UNITED STATES BANKRUPTCY COURT FOR

EASTERN DISTRICT OF KENTUCKY

LEXINGTON DIVISION

IN RE:

MARINA PROPERTY SERVICES, INC.,

MARINA MANAGEMENT SERVICES, INC.,

and ESDEEAYE, INC.,


DEBTORS CASE NO. 01-52861

JOINTLY ADMINISTERED

MEMORANDUM OPINION

This matter is before the court on the objection of the Chapter 11 trustee ("the trustee"), to the fee application of Jenner & Block, LLC ("JB"), a Chicago law firm which has served as counsel for the debtors. JB responded to the trustee's objection, and after a hearing the matter was submitted for decision.

The record in this case shows that on September 27, 2001, February 7, 2002, and February 22, 2002, the debtors filed voluntary petitions for relief under Chapter 11 of the Bankruptcy Code. At the time the petitions were filed the debtors were represented by Robert Treadway, a Lexington attorney. The debtors were later authorized to employ Laura Kincheloe as counsel on May 28, 2002. Ms. Kincheloe, also a Lexington attorney, assisted and eventually replaced Mr. Treadway. On June 7, 2002 the debtors filed an application for an order authorizing the employment of JB as counsel. There were no objections, and on June 13, 2002, an order was entered authorizing JB's employment. On June 14, 2002, the court entered an order directing the appointment of a trustee. JB filed its first and final application for allowance of compensation and expenses ("the fee application") on May 30, 2003.

The statutory basis for consideration of a fee application is found at 11 U.S.C.  330, which provides that a professional person employed under  327 may be awarded "reasonable compensation for actual, necessary services." 11 U.S.C.  330(a)(1). In determining the amount of the award, the court is to 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.

11 U.S.C.  330(a)(3). 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."

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 717-719.

The fee application states that the debtors had retained JB on June 3, 2002, for the purposes of defending them against a pending motion for the appointment of a trustee, negotiating a cash collateral order with certain creditors, and acting as general bankruptcy counsel. JB summarized the work it performed, stating that it attempted to negotiate a resolution of the pending trustee motion and certain cash collateral issues. JB filed a written objection to the trustee motion, and a motion to retain a "disinterested person" to manage the cases. JB further states that it also researched a question concerning whether the debtors' marina license should be treated as a lease, and, after the trustee's appointment, advised the debtors that they should cooperate with him.

JB's itemization of time and charges begins on June 3, 2002, and ends on September 26, 2002. It totals $38,263.80 for 94.70 hours of professional services. The hourly rates of attorneys who provided services range from $195 to $520. The attorney who provided the bulk of the services, Catherine L. Steege, charges $475 per hour. Reimbursement is claimed for expenses in the amount of $1,015.19. On October 27, 2003 JB filed an amendment to its fee application reducing the amount claimed for travel by 50%, and thereby reducing its total claim from $38,263.80 to $36,363.80.

The trustee objects to JB's fee application on the following bases: 1) that no nunc pro tunc order was sought for the time JB expended before the order authorizing its employment was entered, 2) that the rates charged by JB attorneys are excessive, 3) that JB's billing records are not clear, 4) that a substantial amount of time was spent in opposing the appointment of the trustee, and 5) that JB's services were duplicative of those rendered by Laura Kincheloe, who signed most, if not all, the pleadings filed on behalf of the debtors.

In what it terms its "corrected reply" to the trustee's objections, JB responds generally that there is no per se rule that counsel cannot be compensated for opposing a motion to appoint a trustee, citing In re Spanjer Brothers, Inc., 191 B.R. 738, 759 (Bankr. N.D. Ill. 1996); that the trustee does not point out specific instances of duplication of services by JB and Laura Kincheloe; that the court should apply the so-called "30 day gap rule" in regard to work performed before JB's retention order was entered, citing In re Martin, 102 B.R. 653, 656 (Bankr. W.D. Tenn. 1989); that JB's rates are usual and customary in Chicago (and that the debtors were justified in retaining JB because no larger firm could be found locally or in the surrounding area); that the trustee does not explain why JB's work descriptions are inadequate; and that the trustee's claim of no benefit to the estate is unsupported.

The trustee's response to JB's reply maintains that the majority of the time JB spent on the debtors' cases, 82.7 hours, was between June 3 and June 11, 2002, and was directed to obtaining an order allowing Development Specialists, Inc. ("DSI"), the "disinterested person" referred to in JB's fee application, to take over the debtors' operations. The trustee further maintains that this effort was intended to benefit the debtors' principal, Thomas Moore ("Moore"), and various non-debtor entities he owns, rather than the debtors. In that regard, the trustee also maintains that JB may have first viewed itself as counsel for DSI, rather than the debtors. In support of that contention, the trustee points out that JB never offered the debtors an engagement letter setting out the terms of its representation of them. On the other hand, an engagement letter for DSI which was drafted but never sent, was found in JB's files. The trustee contends that it is therefore reasonable to assume that the true attorney-client relationship was between JB and DSI.

While the trustee concedes that there is no per se rule that counsel may not be compensated for efforts to oppose the appointment of a trustee, he maintains that benefit to the estate still must be shown. The trustee argues that retention of DSI, rather than appointment of a trustee, would have benefitted Moore and the non-debtor entities as well as the debtors, and that it is therefore impossible to determine the benefit, if any, to the debtors. The trustee's argument assumes that an effort to oppose the appointment of a Chapter 11 trustee cannot constitute a benefit to the estate so as to come within the purview of  330(a)(1)(A) and be compensable. It also assumes that the effort was made on behalf of Moore and/or non-debtor entities controlled by him.

As explained by the court in Spanjer Brothers, Inc., 191 B.R. at 751, this is not necessarily the case. The court there was faced with a similar situation wherein the unsecured creditors committee objected to attorneys' requests for allowance of compensation, including time spent opposing the appointment of a Chapter 11 trustee. The committee employed arguments very similar to those employed by the trustee here. The court responded:

The record is devoid of any evidence that [counsel] directly or indirectly represented any member of the Spanjer family or its management individually. Rather, all of the unrebutted testimony at trial was that [counsel] only represented the Spanjer estate per the directions of its management. While it is true that "[c]ounsel for a Chapter 11 debtor owes a fiduciary duty to the corporation . . . as an entity and represents its interests, not those of its principals," . . . the mere fact that an attorney for a debtor opposes and loses a motion for the appointment of a trustee under  1104(a)(2) does not ipso facto demonstrate that the attorney is representing the interests of the debtor's principals and management to the exclusion of the creditors, and thus breaches a fiduciary duty owed to the debtor (internal quotations and citations omitted). The Court rejects the Committee's inference that any time counsel for a Chapter 11 debtor opposes the appointment of a trustee, same is being done for self-serving or improper purposes. After all, an attorney is obliged to follow the directions of his client. There was no evidence that [counsel] acted other than at the direction of Spanjer's officers and directors.

Id. This court agrees with this reasoning, and further observes that most of what the trustee has to say about who JB was actually representing amounts to speculation. The trustee tries to create a plot-and-scheme scenario which he maintains was designed to benefit Moore and his non-debtor entities. This attitude of the trustee is not surprising, in light of the lack of cooperation Moore has shown throughout the proceedings. Nothing brought up by the trustee, however, constitutes proof that JB ever represented anyone but the debtors. This court therefore rejects the trustee's argument that JB cannot be compensated for the time spent opposing his appointment and for its efforts directed at having a "disinterested person" appointed instead.

The same reasoning may be applied to the trustee's arguments concerning JB's alleged conflict of interest and lack of disinterestedness on account of prior relationships with DSI and Jay Geller, the attorney representing Moore personally (Geller was previously associated with JB, and apparently referred Moore, as principal of the debtors, to the firm as prospective counsel for the debtors). Once again, the trustee attempts to construct a plot-and-scheme scenario with Moore at its center. The trustee has presented no proof, however, that any relationship or association with DSI or Geller or both constituted a conflict of interest for JB in regard to its representation of the debtors, or kept it from being a "disinterested person" pursuant to 11 U.S.C.  327(a).

As concerns the issue of whether JB can be compensated for work it did before its retention order was entered, JB argues that it should not be denied compensation because it failed to seek and obtain a nunc pro tunc order covering the period from when it began working for the debtor until its employment was authorized by the court. This court agrees. It has always been the court's practice to consider a retention order as authorizing the employment of counsel back to the time it began providing services to the debtor, so long as application for retention was made within a reasonable period of time. Here, JB began working for the debtors on June 3, 2002; it filed its retention application just four days later, on June 7, 2002. It is further this court's practice to hold a retention application for ten days after filing to allow for any objections, resulting in at least a ten day delay before a retention order is entered. JB was not required to seek a nunc pro tunc order authorizing its employment back to the date it started providing services to the debtors, as the retention order entered on June 13, 2002 authorized that employment.

The court next considers the trustee's contention that JB duplicated services provided by Laura Kincheloe. He does not, however, provide specific instances of such duplication. In reviewing JB's itemization, and comparing it with an itemization provided by Laura Kincheloe in regard to work she performed for the debtor during the same time period, the court finds only one obvious example of duplication. Both Laura Kincheloe and Catherine Steege of JB attended the hearings on the motion to appoint the trustee and the application to employ DSI on June 11, 2002. Ms. Kincheloe billed for four hours in regard to attendance at this hearing; Ms. Steege billed for ten hours in regard to preparation for and attendance at the hearing. While the court is not inclined to penalize counsel for the fact that both of them were in attendance at the hearing, a total of fourteen hours spent on this one endeavor seems somewhat excessive. The court will therefore reduce the number of hours Ms. Steege may claim in regard to the June 11, 2002 hearing to six.

The trustee has also objected to the hourly rates charged by JB attorneys. Ronald R. Peterson billed 8.90 hours at $520.00 per hour; Ms. Steege billed 56.60 hours at $475.00 per hour; Michael S. Terrien billed 7.70 hours at $340.00 per hour; Jeffrey L. Gansberg billed 0.20 hours at $285.00 per hour; Megan Fahey billed 20.60 hours at $195.00 per hour; and Marc A. Patterson billed 0.70 hours at $84.00 per hour. The trustee contends that these rates are much higher than those charged by Lexington attorneys involved in the case; JB responds that they are customary and usual rates charged in Chicago. In that regard, JB also argues that the debtors were unable to find a large law firm in Lexington or the surrounding area to represent their interests, and that their choice of JB was a matter of necessity.

As set out above, it is the court's task to determine what a reasonable attorney fee is. One component in the determination of reasonableness is the hourly rate charged. In In re New Boston Coke Corp., 299 B.R. 432, 446 (Bankr. E.D. Mich. 2003), the court stated: "Bankruptcy attorneys are generally entitled to a (sic) hourly fee in line with the prevailing market rates in the community. . . . The Court may, itself, determine the prevailing market rate in the community and thus evaluate the reasonableness of the attorneys' hourly rates." (Internal quotations and citations omitted). Id. In a case in which a New York law firm represented a Chapter 11 debtor in a multi-million dollar case in the Southern District of Florida, the court held that the firm was "limited in the hourly rate for which compensation can be sought to rates ordinarily charged by highly experienced bankruptcy counsel in the [district]." In re Palm Beach Cruises, S.A., 208 B.R. 78, 81 (Bankr. S.D. Fla. 1997).

While this court has agreed that JB should be compensated for its work, the nature and size of the instant case (local or, at most, regional), the type of work JB performed, and the results it obtained do not merit hourly charges as high as $520.00 and $475.00. Recent fee awards to highly experienced bankruptcy counsel from Lexington and Cincinnati have been based on hourly rates ranging from $350.00 to $295.00 per hour for senior partners. These attorneys have served as debtors' counsel in cases such as Horizon Natural Resources Company, Case No. 02-14261, which dwarf the instant case in size, significance, and complexity. If the highest hourly rate charged by JB were set at at $350.00, its total fee would be reduced by approximately 25%. This court therefore finds that JB's fee award should be reduced by 25% from $36,363.80 to $27,272.85. The court also finds that JB should be reimbursed for its expenses in the amount of$1,015.19, for a total award of $28,288.04. An order in conformity with this opinion will be entered separately.

Copies to:

John T. Hamilton, Esq.

Laura Kincheloe, Esq.

Catherine Steege, Esq.