UNITED STATES BANKRUPTCY COURT
EASTERN DISTRICT OF KENTUCKY
WILLIAM J. CRUM
MINNIE MAE CRUM
DEBTORS CASE NO. 01-71245
This matter is before the court on the Application for Allowance of Compensation and Reimbursement for Expenses (“the Final Application”) (Doc. #81) filed herein by the Trustee on behalf of her attorney, John O. Morgan, Jr. (“Morgan”). The Final Application recites that it is submitted “for final allowance of compensation and reimbursement for work performed in the main case, state court action and in preparing fee applications.” The time period encompassed by the Final Application is December 4, 2002, up to and including March 3, 2006. The Final Application seeks $14,906.89 in fees and $746.31 in expenses. Morgan was previously awarded fees in the amount of $3,776.52 and expenses in the amount of $410.27, as set out below. No objections to the Final Application were filed.
2. Factual and procedural background
The record in this case indicates that when the Debtors filed their Chapter 7 case on November 20, 2001, they listed on Schedule B - Personal Property - a contract cause of action against Dynex (Origen) Financial and Cecil’s Mobile Homes. They set their interest in this cause of action at $40,000.00. The Trustee filed an Application to Employ Attorney for Trustee on February 7, 2002 (Doc. #16); no specific reason for the employment was given. Morgan was employed pursuant to an Order entered on February 21, 2002 (Doc. #24). On October 15, 2002, the Trustee filed a Response to Motion for Relief From Stay and Motion to Redeem (Doc. #43) in regard to motions filed respectively by Origen Financial, Inc. and the Debtors. The Trustee explained that the property at issue in these motions, the Debtors’ mobile home, was the subject of a Clay Circuit Court action filed by the Debtors on January 22, 2001. The Trustee’s motion to intervene in this action was granted by the Clay Circuit Court in August 2002. The state court action was then known as Spradlin v. Cecil’s Mobile Homes, Inc., et al., Civil Action No. 01-CI-0023. This is the first and only reference to the state court action that appears in this case to this point.
The Trustee filed an Application for Allowance for Compensation and Reimbursement for Expenses (“the First Application”) (Doc. #47) on Morgan’s behalf on December 11, 2002. The First Application stated that “the Trustee was authorized to retain Applicant as counsel to pursue the adversary proceeding on behalf of the estate.” There was no adversary proceeding filed, and this language presumably refers to the state court action. The First Application asked for fees in the amount of $7,233.51 and expenses in the amount of $410.27 for the period from February 7, 2002 through November 25, 2002.
In response to the First Application, the court entered an Order on January 8, 2003 (Doc. #49) which states in pertinent part:
[C]ounsel shall supplement his fee application to give the court details of the litigation in the Clay Circuit Court, including identification of the parties, how much money is in controversy, and how collectible any such sums are from the parties therein. Mr. Morgan shall also include copies of all relevant pleadings and describe what benefit has inured to this estate from the representation thus far.
No supplemental documentation was filed, and on February 3, 2003, the court entered another Order (Doc. #50) which overruled the First Application without prejudice for failure to comply with the Order of January 8, 2003. The Trustee submitted an Amended Application for Allowance for Compensation and Reimbursement for Expenses (“the Second Application”) (Doc. #51) on Morgan’s behalf on May 16, 2003.
The Second Application contained information on the status of the case, but no supplemental documentation. It was reported that the Trustee had secured a default judgment against the mobile home retailer, Cecil’s Mobile Homes, and that settlement negotiations were under way with the manufacturer of the mobile home, Homes of Legend, Inc. and the finance company, Origen Financial, Inc (formerly Dynex Financial). The value of the Trustee’s claims was stated to be between $18,000.00 and $25,000.00. It was further reported that the cost of litigating the matter had risen because Homes of Legend, Inc. had filed an appeal of the Clay Circuit Court’s order denying its motion to compel arbitration and stay discovery. Finally, it was stated that all the defendants were active businesses appearing in good financial condition. The Second Application requested fees in the amount of $7,233.51 and expenses in the amount of $410.27.
The court entered an Order on June 23, 2003 (Doc. #54) which approved fees in the amount of $3,366.25, or 50% of the fees requested, and all requested expenses. The Order stated that the request for approval of the remainder of the fees was overruled because “the application fails to reflect any benefit to the estate as of this time.” The Order further provided that another application could be made when “the litigation has concluded and the estate has collected any and all recoveries obtained through the litigation.”
The Trustee filed a Status Report on September 1, 2005 (Doc. #74) which stated that her counsel had appeared that day in Clay Circuit Court to participate in a pre-trial conference, and that she anticipated “either a settlement or the setting of a trial date in the near future.” On February 3, 2006 the Trustee filed her Notice to Compromise Controversy, in which she proposed to settle the Clay Circuit Court action with defendant Homes of Legend, Inc. for $4,000.00. An Order (Doc. #77) was entered approving the settlement on February 28, 2006. The Final Application was filed shortly thereafter.
The Final Application recites a history of the Clay Circuit Court proceeding:
The Trustee obtained default judgment against Cecil’s Mobile Homes and began determination of its liability through discovery of the remaining parties.
When discovery began, Homes of Legend, Inc. refused to participate and argued that the debtors had agreed to arbitrate any dispute. The Trustee disagreed and successfully defended against Homes of Legend, Inc.’s motion for arbitration. Homes of Legend, Inc. appealed the Clay Circuit Court’s decision to the Kentucky Court of Appeals. Again, the Trustee successfully defended the appeal. Homes of Legend, Inc. then petitioned the Kentucky Court of Appeals for a rehearing of the matter. The Trustee was successful and the petition was denied. Homes of Legend, Inc. then petitioned the Kentucky Supreme Court for discretionary review. Once more the Trustee was successful and the matter was finally remanded to the Clay Circuit Court.
During the appeal, Cecil’s Mobile Homes ceased doing business and became uncollectible. The Trustee continued to pursue Dynex Financial, Inc. which had become Origen Financial, Inc. She achieved a settlement with Dynex Financial in the amount of $7,500.00. Throughout this time, Homes of Legend, Inc. declined to engage in serious settlement negotiations.
Only months before the case resumed in Clay Circuit Court, eastern Kentucky experienced profound flooding and the mobile home at issue was completely destroyed. Counsel for Homes of Legend, Inc. reported to the Trustee that it was also experiencing extreme financial difficulties. Discovery was finally resumed and it appeared to the parties that the majority of the damage to the mobile home occurred during the delivery and installation performed by Cecil’s Mobile Homes. This evidence was contrary to the documents in the Trustee’s possession prior to that time. Due to its financial condition and the evidence before the Trustee, she agreed to a settlement of $4,000.00 with Homes of Legend, Inc. The Trustee was never able to collect against Cecil’s Mobile Homes. Through the efforts of counsel, the bankruptcy estate received a total of $11,500.00 as a result of the Clay Circuit Court action.
The court repeats this narrative in its entirety because it raises several important issues that must be addressed in determining what fees will be awarded.
The compensation of professionals is governed by Bankruptcy Code section 330, which provides at subsection (a)(1) for "reasonable compensation for actual, necessary services." 11 U.S.C. § 330(a)(1). Section 330(a)(3) and (4) also provide guidelines for the court:
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 task 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.
11 U.S.C. §§ 330(a)(3)and (4). The burden is on the fee applicant to prove entitlement to fees. In re Wildman, 72 B.R. 700, 708 (Bankr. N.D. Ill. 1987). The starting point for determining an award of attorney fees is the application of the "Lodestar" method, whereby "the attorney's reasonable hourly rate [is multiplied] by the number of hours reasonably expended." In re Boddy, 950 F.2d 334, 337 (6th Cir. 1991). It is the Court's task to determine what is "reasonable". The court begins with the observation that the Trustee’s involvement in the Clay Circuit Court action continued for 3 1/2 years. The result of that involvement was an $11,500.00 recovery for the estate. Morgan seeks a total of $18,683.41 in fees (encompassing the $3,776.52 already paid) and $1,156.58 in expenses (encompassing the $427.10 already paid). If all the amounts sought are paid, the estate will have spent almost twice as much on legal fees and expenses as it recovered. The court does not believe that there are any hourly rate issues to be addressed; all the hourly rates charged appear to be reasonable. The court does take issue, however, with the amount of time spent on the Clay Circuit Court action.
The great majority of the time spent was taken up with responses to the appeals filed by Homes of Legend, Inc. As set out in the narrative contained in the Final Application, it appears that time was not well spent. While the Trustee was “victorious” in fending off these appeals, Homes of Legend, Inc. apparently developed serious financial problems (when or why, we are not informed) necessitating the Trustee’s acceptance of a very small settlement amount from it when the last appeal had been exhausted. Not only that, but after the Debtors’ mobile home was destroyed in a flood, the parties discovered that the majority of the damage complained of in the Clay Circuit Court action had been caused by the entity from whom the Trustee could not collect anything, the mobile home dealer, Cecil’s Mobile Homes. The narrative states that “[t]his evidence was contrary to the documents in the Trustee’s possession prior to that time.” There are no documents in the record to enlighten the court on this point. As set out above, Morgan never complied with the court’s January 8, 2003 order requiring him to “include copies of all relevant pleadings and describe what benefit has inured to this estate from the representation thus far.”
In any event, the court believes that it was incumbent upon the Trustee and/or Morgan to investigate the facts alleged in the Clay Circuit Court action more closely, and to monitor the condition of the parties to the action. More importantly, it was also incumbent upon them to assess at some point the wisdom of pursuing Homes of Legend, Inc. through a long and costly appeals marathon when the most the Trustee hoped to realize was $25,000.00. Even if she had recovered this maximum amount, attorney fees and expenses would have equaled 75% of the recovery.
The court concludes that the history of the Trustee’s involvement in the Clay Circuit Court action does not justify an award of fees in the amount sought in the Final Application. The court will therefore allow fees in the amount of $3,723.48, for a total of $7,500.00 including $3,776.52 already paid, and expenses in the amount of $746.31, for a total of $1,156.58 including $410.27 already paid. An order in conformity with this opinion will be entered separately.
John O. Morgan, Jr., Esq.