Opinion
Case No. 97-14180-SSM
September 22, 1998
Alan Kerxton, Esquire, Rockville, MD, Counsel for the debtor in possession
Frank Bove, Esquire, Alexandria, VA, Counsel for W. Clarkson McDow, Jr., United States Trustee
MEMORANDUM OPINION
A hearing was held in open court on September 15, 1998, on the application of the law firm of Glenn Rasmussen Fogarty, P.A. ("Glenn Rasmussen") for compensation and reimbursement of expenses for legal services provided to the debtor in possession. The application was supported by the reorganized debtor, who emphasized the benefit to the chapter 11 estate, but was opposed by the United States Trustee on the ground that the firm's employment as special counsel for the debtor in possession had not been approved. The United States Trustee also objected to the fee application on its merits because of the "blocking" of time and the inclusion of charges for services that did not benefit the estate. The court then took the matter under advisement to review the record and the applicable law.
An unsecured creditor, Powell, Goldstein, Frazer and Murphy, L.L.P., also filed an objection to the application, but did not appear at the hearing. The court has nevertheless considered its Objection.
Facts
University Development, L.L.C., the owner of a large tract of undeveloped land, filed a voluntary petition under chapter 11 of the Bankruptcy Code in this court on June 5, 1997, and remained in possession of its estate as a debtor in possession until July 23, 1998, when a plan of reorganization proposed by Xerox Realty Corporation ("Xerox Realty"), the debtor's chief and most antagonistic creditor, was confirmed. At the time the chapter 11 petition was filed, the debtor, together with an affiliate, Lansdowne Development Co., L.L.C., was involved in extensive litigation with Xerox Realty in state court. Both the debtor and Lansdowne Development were represented in that litigation by Warwick R. Furr, II, of the law firm of Glenn Rasmussen Fogarty, P. A. The chapter 11 petition was filed after the state court chancellor had ruled that Xerox Realty was entitled to specific performance of an option agreement to purchase the debtor's real estate for a price equal to the existing deed of trust against the property. The filing of the chapter 11 petition quickly brought motions by Xerox Realty to dismiss the case as a bad faith filing and to terminate the automatic stay to permit the state court to enter and enforce a final decree. The debtor for its own part filed a motion to reject the option agreement as an executory contract.
On July 1, 1997, the debtor in possession, which was represented in connection with the reorganization by experienced bankruptcy counsel, filed an application to employ Warwick W. Furr, II, and the law firm of Glenn Rasmussen as special counsel. The motion set forth at length the prepetition litigation among Xerox Realty, Lansdowne Development, and the debtor; and sought leave to employ Mr. Furr for the specific purpose of (a) opposing Xerox Realty's motion for relief from the automatic stay, (b) prosecuting the debtor's motion to reject the option contract, (c) participating in the state court suit to the extent required in connection with any further proceedings, and (d) appealing any decision of the state court which involved the debtor's interests. The motion also disclosed that Lansdowne Development had paid the law firm a $25,000.00 retainer. At a hearing held on the application on September 3, 1997, the debtor in possession orally withdrew the application to employ Mr. Furr as special counsel after the court expressed concerns with respect to the proposed employment. The court signed an order that same date reciting the withdrawal of the application and decreeing in relevant part as follows:
Lansdowne Development was listed on the List of Creditors Holding 20 Largest Unsecured Claims as holding a $2,866,800.94 unsecured claim, and Glenn Rasmussen was listed as holding a $133,476.24 claim.
1. The debtor may not employ Warwick R. Furr, II, to appear as its attorney in this chapter 7 [sic] case regardless of whether compensation is or is [sic] to be paid from the debtor's estate.
2. This order shall become effective ten days from the date of entry.
3. The entry of this order is without prejudice to an application to employ Mr. Furr as special counsel in University Development, LLC v. Xerox Realty Corp[.]
The order was not entered on the docket until September 12, 1997, and the effective date was therefore September 22, 1997. The litigation referred to in paragraph 3 was an adversary proceeding brought by the debtor in possession to avoid the option contract. No further employment applications were submitted, and on September 8, 1997, Mr. Furr filed a "Notice of Withdrawal" stating, "In light of the court's ruling of September 3, 1997,. . . Warwick R. Furr, II, hereby gives notice of the withdrawal of his appearance as additional counsel for the debtor." Mr. Furr did not thereafter appear as counsel for the debtor in any of the various matters heard by this court.
Competing plans of reorganization were filed by the debtor, Xerox Realty, and Toll Land IX, L.P., which had purchased a small claim in order to position itself to acquire the debtor's real estate. Eventually, an amended version of the Xerox Realty plan was confirmed on July 23, 1998, with the support of the debtor. On August 26, 1998, Glenn Rasmussen filed the fee application that is presently before the court, seeking compensation for legal services provided to the debtor in possession during the period from August 1, 1997, through April 30, 1998, in the amount of $31,629.26 and reimbursement of expenses in the amount of $9,719.12, for a total of $41,348.38. This sum was net of a $10,728.74 retainer and credit for two billing adjustments aggregating $15,000. Of the billed fees and expenses, $21,302.77 were incurred prior to September 22, 1997 (the transition date specified in the September 3, 1997 order). An additional $29,539.32 in claimed fees and expenses accrued after September 22, 1997. A significant portion of this amount involved proceedings in this court with respect to which Mr. Furr, without the court's knowledge, assisted the attorney who was ultimately appointed as special litigation counsel in his stead, and some involved representation of the debtor in the state court proceedings after this court modified the automatic stay to permit entry of a final decree and prosecution of any appeals.
This figure is net of the $10,728.74 retainer which the law firm applied during this period and includes a pro-rated portion ($3,868.80) portion of the $5,000 billing adjustment credit the law firm had agreed to. It does not include any portion of the subsequent $10,000 billing adjustment credit.
This figure does not include the $10,000 billing adjustment credit.
Discussion A.
It is fundamental that a professional cannot be compensated from a bankruptcy estate for services provided to a trustee or debtor in possession unless the professional's employment has previously been approved by the court. In re Tidewater Memorial Hosp., Inc., 110 B.R. 221, 225 (Bankr. E.D. Va. 1989) (Tice, J.). Although some courts have taken an absolute view of this requirement, most courts have concluded that under extraordinary circumstances a court "may award fees and costs to an attorney or other professional whose employment was not previously approved by the court" by approving the employment retroactively. In re Tamojira, Inc., 210 B.R. 702, 705-06 (Bankr. E.D. Va. 1996) (Tice, J.). In this district, the test that has been applied for retroactive approval of employment is as follows:
(1) the professional satisfactorily explains the failure to obtain prior approval of employment, and (2) the professional meets the requirements set forth in § 327 and Rule 2014(a), aside from that of obtaining timely appointment.
Id., at 706; Tidewater Memorial Hospital, 110 B.R. at 226; see In re King Electric Co., Inc., 19 B.R. 660 (E.D. Va. 1982).
In the present case, the law firm has provided no explanation, let alone a satisfactory one, for not seeking approval of its employment as special counsel after the initial application was withdrawn. Although this court's order of September 3, 1997, expressly did not foreclose consideration of an application to employ Mr. Furr as special counsel for a more limited and specialized purpose than that set forth in the original application, no such application was ever submitted. Essentially, Mr. Furr simply took it on himself to continue to work behind the scenes for the debtor even after the court expressed reservations concerning his involvement. Having been present in court when the original application was withdrawn, he could not have been unaware — as counsel not experienced in bankruptcy sometimes are — of the necessity of obtaining approval of his employment. That at least some of the services benefitted the debtor and would have to have been performed by someone else had they not been performed by Mr. Furr and other members of his firm does not change the result. To the extent that this court does not require a compelling reason for the failure to obtain prior approval of employment, the provisions of the Bankruptcy Code requiring such approval will be severely undermined and the intent of Congress thwarted. See Tidewater Memorial Hospital, 110 B.R. at 226-27 (the explanation that there was "an awful lot of activity in the case" which resulted in employment application being put on the "back burner" did not justify retroactive employment).
Because the court does not find that the applicant has met the threshold test of showing good cause for failure to obtain an order approving its employment, it is not necessary to discuss the second prong of the test. The court notes that the firm's employment as special counsel in connection with the state court litigation might have been approved. The applicant's time records, however, include a number of entries after September 22, 1997, not confined to the state court litigation, but involving instead the conduct of the reorganization case. See, e.g., the entry for October 1, 1997: "Sketch debtor's motion for authority to employ broker and to conduct sale of assets; correspondence re same; telephone conference with Schroll's office; research re Sections 105, 362."
B.
A somewhat different issue, not previously addressed by a reported decision in this district or by the Fourth Circuit, arises with respect to the firm's services prior to the withdrawal of the application. In the nature of things, employment applications are not acted upon instantaneously, and counsel and other professionals may perform significant work on behalf of a debtor in possession or trustee between the time the application is submitted and the court makes a ruling.
If the application is disapproved, can the professional nevertheless be compensated on a quantum meruit basis for the work done up to that point? Courts have divided on this point, with some holding that if an application is disapproved, no compensation can be awarded, while others have held that compensation may be approved on a quantum meruit basis up to the point of disqualification if the professional timely filed an employment application, fully disclosed the relevant facts, and acted in good faith. Compare In re Weibel, Inc., 176 B.R. 209 (B.A.P. 9th Cir. 1994) (denying compensation), with In re M-H Group, Inc., 139 B.R. 836 (Bankr. N.D. Ohio 1991) (allowing compensation). In the absence of a reported decision in this district or by the Fourth Circuit, I am inclined to adopt the latter position.
In the present case, the employment application was filed 26 days after the petition was filed. See Tidewater Memorial Hospital, 110 B.R. at 225 n. 4 (suggesting that a reasonable time for submission of an application for employment is within 30 days after the filing of the petition). It fully disclosed the $25,000 retainer received from the debtor's affiliate, Lansdowne Development which was also a creditor in the case. Because of that retainer, Mr. Furr's on-going representation of Lansdowne Development, and Mr. Furr's own substantial claim, Mr. Furr's employment as counsel could not be approved under § 327(a), Bankruptcy Code. In re Huntmar Beaumeade I L.P., 127 B.R. 363 (Bankr. E.D. Va. 1991). Additionally, a major portion of the services proposed to be performed as "special" counsel under § 327(e), Bankruptcy Code, involved, in the court's view, functions that were properly those of the debtor's general bankruptcy counsel. See Tidewater Memorial Hospital, 110 B.R. at 228 ("special purpose" to be served by counsel appointed under § 327(e) must not be tantamount to representing the debtor in the conduct of the case, and counsel who cannot meet the disinterestedness requirement of § 327(a) cannot evade that requirement through employment as special counsel). That said, there is no evidence that Mr. Furr failed to disclose relevant facts concerning his involvement with the debtor and Lansdowne Development, or that he acted in bad faith. Accordingly, not to allow compensation for the benefit derived by the debtor from the legal services performed by Mr. Furr's firm up through the transition period specified in the September 3, 1997, order would be unjust.
The applicant, recognizing the difficulty arising from its failure to obtain an order authorizing its employment, argues in the alternative that since the firm itself was a creditor, its efforts are independently compensable under § 503(b)(3)(D), Bankruptcy Code, which allows the court to award compensation to a creditor who makes "a substantial contribution" in a chapter 11 case. However,
[c]ourts have consistently held that professionals cannot circumvent the requirements of 11 U.S.C. § 327(a) by seeking compensation as a general administrative expense under Section 503(b) when they would have been denied compensation for the same activities under the former section.
In re Southern Diversified Properties, Inc., 110 B.R. 992, 995 (Bankr. N.D. Ga. 1990). This court concurs.
C.
Under a quantum meruit analysis, the question to be resolved is the value of the benefit received by the debtor in possession as a result of the law firm's services up through September 22, 1997. Although the value of the benefit is not necessarily co-extensive with the fee that might have been awarded under § 330(a), Bankruptcy Code, had the employment been approved, the factors specified in § 330(a)(3) provide a reasonable starting point for valuing those services. While Mr. Furr's hourly rate of $250 per hour is higher than routinely approved by this court, the court is aware that he was up against a formidable and very aggressive adversary that was seemingly prepared to spend millions for defense and not one cent for tribute. Much of the time reflected on the billing statements represent travel between Florida, where the law firm's offices are located, and Virginia. Ordinarily, this court allows no compensation for local travel and only one-half the otherwise applicable hourly rate for non-local travel (and even then, only when the travel is performed during normal business hours). Mr. Furr has represented to the court that his travel time was billed equally to the debtor and to Lansdowne Development and that he made full use of his time airborne to work on the case.
The most serious difficulty faced by the court in assessing the benefit to the debtor from the firm's services lies in the extensive "blocking" or "lumping" of time entries for a multitude of activities. See In re Great Sweats, Inc., 113 B.R. 240, 244-45 (Bankr. E.D. Va. 1990) (Shelley, J.) (no fee award for blocked time). A significant number of those "blocked" entries reflect a whole number of hours, suggesting a pattern of rounding up. This court normally requires that time be reported for each discrete activity in 0.1 hour (6 minute) intervals, precisely so that the court can gauge whether a particular activity was accomplished in a reasonable amount of time and determine whether a particular task could reasonably have been performed by a lower paid professional, para-professional, or employee. It was represented at the hearing that, because Mr. Furr had not previously been involved as a professional in a bankruptcy case, he was not aware of the requirement to record time with the level of detail commonly required by bankruptcy courts. Some courts have disallowed all time represented by "blocked" time entries; others have applied a discount factor. Any such discount is necessarily somewhat arbitrary. Having reviewed the particular time entries in question, which, although not broken down, are otherwise reasonably detailed, and also taking into account the fact that the billing statements already reflect the application of a $5,000 billing adjustment credit, I find that a 15% discount is sufficient to compensate for the uncertainty resulting from the blocking. This discount will be applied to the billed fees, net of the retainer and a pro-rata portion of the $5,000 adjustment, for the period from April 30, 1997 through September 22, 1997. The expenses for the same period will be approved as requested.
Specifically, the billed fees for August 1, 1997, through September 22, 1997, as reflected on the September 17, 1997, and October 27, 1997, invoices total $32,564.00. The unexpended retainer in the amount of $10,728.74 was applied on September 17, 1997. The court has pro-rated the $5,000 billing adjustment shown on the October 27, 1997, invoice (which covered the period from September 1, 1997, through September 30, 1997) in proportion to the fees billed up through, and subsequent to, September 22, 1997. Thus, $3,868.80 of the credit has been applied, leaving total billed fees, after application of the retainer and the pro-rated portion of the credit, of $17,966.46. Applying a 15% discount factor leaves $15,271.49. Expenses posted through September 22, 1997, total $3,342.37.
D.
A separate order will be entered approving compensation to Glenn Rasmussen Fogarty, P.A., on a quantum meruit basis for the period from April 30, 1997, through September 22, 1997, in the amount of $15,271.49, and reimbursement of expenses in the amount of $3,342.37, for a total of $18,613.86. No compensation will be approved for work performed, or expenses incurred, after September 22, 1997.