compensation charged by comparably skilled practitioners in cases other than cases under this title.
(4)(A) Except as provided in subparagraph (B), the court shall not allow compensation for —
(i) unnecessary duplication of services; or
(ii) services that were not —
(I) reasonably likely to benefit the debtor's estate; or
(II) necessary to the administration of the case.
The Bankruptcy Reform Act of 1994 further amended 28 U.S.C. § 586(a)(3), relating to the duties of United States Trustee, by adding the following language:
(A)(i) reviewing, in accordance with procedural guidelines adopted by the Executive Office of the United States Trustee (which guidelines shall be applied uniformly by the United States trustee except when circumstances warrant different treatment), applications filed for compensation and reimbursement under section 330 of title 11; and
(ii) filing with the court comments with respect to such application and, if the United States Trustee considers it to be appropriate, objections to such application.
(emphasis added). As required by the statute, the U.S. Department of Justice, Executive Office of United States Trustees, issued on March 22, 1995, "United States Trustee Guidelines for Compensation and Reimbursement of Expenses Filed Under 11 U.S.C. § 330" ("the Guidelines"). Although not apparently published in the Federal Register, the Guidelines have been widely distributed and have engendered considerable discussion, not all of it favorable, among members of the bar. The Guidelines became effective on May 1, 1995, but public comment is currently being solicited, and it is possible that changes will be made to the Guidelines after the public comment period expires.
C.
At the outset, it is worth emphasizing that under the statute the purpose of the Guidelines is to assist the United States Trustee in his or her review of fee applications and are intended to promote uniformity in such review. The Guidelines do not have the force and effect of law and are not in any sense binding on the court, any more than the recommendation of the United States Trustee is binding on the court. Consequently, the applicant's complaint in this case that the Guidelines have never been properly "promulgated," either as a local rule of court or otherwise, misses the point. Failure to comply with the Guidelines in submission of a fee application is not an independent basis for denial of the fee application. Rather, the failure to comply with the Guidelines as such is relevant only to the extent that it impacts on the United States Trustee's statutory responsibility to review and, if appropriate, to comment upon or object to fee applications. It is certainly no secret that the review of fee applications, particularly in large cases, is a tremendous burden on the court called upon to approve the requested fees, and this court has long found the independent examination of such applications by the United States Trustee to be helpful. Where, because the applicant has complied with the Guidelines, the United States Trustee has been able to conduct an informed and intelligent review of the application and recommends approval, the court's confidence that the requested fees are proper is greatly increased and the burden on the court in reviewing the application is correspondingly reduced. This does not mean that the court will not approve a fee application that fails to comply with the Guidelines or is opposed by the United States Trustee. As a practical matter, however, it does mean that the application will be subject to greater scrutiny.
D.
As an initial matter, the court discounts the assertion by the applicant that he has been somehow unfairly singled out by the United States Trustee because he represents "unpopular" clients. While it is certainly true that creditors in nearly all of these jointly administered cases have been vocal in their criticism of the DeLucas, whom they have accused of improperly transferring large sums of money among the various entities they control, there is no evidence that the Office of the United States Trustee has embarked on any sort of crusade against the DeLucas or that the United States Trustee has any concern other than its professional concern with the integrity of the reorganization process. As counsel for the United States Trustee pointed out at the hearing on the fee application, it is not improbable that the total professional fees and expenses requested in these jointly administered cases may exceed a million dollars. Although it is true, as the applicant argues, that most of those fees will arise in the "entity" cases rather than the DeLucas' individual case, the fact is that the cases are in a large measure intertwined. Not only was an order for joint administration entered early in the case on the motion of the DeLucas, but a joint plan of reorganization has been filed. The court agrees with the United States Trustee that the larger the requested fees, the more important it is that applicants seeking compensation out of the bankruptcy estate fully and clearly justify their entitlement to the fees they have requested. Put another way, the smaller the case, the easier it may be to determine, without elaborate analysis, whether the requested fees and expenses were "actual" and "necessary."
The fact that the application currently before the court may be, as the applicant asserts, identical in format to applications he and his firm have submitted in the past, and which have been routinely approved by the United States Trustee and this court, is simply irrelevant. The level of detail required in an application will depend in every case on the scope of the work performed and the likely magnitude of fees to be awarded in a case. Hence, it is no answer that in another case a less elaborate fee application sufficed. Additionally, as a practical matter, even though the Guidelines have in theory been effective since May 1, 1995, the court recognizes that there could well be a transition period in terms of the United States Trustee's insistence on conformance to the Guidelines while an effort is made to educate the bar to their provisions. Put another way, there will always be a first application with respect to which the United States Trustee insists on the detail required by the Guidelines, and if that first application happens to the applicant's, so be it.
E.
Prior to the Bankruptcy Reform Act of 1994, the Bankruptcy Code did not set forth any substantive standard for approval of professional fees other than the general requirement that they be "actual [and] necessary . . . 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." § 330, Bankruptcy Code (text prior to 1994). As a result, a number of court decisions attempted to define "factors" to be weighed by the court in passing upon fee applications. Within the Fourth Circuit, Harman v. Levin, 772 F.2d 1150 (4th Cir. 1985) expressly applied to bankruptcy cases a 12-factor test previously articulated in Barber v. Kimbrell's Inc., 577 F.2d 216 (4th Cir. 1978). As noted in In re Great Sweats of Virginia, Inc., 109 B.R. 696 (E.D.Va. 1989), however, the vitality of Harman v. Levin was called into question by three Supreme Court decisions, Hensley v. Eckerhart, 461 U.S. 424, 103 S.Ct. 1933, 76 L.Ed.2d 40 (1983), Blum v. Stenson, 465 U.S. 886, 104 S.Ct. 1541, 79 L.Ed.2d 891 (1984), and Pennsylvania v. Delaware Valley Citizens Council for Clean Air, 478 U.S. 546, 106 S.Ct. 3088, 92 L.Ed.2d 439 (1986), that essentially abandoned the "factor" approach to approval of attorneys fees in favor of a "lodestar" approach which determined a presumptively reasonable fee based on the "calculation of hours reasonably expended at a reasonable hourly rate." Hensley, 461 U.S. at 434 n. 9, 103 S.Ct. at 1940 n. 9. Accordingly, in Great Sweats, the District Court ruled:
The enumerated factors were: "(1) the time and labor expended; (2) the novelty and difficulty of the questions raised; (3) the skill required to properly perform the legal services rendered; (4) the attorney's opportunity costs in pressing the instant litigation; (5) the customary fee for like work; (6) the attorney's expectations at the outset of the litigation; (7) the time limitations imposed by the client or circumstances; (8) the amount in controversy and the results obtained; (9) the experience, reputation and ability of the attorney; (10) the undesirability of the case within the legal community in which the suit arose; (11) the nature and length of the professional relationship between attorney and client; and (12) attorneys' fees awards in similar cases." Barber, 557 F.2d at 226 n. 28.
The lodestar approach, as refined by the Supreme Court, provides a clear framework for calculating a reasonable attorneys fee. . . . The strong presumption that the product of reasonable hours times a reasonable rate represents a proper fee reduces the risk of arbitrary awards without eliminating the discretion necessary in fee decisions.
The enactment of the Bankruptcy Reform Act of 1994, however, significantly affects the rules of the game. New subsection (a)(3) to § 330, Bankruptcy Code, expressly commands the court to consider "all relevant factors" (emphasis added), including
(A) the time spent on such services;
(B) the rates charged for such services;
(C) 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;
(D) whether the services were performed within a reasonable amount of time commensurate with the complexity, importance, and nature of the problem, issue, or tasks addressed; and
(E) whether the compensation is reasonable based on the customary compensation charged by comparably skilled practitioners in cases other than cases under this title.
Thus, it is clear that Congress has now mandated a "factor" rather than "lodestar" analysis. Of course, the first two factors which the court is directed to consider (the time spent and the rate charged) are the same factors which would be considered in the lodestar approach, except that the lodestar amount would not necessarily be calculated on the basis of the "rate charged" but rather a "reasonable hourly rate." In addition, however, Congress requires the court to consider whether the services were "necessary" or "beneficial," whether they were "performed within a reasonable amount of time," and whether the compensation is reasonable based on the cost of similar services in a non-bankruptcy context. The consideration of whether the services were "necessary" or "beneficial" is arguably subsumed within the lodestar calculation of "hours reasonably expended," and comparability is arguably an issue in determining a "reasonable hourly rate," so it may be that applying the factors set forth in § 330(a)(3) will lead in almost every case to the same result as using the lodestar approach. Nevertheless, it is analytically a different approach, and in order for the court to determine whether requested fees and expenses should be approved, the applicant must present the court with sufficient information that it can intelligently evaluate the request in light of the Congressionally-mandated standards. The issue is whether the application now before the court does so.
F.
F.R.Bankr.P. 2016 ("Compensation for Services Rendered and Reimbursement of Expenses") provides:
(a) Application for Compensation or Reimbursement. An entity seeking interim or final compensation for services, or reimbursement of necessary expenses, from the estate shall file an application setting forth a detailed statement of (1) the services rendered, time expended and expenses incurred, and (2) the amounts requested. An application for compensation shall include a statement as to what payments have theretofore been made or promised to the applicant for services rendered or to be rendered in any capacity whatsoever in connection with the case, the source of the compensation so paid or promised, whether any compensation previously received has been shared and whether an agreement or understanding exists between the applicant and any other entity for the sharing of compensation received or to be received for services rendered in or in connection with the case, and the particulars of any sharing of compensation or agreement or understanding therefor, except that details of any agreement by the applicant for the sharing of compensation as a member or regular associate of a firm of lawyers or accountants shall not be required. . . . Unless the case is a chapter 9 municipality case, the applicant shall transmit to the United States trustee a copy of the application.
The question is what constitutes a "detailed statement" of the services rendered, time expended and expenses incurred. It is (or should be) apparent that a mere chronological listing of time expended on discrete tasks will not always give a clear picture of the services provided by the applicant or furnish information sufficient to judge whether those services meet the standards for approval set forth in § 330(a)(3), Bankruptcy Code. Accordingly, some courts have long required that applicants set forth in their fee applications in narrative form the status of the case and, where, the services are extensive, a breakdown by professional project or task, sometimes referred to as "project billing." See, e.g., "Guidelines for Compensation and Expense Reimbursement of Professionals," U.S. Bankr. Ct, N.D.Calif., (Aug. 1, 1993). The United States Trustee Guidelines adopt essentially the same approach. That is, they require the application to contain, in addition to an itemization of time expended and expenses incurred, a narrative summary setting forth the background of the applicant's appointment and any prior fees approved, the status of the case, a project summary, sufficient information from which an analysis of the factors specified in § 330(a) can be made, and a certification that the entity on whose behalf the services were rendered has reviewed the application and either has or has not approved it. The project summary may be omitted "[i]n cases that are not complex or extensive, either because of size or the issues involved." Guidelines, II(C)(2).
The Northern District of California guidelines require project billing where the application exceeds $10,000, or when the professional's anticipated services for the case will exceed $20,000.
In the application currently before the court, no attempt has been made to provide a narrative overview of the case status or to break the applicant's services down by professional project or task. As noted above, the application seeks approval of $28,861.25, in addition to $26,901.12 previously approved. These are by no means insignificant fees, and it is far from apparent, simply from reading the time entries, how the various tasks relate to the overall reorganization effort. The difficulty in reviewing the time entries is exacerbated by the fact that many of them provide no meaningful information — that is, the entry will reflect, for example, a telephone discussion with a named person on a particular date but not the subject matter of the discussion. In short, the application, although sufficient to allow the court to make an informed decision with respect to the factors set forth at § 330(a)(3)(A) and (B), does not supply sufficient information to enable the court to find that requested fees are supported by the factors set forth at § 330(a)(3)(C), (D), and (E).
The original application also did not include a certification that the application had been reviewed by the debtors in possession. However, attached to the response filed by the applicant on November 6, 1995, is a signed statement by the debtors in possession that they have reviewed the fee application and support it.
The applicant justifies the lack of subject matter detail on the ground that to supply such information would or could violate the attorney-client privilege, and pointing out that the chapter 11 case is at a sensitive point concerning negotiations with creditors which could be compromised if the substance of the discussions were disclosed. The problem, of course, is that a debtor in possession is not an ordinary client whose only interest is its self-interest: it is a fiduciary for the creditors, and when its professionals seek compensation for what, after all, are assets being administered for the benefit of creditors, there is a duty of maximum disclosure consistent with the need to preserve essential client confidences or not compromise sensitive negotiations. As one court has noted, "If the full description of legal services performed must be protected, a much better practice would be to obtain a protective order, as opposed to redacting descriptive entries. The professional should weigh the necessity for confidentiality against the mandate to fully disclose to all parties the basis for the fees requested." In re CF I Fabricators of Utah, Inc., 131 B.R. 474, 487 (Bankr.D.Utah 1991). In many, and probably most, instances, however, it will be possible to supply a general description of the subject matter sufficient to permit review without disclosing privileged details. Since the current application will have to be resubmitted in any event, the court will make no ruling on the privilege issue but expects that counsel in any amended application will provide reasonable detail as to the subject matter and, where in counsel's considered professional judgment the subject matter cannot be disclosed, counsel should consider seeking an order to file the relevant portion of the time entries under seal or requesting in camera review by the court.
The burden is upon an applicant seeking compensation from the bankruptcy estate to demonstrate compliance with the requirements for approval of the fee. In re Junco, Inc., 185 B.R. 215, 218-219 (Bankr.E.D.Va. 1995) (Shelley, J.) (holding that time spent preparing fee application is not compensable). Put another way, it is not the court's responsibility to comb through, organize and analyze the time entries in order to satisfy itself that the requested fees and expenses meet the standards of § 330(a). That essentially is what the applicant asks this court to do when he "draws a line in the sand" and refuses to supply the additional detail sought by the United States Trustee so that the United States Trustee can efficiently carry out his statutory responsibility to review fee applications submitted in chapter 11 cases. The fees requested in the application before the court are sufficiently large, and the case itself sufficiently complex, that the applicant should be required to comply with the Guidelines, not because they control the court's substantive consideration of the application, but because noncompliance impairs the ability of the United States Trustee to carry out his statutory responsibility of reviewing and commenting on the application. By requiring that the application reasonably comply with the requirements of the Guidelines, the court not only secures the benefit of effective review by the United States Trustee but itself is provided with the information needed to make the findings required by § 330(a). Because the current application does not supply sufficient information to enable the court to make such findings, it will be denied without prejudice to the submission of an amended application.
ORDER
For the foregoing reasons, it is ORDERED:
1. The second interim fee application of Thomas P. Gorman and the law firm of Tyler, Bartl, Burke and Albert, P.L.C. is DENIED without prejudice to the filing of an amended application reasonably conforming to the Guidelines promulgated by the Executive Office of United States Trustees.
2. The clerk will mail a copy of this memorandum opinion and order to counsel for the debtors in possession and the United States Trustee.