UNITED STATES BANKRUPTCY COURT
EASTERN DISTRICT OF KENTUCKY
EAST KENTUCKY LUMBER COMPANY, INC.
DEBTOR CASE NO. 93-60392
This matter is before the Court on the objection of creditor Midwest Lumber and Dimension, Inc. ("Midwest") to the Application for a Final Allowance of Compensation filed by counsel for the debtor on June 21, 1994. W. Thomas Bunch, W. Thomas Bunch II, and Charles J. McEnroe are counsel for the debtor. Midwest's objection was filed herein on July 11, 1994. After a hearing on August 5, 1994, the Court set a briefing schedule for the parties, and the matter is now ripe for decision.
Pursuant to the requirements of the briefing schedule, counsel for the debtor and for Midwest entered into a stipulation on September 2, 1994, which set out the following facts:
1. Debtor's counsel seeks compensation of $2,878.50 (16.5 hours) for preparing and editing debtor's brief in support of its Motion for Cash Collateral Order filed in this cause, which amount and hours are exclusive of any time spent negotiating or discussing same with the debtor and any other interested party.
2. Debtor's counsel seeks compensation of $1,356.25 (7.75 hours) for preparing and editing the Agreed Order of Adequate Protection for Cumberland Security Bank, which amount and hours are exclusive of any time spent negotiating or discussing same with the debtor or any other interested party.
3. Debtor's counsel seeks compensation of $5,273.28 (30.133 hours) for work done in preparing and editing the Plan and Disclosure Statement filed in this cause, which amount and hours are exclusive of any time spent negotiating or discussing same with the debtor or any other interested party.
4. Debtor's counsel seeks compensation of $656.25 (3.75 hours) for work done in preparing and editing the debtor's counsel's Fee Application.
5. Debtor's counsel seeks compensation of $1,150.00 (9.2 hours) for work done in preparing and editing a Rental Agreement for a portion of the debtor's premises.
The Application for a Final Allowance of Compensation seeks a total of $55,450.09 for compensation and expenses. Of this total, W. Thomas Bunch and W. Thomas Bunch II seek $43,473.13 for compensation and $3,498.46 for reimbursement of expenses, or a total final allowance of $46,971.59 less a credit retainer of $15,000.00, or a net final allowance of $31,971.59 through June 16, 1994. Charles J. McEnroe seeks $8,320.00 for compensation and $158.50 for reimbursement of expenses, or a total of $8,478.50 less a credit retainer of $8000.00, or a net final allowance of $478.50.
Midwest argues in its objection that approximately $19,791.00 of the requested fees are for services that were either unreasonable or unnecessary, or were not compensable. This is the approximate total of the items set out in the stipulation. Midwest also objects to Mr. McEnroe's fee application in its entirety on the grounds that none of the services noted therein were reasonable or necessary.
The compensation of professionals is governed by 11 U.S.C.'330, which provides for "reasonable compensation for actual, necessary services." The burden is on the fee applicant to prove entitlement to fees. In re Wildman, 72 B.R. 700, 708 (Bkrtcy.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, at 337 (6th Cir. 1991). It is the Court's task to determine what is "reasonable".
Courts often apply a 12-factor formula set out in Johnson v. Georgia Highway Express, Inc., 488 F.2d 714 (5th Cir. 1974), in making determinations about "reasonableness". These factors are: 1) the time and labor required; 2) the novelty and difficulty of the question involved; 3) the skill requisite to perform the legal service properly; 4) the preclusion of other employment by the attorney due to acceptance of the case; 5) the customary fee; 6) whether the fee is fixed or contingent; 7) time limitations imposed by the client or the circumstances; 8) the amount involved and the results obtained; 9) the experience, reputation and ability of the attorney; 10) the undesirability of the case; 11) the nature and length of the professional relationship with the client; and 12) awards in similar cases. Id., at pages 717-719.
In addition, as Judge Schmetterer points out in In re Wire Cloth Products, Inc., 130 B.R. 798 (Bkrtcy.N.D.Ill. 1991):
The Court not only scrutinizes the form and content of the fee application, but also considers the billing judgment of professional (sic) seeking compensation. The United States Supreme Court in Hensley v. Eckerhart, 461 U.S. 424, 103 S.Ct. 1933, 76 L.Ed.2d 40 (1983), a nonbankruptcy matter, stated that attorneys applying for statutory attorney's fees
'should make a good faith effort to exclude from a fee request hours that are excessive, redundant or otherwise unnecessary; just as a lawyer in private practice ethically is obligated to exclude such hours from his fee submission. ....'
Hensley, 461 U.S. at 434, 103 S.Ct. at 1939-40; ....The requirement of Section 330 that compensation be for 'actual' and 'necessary' services makes the exercise of 'billing judgment' a mandatory requirement in bankruptcy fee matters.
At page 806.
The Court will address the question of Mr. McEnroe's fees first. Midwest maintains that the services billed by Mr. McEnroe were neither reasonable nor necessary, and that his fee application should be denied in its entirety, because the services billed for consisted primarily of receipt and review of Mr. Bunch's work. In addition, Midwest takes issue with Mr. McEnroe having billed for attendance at an Emergency Cash Collateral hearing in Lexington. Midwest contends that his attendance was unnecessary.
The Court does not agree with Midwest that Mr. McEnroe's fee should be denied in its entirety because his primary activity was reviewing the work of another attorney. Mr. McEnroe was local counsel for the debtor, and similar arrangements between local counsel and out-of-town counsel in bankruptcy cases are not uncommon. Mr. McEnroe undoubtedly provided valuable information concerning and insight into the debtor's case to Mr. Bunch which information reduced the initial time Mr. Bunch was required to expend to become familiar with the client and its predicament.
The Court does, however, have a problem with Mr. McEnroe's method of timekeeping. Review of Mr. McEnroe's fee application reveals that he charged his time in minimum increments of one-quarter hour. This is no longer an acceptable practice in most bankruptcy jurisdictions. As stated in In re Jefsaba, Inc., 172 B.R. 786 (Bkrtcy.E.D.Pa. 1994):
[A]ll time should be recorded in increments of one-tenth of one hour or six minutes. As stated by one bankruptcy court, 'minimum charges of .10-hour increments more fairly reflect actual time involved, than do quarter hour segments.' In re Corporacion de Servicios Medico-Hospitalarios de Fajardo, Inc., 155 B.R. 1 (Bankr.D.P.R. 1993). Similarly, the bankruptcy court in In re Price, 143 B.R. 190 (Bankr.N.D.Ill. 1992) stated that the attorney's practice of billing in quarter hour increments 'inherently inflates and distorts the time actually expended, and hence is unacceptable.'
At page 801.
This unintended distorting effect may be seen in Mr. McEnroe's application in items like the three different quarter-hour entries on September 27, 1993. These entries are for receipt and review of a Notice of Entry of Appearance and Request for Notice, an Order Admitting John Deckard as Counsel for Midwest, and an Order Shortening Notice for Hearing. None of these activities should take an experienced attorney more than a few minutes each to perform. The Court is not suggesting that Mr. McEnroe intentionally overbilled on any item. However, his use of quarter-hour increments (which for many years was accepted practice in bankruptcy courts in Kentucky) does not give an accurate picture of the time he actually spent performing the tasks for which he requests compensation.
The Court further specifically questions the October 8, 1993, item in which Mr. McEnroe billed for eight hours at his full hourly rate for a court appearance in Lexington and conference with his client, the debtor. There is actually a third activity lumped together with the other two in this item: travel from his office to Lexington, and back. Courts are divided as to whether travel time is compensable and if so, at what rate. If an attorney bills at his full hourly rate, many courts will under certain circumstances reduce the hourly rate by half or more. The primary concern, of course, is whether the travel was "necessary". See In re Landing, Inc., (Bkrtcy.N.D.Ohio 1990); In re Gillette Associates, Ltd., 101 B.R. 866 (Bkrtcy.N.D.Ohio 1989). Under the circumstances of this particular case, the Court believes that an allowance of 50% of his regular billing time for travel would be appropriate for 4 hours of travel.
While it was most likely helpful for Mr. McEnroe to attend the hearing, Mr. Bunch as lead counsel represented the debtor while Mr. McEnroe did not participate in an active way. It appears that it was probably necessary for Mr. McEnroe to be there. The Court finds that it should allow all of the charges for preparing for and attending the actual hearing (4 hours). The remainder of Mr. McEnroe's fee application will be reduced by 25% to reflect an adjustment for the practice of billing in quarter hour increments as discussed above.
As concerns the applications of Mr. Bunch and Mr. Bunch II, Midwest specifically objects to the five items stipulated to, supra, contending that they were either unreasonable or unnecessary, or not compensable. Four of these items involve preparation of documents to be filed in the debtor's case; the fifth item is for the preparation of the fee application. Of the five items, the Court will consider the billing for the preparation of the fee application first.
Bankruptcy courts are divided on the issue of whether time spent preparing a fee application is compensable. In the Western District of Kentucky, the court has held that it is. In In re Atwell, 148 B.R. 483, 492 (Bkrtcy.W.D.Ky. 1993), the court permitted fees related to the preparation of the fee application where they did not exceed 5% of the total fees requested. In In re CF & I Fabricators of Utah, Inc., 131 B.R. 474 (Bkrtcy.D.Utah 1991), the court stated:
A professional will generally be allowed a full reasonable hourly rate at the customary billing rate unless he or she performs work that could have been done by another at a lesser hourly rate. .... Because the fee application is required by the bankruptcy court, the professional is entitled to the reasonable market rate for time in fulfilling that requirement. .... (Cites omitted.)
At page 483. This Court agrees with this reasoning and will allow the requested fee for the preparation of the fee application, which amounts to about 1% of the total, in its entirety. It would seem fundamentally unfair to require significant detail in all bankruptcy court approved billing and then deny the professional compensation for that very time spent in properly preparing the application and billing detail.
The remainder of Midwest's objection is concerned with the time spent drafting and editing various documents. One of these was the Brief in Support of the Debtor's Emergency Motion for Use of Cash Collateral. Mr. Bunch billed for 16.5 hours spent drafting and editing this brief for a total of $2,878.50. Midwest contends that the time is excessive, and that the lengthy rendition of the debtor's history and the discussion of "horn-book law" was unnecessary.
The Court will note here that Mr. Bunch is one of the ablest, most experienced bankruptcy practitioners in the area, with a very broad knowledge of the law. Mr. Bunch regularly handles complicated Chapter 11 cases. The Court therefore agrees that the time spent drafting and editing this brief was excessive, but only because the Court is sure that Mr. Bunch does not need to reinvent the wheel every time he writes a brief. The Court feels that Mr. Bunch could have put this brief together in less than 16-plus hours. The Court will allow 9 hours ($1,575) for this item. The same reasoning applies to the Agreed Order of Adequate Protection for which Mr. Bunch billed $1,356.25 for 7.75 hours. The Court will allow 5 hours ($875) for this item.
As concerns Mr. Bunch II's preparation and editing of a sublease for a portion of the debtor's business premises, Midwest contends that the entire fee request of $1,150.00 should be disallowed because the work did not benefit the estate, and in fact only generated $1,000.00 in payments to the debtor. While fee awards are not primarily "result-driven", the result obtained by the attorney's effort is a factor to be considered. Johnson v. Georgia Highway Express, Inc., supra. The expenditure of more than eight hours for such a small return is not entirely justified. The Court will allow 4 hours ($500) for this item.
Finally, the Court considers Midwest's objection to Mr. Bunch's request for $5,273.28 for 30.133 hours spent drafting and editing the Plan and Disclosure Statement. The basis of Midwest's objection is the fact that a week after the Plan was confirmed it became apparent that the Plan was not viable because the debtor had sustained huge losses. Mr. Bunch maintains that problems were disguised by the debtor's accounting methods, and that counsel for the debtor were taken by surprise by this turn of events. Midwest contends that surprise should not be an excuse.
Midwest is in fact making a due diligence argument. This issue was discussed in depth by the court in In re Narragansett Clothing Co., 160 B.R. 477 (Bkrtcy.D.R.I. 1993), in regard to a fee request by the attorney for the trustee. An offer to purchase the debtor had been negotiated and accepted. Shortly thereafter, the purchaser filed for bankruptcy and the purchase price could not be collected. The court stated:
It is now clear, in hindsight, that the Applicant failed to perform adequate or reasonable due diligence during at least two critical periods in its representation of this estate, to the extent that a downward adjustment is required in the lodestar. It has become quite apparent that the pre-confirmation service devoted to investigating the substance of the J.L. Sanford offer was not time well spent, and that the demise of J.L. Sanford within five months of its celebrated sale indicated major shortcomings in the due diligence area, for which the creditors are now faced with some very heavy legal/Trustee charges.
At page 480. In a related footnote, the court referred to counsel's "duty to investigate, ...". (fn. 3).
This Court is of the opinion that a more in-depth investigation of the debtor prior to formulation of the plan should have revealed the depth of these problems. If Mr. Bunch did not know the debtor's true financial circumstances before he began drafting the Plan and Disclosure Statement, he should have. Mr. Bunch, as noted above, is a knowledgeable and experienced practitioner. The fee award for the preparation of the Plan and Disclosure Statement will be allowed in the amount of 18 hours ($3,150).
An order in conformity with this opinion will be entered separately.
By the Court -
John G. Deckard, Esq.
W. Thomas Bunch, Esq.
Charles J. McEnroe, Esq.