IN RE: SPENDTHRIFT FARMS, INC. CASE NO. 88-01719

UNITED STATES BANKRUPTCY COURT 

FOR THE EASTERN DISTRICT OF KENTUCKY

LEXINGTON DIVISION

IN RE:

SPENDTHRIFT FARMS, INC. CASE NO. 88-01719

DEBTOR CHAPTER 11

MEMORANDUM OPINION

This matter is before the court on applications of Anderson, Kill, Olick and Oshinsky ("the Anderson Firm" or "the Firm"), co-counsel for the committee of unsecured creditors, for compensation for services rendered and for reimbursement of expenses incurred in the course of representation of the committee in this case.

On November 18, 1988, an involuntary case was commenced under chapter 11 of title 11, United States Code, against Spendthrift Farms, Inc. Spendthrift filed a voluntary petition for relief under chapter 11 on December 21, 1988, and has continued operations as debtor in possession.

The committee of unsecured creditors was appointed on January 25, 1989. The appointment was amended on January 27, 1989, and again on February 6, 1989. On March 9, 1989, the committee filed an application pursuant to 11 U.S.C. § 1103 to employ the New York firm of Anderson, Russell, Kill and Olick (now Anderson, Kill, Olick and Oshinsky) and the local firm of Bunch and Brock as co-counsel. The order authorizing employment was entered on the same day.

The involvement of the committee by counsel in the administration of this case has been substantial. A brief description of the activities of the Anderson Firm as counsel for the committee is set forth in each fee application. One matter of some consequence with regard to the pending fee application was the filing on June 28, 1989, of adversary proceeding number 89-138, Official Committee of Unsecured Creditors of Spendthrift Farms, Inc. v. Central Bank & Trust Co., et al., a lender liability action brought by the committee on its own behalf and on behalf of the debtor in possession seeking damages and other relief from Central Bank and Trust Co., Manufacturers Hanover Trust Co., and NCNB North Carolina National Bank. The adversary proceeding was dismissed on December 19, 1989. The committee appealed the order of dismissal, and the order of dismissal was reversed by the district court on September 17, 1990.

On July 20, 1989, the Firm filed its first interim fee application for the period of February 13, 1989 to June 30, 1989, seeking compensation for services rendered in the amount of $195,715.00 and reimbursement of expenses in the amount of $36,132.58. A supplement to that application was filed August 7, 1989, requesting additional fees incurred during the period between July 1, 1989 and July 31, 1989 in the amount of $11,832.50 and expenses of $2,078.84.

Central Bank and Trust Co., Manufacturers Hanover Trust Co., and NCNB North Carolina National Bank (the banks named as defendants in the committee's lender liability action) on August 15, 1989, collectively filed an objection to the fee application on the grounds that: (1) services provided prior to March 9, 1989 are unauthorized by the court and compensation for such services should be denied; (2) because the filing of the lender liability action conferred no benefit on the estate, compensation for all time devoted thereto should not be allowed; (3) the amount of compensation requested is unreasonable because of the lack of complex issues; and (4) the Firm has not satisfied the requirements of Bankruptcy Rules 2014 and 2016. The Firm responded to the banks' objection and filed supplemental affidavits in compliance with Bankruptcy Rules 2014 and 2016.

On August 24, 1989, the U. S. Trustee filed a comment pursuant to 28 U.S.C. § 586(a)(3)(A) with regard to the Firm's fee application, pointing out "concerns" of the U. S. Trustee. The U. S. Trustee raised four issues: (1) the rate at which the Anderson Firm should be compensated should reflect an average of the rate charged by Firm and the rate charged by attorneys in the locus of this proceeding; (2) the request for compensation should be reduced in response to the absence of detail in explaining over 78 hours of meetings between junior and senior attorneys in the Firm; (3) the request for compensation should be reduced to reflect the unnecessary attendance by multiple attorneys at a single hearing or meeting; (4) compensation for "WRG," "KAL," and "JGD," who are not identified in the fee application, should not be allowed.

On December 28, 1989, the court authorized reimbursement of expenses in the amount of $38,211.42 and reserved ruling on the request for compensation for services until a legible copy of Exhibit A to the original and supplemental fee application setting forth dates, hours, and a description of the work performed was filed. A more legible copy was provided to the court at a subsequent hearing. The banks renewed their objection to the fee application on January 16, 1990.

The U. S. Trustee filed an additional comment on January 30, 1990, suggesting that two problems should be resolved before the fee application is approved: (1) the supplemental fee application contained no key stating each professional's hourly rate; and (2) persons with the initials "KAL," "WRG," A-P," "JWS," "JAL," and "AJS" were not identified in the fee application. The comment further stated that although the Firm "may have indulged in a bit of overkill with regard to the platoon of attorneys involved in the case," an objection would not be appropriate because the Firm charged for only one attorney at a time except for team meetings.

The Anderson Firm filed a second interim fee application on February 28, 1990, for the period between August 1, 1989 and December 31, 1989, requesting compensation for services rendered in the amount of $57,277.50 and reimbursement of expenses in the amount of $24,430.99. On March 19, 1990, the Firm filed a third interim application for the period of January 1, 1990 to February 28, 1990, requesting compensation in the amount of $46,968.75 and reimbursement of expenses in the amount of $8,168.98. The banks reiterated their objection on April 2, 1990, incorporating by reference the arguments previously made. The U. S. Trustee formulated an objection on April 2, 1990, to the request for compensation and reimbursement of expenses for the period January 1, 1990 through February 28, 1990, objecting for the first time to certain categories of expenses that had been submitted by the firm for reimbursement in the first interim fee application and subsequent applications. The reasons for the U. S. Trustee's objections are as follows:

1. LEXIS, WESTLAW, and in-house mailroom services are overhead expenses; $1,155.50 should be disallowed.

2. Local travel expenses are not reimbursable.

3. A rate of $300 per hour is excessive.

4. Twelve first class air fares should be reduced to coach fare.

5. Twenty-one hours to prepare a fee application for a period of 59 days is "manifestly unreasonable" and should be reduced by half absent detailed justification.

6. Compensation for 2.5 hours billed by the partner in charge on January 9, 1990, to "obtain a more legible copy of time charges" in response to this court's order of December 28, 1989, should be denied because the legible copy should have been provided initially along with the fee application.

The total amount requested as compensation for services rendered as co-counsel for the committee for the period from February 13, 1989 to March 19, 1990, is $311,793.75. Expenses incurred during the same period of time for which reimbursement is requested total $70,811.39. After due consideration of the fee applications and supporting documentation, the objections of the banks, and the comments and objection of the U. S. Trustee, the court finds a reduction in the amount of compensation and expenses requested is in order for reasons hereinafter discussed.

1. Compensation for services rendered prior to March 9, 1989. The fee application includes a request for compensation in the amount of $28,592.50 for services rendered between February 13, 1990, the date on which the committee selected the Anderson Firm as co-counsel, and March 9, 1990, the date on which the committee filed an application for an order authorizing the retention and employment of the Anderson Firm. The Firm's fee applications state, "Although the Order [approving employment of counsel by the committee] is dated March 9, 1989, the Anderson Firm commenced performance of services for the Committee upon its selection as counsel on February 13, 1989. Accordingly, the period encompassed by the Application commences on February 13, 1989."

The application did not request an order authorizing the employment of counsel retroactively to February 13, 1989, nor did the order entered on March 9, 1989 have that effect. The request for compensation to the extent of $28,592.50 is denied.

2. Compensation for services performed by persons unidentified in the fee application. Compensation is sought for 43.5 hours of services rendered by persons identified in the fee application only by the initials WRG, KAL, G-J, L-B, JGD, NFS, and ASO. The identity of these persons is not set forth in the fee application. Unexplained abbreviations will render a time entry noncompensable. In re Wildman, 72 B.R. 700, 709 (Bankr. N.D. Ill. 1987). The rate of compensation for all persons except NFS and ASO can be gleaned from the documentation provided by the Firm. Based on the hourly rates of the other unidentified persons, a rate of $175 per hour is assumed for the 1.25 hours billed by NFS and ASO. An amount of $4,617.50, representing compensation sought for services performed by persons not identified in the fee applications, shall be deducted from the Firm's request for compensation.

3. Compensation for daily totals rather than detailed hours. Professionals appointed pursuant to section 1103 or section 327 of the Bankruptcy Code are required to provide sufficient itemization of the time spent on each type of service performed so that the reasonableness of the service and value of the service to the estate may be determined. See Bankruptcy Rule 2016. Aggregating or "lumping" all tasks performed in one day into a single billing is not sufficient. See, e.g., In re Beverly Manufacturing Corp., 841 F.2d 365, 370 (11th Cir. 1988); In re Curtis, 70 B.R. 712, 716 (Bankr. E.D. Ark. 1987). Between February 15, 1989, and March 23, 1989, one attorney consistently reported daily totals for billing purposes. The first fee application includes a request for compensation for 82.5 hours between February 13, 1989, and March 23, 1989 for an attorney with the Firm at a rate of $175 per hour. These hours reflect daily totals and do not constitute the detailed statement contemplated by Bankruptcy Rule 2016. Compensation for 42.5 of those hours has been deducted from the amount of compensation requested because the work reflected by those hours was performed prior to March 9, 1989. An amount of $7,000 (40 hours of services rendered between March 14, 1989 and March 23, 1989 at $175) shall be deducted from the amount of requested compensation because that amount is not substantiated by a detailed statement required by Bankruptcy Rule 2016.

4. Compensation for time spent on lender liability action; benefit to the estate.

On June 8, 1989, Spendthrift moved for authorization to sell its assets to a group of four local investors (the Hershey-Greene Group) and to release all claims Spendthrift might have against Central Bank and Trust Co., Manufacturers Hanover Trust Co. and NCNB North Carolina National Bank in exchange for a compromise of the banks' claim against Spendthrift. On June 26, 1989, the Committee filed objections to the proposed sale and release of claims against the banks. On the morning of June 28, 1989, the Committee commenced adversary proceeding number 89-138 against Central Bank and Trust Co., Manufacturers Hanover Trust Co., and NCNB North Carolina National Bank. On the afternoon of June 28, 1989, after a hearing, the court approved the sale of Spendthrift's assets to the Hershey-Greene Group and the release of Spendthrift's claims against the banks. With reference to the release of Spendthrift's claims against the banks, an order entered June 29, 1989, stated in pertinent part:

On July 17, 1989, Spendthrift and the banks entered into a Settlement Agreement and Release pursuant to the order of June 29, 1989, whereby the banks agreed to a payment of $5,250,000 in satisfaction of their $7,800,000 claim in exchange for the release by Spendthrift of the banks -

The adversary proceeding commenced by the Committee on its behalf and on behalf of Spendthrift alleged four causes of action: (1) equitable subordination of the banks' claims pursuant to title 11 U.S.C. § 510(c); (2) fraudulent misrepresentation; (3) tortious interference with contractual relations; and (4) economic duress and coercion. The Committee requested in its complaint that the secured claim of the banks be disallowed pursuant to title 11 U.S.C. § 502(b)(1); that any allowed part of the secured claims of the banks be equitably subordinated pursuant to title 11 U.S.C. § 510(c); and that compensatory damages of at least $40 million and punitive damages of $50 million be awarded.

On September 15, 1989, the banks filed a motion to dismiss the adversary proceeding, arguing that the Committee is precluded by the Settlement Agreement and Release executed July 17, 1989, from asserting claims that Spendthrift could have asserted against the banks. The Committee conceded that all claims it asserted in the adversary proceeding were derivative claims, but argued that the June 29, 1989 order of the court authorized the Committee to prosecute the adversary proceeding. On December 19, 1989, the court dismissed the adversary proceeding on the grounds that the Committee is barred by the terms of the Release from asserting derivative claims. That decision was reversed by the district court on September 17, 1990.

There is no way to predict at this time whether any benefit will inure to the estate or creditors generally from this adversary proceeding. An award of full compensation for hours expended in preparing and pursuing this adversary proceeding would be premature at this time. Accordingly, compensation in the amount of $121,224.25 sought in connection with the prosecution of this adversary proceeding shall be reduced by half, subject to reconsideration depending on the outcome of or results obtained by the adversary proceeding.

5. Compensation for time spent in preparation of the fee application. The court is of the opinion that a reasonable fee may be allowed as compensation for the time spent in preparing a fee application. However, in this case, the partner in charge has billed the estate for 18.5 hours at $260 per hour and 4.5 hours at $300 per hour, for a total of $6,160.00, for preparation of fee applications. The partner in charge reported spending 9 hours on August 6, 1989, preparing the fee application and its supporting documentation, including 2 hours on the "assembly of fee application and exhibits; supervision of photocopying with assistance from paralegal." A request for compensation for 23 hours at $260 or $300 per hour for preparation of a fee application is patently unreasonable. A fee will be allowed for 23 hours at $120 per hour, the rate charged by one of the Firm's associates, for a total of $2,760.00. An amount of $3,400.00 shall therefore be disallowed.

6. Compensation for duplication of services. When a firm employs several attorneys and paralegals to work on a particular case, it is expected that efforts will be made to avoid charging for duplication of services. Some courts have held that no more than one attorney may charge for intraoffice conferences unless an explanation of each attorney's participation is given. See In re Wildman, 72 B.R. 700, 709-10 (Bankr. N.D. Ill. 1987). Some courts do not authorize compensation to an attorney who appears at a court hearing but does not participate in the hearing. Id.; In re Jensen-Farley Pictures, Inc., 47 B.R. 557, 583 (Bankr. Utah 1985).

In the Spendthrift case there are numerous instances of intraoffice conferences, joint appearances by counsel at meetings (e.g., meetings of the committee of unsecured creditors or with opposing counsel), and joint court appearances. The court is not persuaded that compensation should be disallowed for intraoffice conferences or joint court appearances.

7. Rate of compensation. The U. S. Trustee has proposed that the Anderson Firm's fees should be calculated at a rate reflecting an average between the Firm's New York rates and the rates customarily charged by Lexington attorneys. The hourly rates charged by the Firm's attorneys between February 13, 1989 and December 31, 1989 included a high of $260 per hour for the partner in charge as well as hourly rates of $240, $195, $175, $155, $140 and $120. Hourly charges for the Firm's paralegals during that period of time were $65 per hour. As of January 1, 1990, The Firm's hourly rates for its attorneys increased to $300 for the partner in charge, and $260, $200, $180, $160, and $140 for its other attorneys, with paralegal rates at $80 per hour. In contrast the hourly rate of local co-counsel is $150. The Anderson Firm states in its fee applications, "The billing rates for all professionals working on the Spendthrift matter are identical to the rates charged to all of the Anderson Firm's clients for whom those professionals performed services during the same period."

The court is of the opinion that compensation under section 330 should be based on the usual and customary rates of the applicant, not necessarily the rates charged in the community in which the bankruptcy petition was filed.

Based on the foregoing, the total fee allowed as compensation for services rendered is $207,571.63, calculated as follows:

Compensation requested: $311,793.75

Less:

1. compensation for services

rendered prior to 3/9/89 28,592.50

2. compensation for services

performed by unidentified

persons 4,617.50

3. compensation for daily

totals 7,000.00

4. compensation for time spent

on lender liability action 60,612.12

5. compensation for time spent

in preparation of fee app. 3,400.00

Compensation allowed: $207,571.63

Much has been written of the fact that the adoption of section 330 of the Bankruptcy Code dispensed with notions of conservation of the estate and economy of administration that governed review of fee applications in cases under the Bankruptcy Act. See H. Rep. No. 595, 95th Cong., 1st Sess. 329-330 (1977); 124 Cong. Rec. H11091, H11092 (Sept. 28, 1978). However, professionals providing services pursuant to section 1102 of the Bankruptcy Code are not given a blank check with which to reimburse themselves for all expenses incurred in the course of representation. To be reimbursable, expenses incurred must be actual and necessary. Implicit in the term necessary is a standard of reasonableness. Any expense that is unreasonable in amount or by its nature cannot be necessary. The factors employed to determine the reasonableness of compensation for services apply to determine the reasonableness of expenses. 2 Collier on Bankruptcy ¶ 330.06[1], at 330-55 (15th ed. 1990).

When this matter was taken under advisement the court did not intend to subject each item of expense for which reimbursement was requested to the rigorous scrutiny that was eventually undertaken. The court's initial review of the fee applications and supporting documentation revealed a pattern of deception, excessive spending, and an apparent paramount goal of the Firm to find a "deep pocket." These factors warranted further examination of the fee application and supporting documentation.

There are several categories of expenses, as well as a few individual expenses, for which reimbursement cannot be authorized.

1. First class travel. Airfare and other expenses relating to business travel are generally reimbursable as necessary expenses. First class airfare is not a necessary expense. Furthermore, reimbursement for expenses for which receipts have been altered or are not available will not be authorized. The court is dismayed that a law firm appearing before this court would use "white-out" in an attempt to conceal the notation of "first class" on a receipt, yet that was done on three receipts: one for air travel on May 1-2, 1989 and two for trips on June 11-13, 1989. In addition, many receipts were not attached to the fee applications, thereby denying the court the opportunity to review the receipts to determine whether the fee application includes first class travel.

In instances where supporting documentation indicates travel was by first class, the amount of reimbursement requested shall be reduced to an amount reflecting travel by coach. In instances where the receipt was altered or is missing, the request for reimbursement for airfare shall be disallowed completely.

2. Meals in office. These expenses are described by the Anderson Firm as expenses for "meals ordered into the office by the Firm's staff if they work beyond 7:30 p.m." These expenses are properly allocable to overhead. The court notes that the fee applications filed by the Anderson Firm are replete with copies of receipts from one of the delicatessens frequented by Firm employees revealing orders made around the customary noon lunchtime, not after 7:30 p.m. as represented by the Firm. If expenses for these meals in office were not disallowed as overhead they most certainly would be disallowed in response to the Anderson Firm's misrepresentations to the court.

3. Local travel. The Anderson Firm describes expenses related to local travel as follows:

Providing transportation to Firm employees who worked beyond 9:00 p.m. on matters concerning the Spendthrift case may be admirable, but it is an expense properly attributable to overhead. Taxi fares to and from local airports for business travel may constitute reimbursable expenses to the extent such expenses are documented and segregated from nonreimbursable expenses. In this instance, all expenses categorized as local travel must be disallowed because the court cannot determine which expenses may be reimbursable.

4. Overtime billable and outside professional services. The Anderson Firm describes this category of expenses as follows:

Whether overtime or not, secretarial and word processing expenses are allocable to overhead and are not chargeable to the estate as necessary expenses.

5. LEXIS and WESTLAW. Although there is a split of authority with respect to whether expenses relating to computer-assisted legal research programs such as LEXIS and WESTLAW constitute overhead, this court is of the opinion such expenses are not properly chargeable to the bankruptcy estate.

6. Unreasonable amounts for meals; meal expenses unrelated to travel. One attorney with the Anderson Firm submitted a "Client Charge - Cash Travel Expense Report" reflecting expenses for meals in the amount of $232.84 incurred during a trip to San Francisco on April 12, 1989. Attached to the report were receipts for meals. One credit card receipt shows a meal for the amount of $119.31, tip included. Another receipt is duplicated below:

GUEST CHECK

SERVER 13 TABLE 43/ 1 TIME 21:00

1 CHIVAS REGAL 4.25

1 SODA 1.50

1 SW PEPPER 7.25

1 BHUJIA 7.25

1 OYSTERS 9.50

1 RIGATONI APP 8.00

1 TAND APP 7.50

1 SONOMA C 4.75

1 NAAN 2.00

1 CRAYFISH 9.00

1 CHIVAS REGAL 4.25

1 DECAF 1.75

1 ST HONORE 6.50

TOTAL 73.50

TAX 3.71

GRAND TOTAL 77.21

An $11.00 tip was added, making this meal $88.21 for one person.

Expenses for meals incurred during business travel are generally reimbursable; expenses for a meal in the amount of $119.31 and for a meal in the amount of $88.21 are unreasonable and therefore unnecessary. The request for reimbursement for expenses shall be reduced by half of $232.84 (the amount reported for meals on the San Francisco trip).

The partner in charge submitted several requests for reimbursements for "meals away and travel expenses" when in fact no travel was involved, and for "meals (in-office OT)" when the expenses were incurred at local restaurants. On August 10, 1989, the partner in charge submitted a "Disbursement Request" and a receipt from a restaurant located in New York seeking reimbursement in the amount of $73.25, billable to "Spendthrift," for "Dinner with [an associate], after working very late, to discuss status of motion for reconsid. and other aspects of SFI case." This expense was allocated to "meals away and travel expenses."

The partner in charge also submitted on August 10, 1989 a "Disbursement Request" and a receipt from a New York restaurant seeking reimbursement in the amount of $23.50, billable to Spendthrift, for "Dinner, working late on SFI matter." This expense was allocated to "meals (in-office OT)."

On October 5, 1989, the partner in charge submitted a "Disbursement Request" and a receipt from a restaurant located in New York seeking reimbursement in the amount of $35.07, billable to Spendthrift, for "Lunch with [an associate] to review status of litigation and claims settlement in case." This expense was categorized as "meals away and travel expenses."

On November 12, 1989, the partner in charge submitted a "Disbursement Request" and a receipt from a restaurant located in New York seeking reimbursement in the amount of $10.25, billable to Spendthrift, for "Dinner after working till 11:00 a.m. [sic] on SFI litigation/motions." This expense was allocated to "meals (in-office OT)."

Two additional expense entries on Exhibit B to the Application for the Second Interim Period are questionable. An entry dated December 21, 1989, states, "Meals away & travel exp. DND/lunch 12/13 $148.65." An entry dated December 26, 1989, reads, "Meals away & travel exp. DND/breakfast 12/1 $20.32." There are no receipts for these expenses. There are no other entries for airfare, hotel room, or any other indication these expenses were incurred during travel. The amount of $148.65 for lunch appears to be unreasonable.

Because these expenses were incurred locally and not as a result of necessary travel, or because the expenses are not substantiated by proper documentation, request for reimbursement of these particular expenses is denied.

7. Suit pressing. An amount of $20.00 incurred by an attorney with the Firm on May 1-2, 1989, is disallowed as being an unnecessary expense.

8. In-house mailroom services. These expenses are allocable to overhead and are not properly chargeable to the estate.

9. Expenses incurred prior to March 9, 1989. The request for reimbursement of expenses incurred prior to the date on which the committee made application to the court for an order authorizing the retention and employment of the Anderson Firm is denied.

Based on the foregoing, an amount of $21,409.68 shall be deducted from the amount of expenses for which reimbursement has been requested ($70,811.39) to arrive at an award of $49,401.71 for expenses. Payment in the amount of $38,211.42 was authorized on December 28, 1989, leaving $11,190.29 to be awarded to the Firm for reimbursement of expenses.

Title 11 U.S.C. § 330 states:

Bankruptcy Rule 2016 provides:

The Anderson Firm is entitled to reasonable compensation from the estate for actual and necessary services rendered by its attorneys and paralegals, 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 [title 11]." 11 U.S.C. § 330(a).

It is well established that under the "American Rule" the prevailing party in a case is not entitled to recover attorneys' fees from the nonprevailing party. Exceptions to the "American Rule" exist, one of which is any legislative act authorizing the recovery of attorneys' fees from another party. Section 330 is but one of more than one hundred so-called "fee-shifting" statutes Congress has enacted. See Coulter v. Tennessee, 805 F.2d 146, 152-55 (6th Cir. 1986) (Appendix to opinion lists 131 federal fee-shifting statutes).

Attorney fee provisions typically, although not exclusively, are found in statutes which "rely heavily on private enforcement to implement public policy." Alyeska Pipeline Service Co. v. Wilderness Society, 421 U.S. 240, 263 (1975). The first wave of fee-shifting statutes came in the 1930's as Congress sought to regulate securities and to protect American laborers. The next wave began in the late 1960's and continued throughout the 1970's as fee-shifting statutes were appended to civil rights, environmental, consumer, and other "public interest" laws. 1 M. Derfner & A. Wolf, Court Awarded Attorney Fees ¶1.02 at 1-27 (1990) [hereinafter "Derfner & Wolf"].

Prior to the 1970's United States District Courts exercised broad discretion in determining the amount of an award of attorneys' fees under a fee-shifting statute. Courts commonly emphasized results of litigation by awarding attorneys' fees based on a percentage of the recovery obtained, following the tradition of the unique American contingent fee system. 2 Derfner & Wolf, ¶15.01 at 15-3 - 15-6.

During the late 1960's and throughout the 1970's, Congress enacted numerous fee-shifting statutes, many of which authorized an award of attorneys' fees in cases involving only injunctive or declaratory relief. Result-oriented courts often awarded rather small fees in these cases. In contrast, commercial or antitrust cases during that time period tended to result in sizeable damage awards with substantial attorney fee awards calculated as a percentage of recovery. Id. at 15-5 n.8.

Concern for this disparity is reflected in two courts of appeals opinions that began the movement toward the "rate-times-hours" calculation most courts apply today and the requirement that lower courts specify the factors considered in making an attorney fee award.

In 1973, the Third Circuit adopted an approach in Lindy Brothers Builders, Inc. v. American Radiator & Standard Sanitary Corp., 487 F.2d 161 (3d Cir. 1973) commonly referred to as the lodestar method. Under the lodestar method, a reasonable hourly rate is multiplied by the number of hours reasonably expended to arrive at an initial estimate. That amount may then be adjusted to take into account other factors to arrive at the fee allowance. The Third Circuit sought to serve the purpose of awarding attorneys' fees: to compensate attorneys for the reasonable value of services rendered. Id. at 167. The Third Circuit instructed the district court to set forth the facts that support the court's fee calculation. The court of appeals vacated an order awarding attorneys' fees in an amount of $2.3 million in an antitrust case in which a settlement had been negotiated.

The Fifth Circuit adopted a more subjective approach, identifying twelve factors a court should consider in calculating an appropriate award of attorneys' fees. Johnson v. Georgia Highway Express, Inc., 488 F.2d 714 (5th Cir. 1974). In Johnson the district court awarded plaintiff's counsel in an employment discrimination case a fee of $13,500 for the attorneys' 659.5 hours. The court in Johnson remanded the matter for reconsideration by the district court in light of the twelve factors enumerated by the court of appeals and for entry of an order that would reflect the basis for the award.

In Hensley v. Eckerhart, 461 U.S. 424, 103 S. Ct. 1933 (1983) the Supreme Court adopted a "blended" approach in addressing fee awards under the Civil Rights Attorney's Fees Award Act of 1976, title 42 U.S.C. § 1988. The Supreme Court instructed courts first to calculate the number of hours reasonably spent times the reasonable hourly rate to determine an initial estimate, and second to apply the Johnson factors to increase or decrease the amount of the estimate. The Supreme Court required courts to consider "the relationship between the amount of the fee awarded and the results obtained" to determine whether the amount of the fee is reasonable. 461 U.S. at 438-40, 103 S. Ct. 1942-43.

The Supreme Court refined its position in Blum v. Stenson, 465 U.S. 886, 104 S. Ct. 1541 (1984), by stating that the "lodestar" amount is presumed to be a reasonable fee which is not subject to enhancement except in rare circumstances. The Court identified several of the Johnson factors that "are subsumed within the initial calculation" of the lodestar and cannot supply the basis for an enhancement of the award. 465 U.S. at 898-900, 194 S. Ct. at 1548-50. The Court again limited the ability of counsel for the prevailing party to seek an enhancement of a fee calculated by the lodestar method in Pennsylvania v. Delaware Valley Citizens' Council, 478 U.S. 546, 106 S. Ct. 3088 (1986).

The issue of whether a lodestar fee may be reduced was not before the Court in either Blum or Delaware Valley. The Court addressed the issue in Hensley, stating that hours expended on an unsuccessful claim cannot be deemed hours reasonably spent and that compensation for those hours must be denied. Hensley, 461 U.S. at 435, 103 S. Ct. at 1940. The holding seems to have survived the Court's decision in Blum. 465 U.S. at 900, 104 S. Ct. at 1549 (" 'Results obtained' is one of the twelve factors identified in Johnson . . . as relevant to the calculation of a reasonable attorney's fee. It is 'particularly crucial where a plaintiff is deemed 'prevailing' even though he succeeded on only some of his claims for relief.' Hensley . . . . (fee award must be reduced by the number of hours spent on unsuccessful claims.)"). Despite language in the Supreme Court's opinions in Blum and Delaware Valley to the effect that the amount of the lodestar is presumed to be a reasonable fee, there appears to be no prohibition against a reduction in the number of hours requested to a number representing hours reasonably spent or a reduction in the rate of compensation requested to an amount representing a reasonable rate before multiplying the number of reasonable hours by the reasonable rate in calculating the lodestar.

The degree of success of the creditors' committee in its action against the banks in adversary proceeding number 89-138

remains a matter of conjecture. An award of full compensation for hours expended in preparing and pursuing this adversary proceeding would be premature at this time. Accordingly the compensation for hours attributable to work on this adversary proceeding has been reduced by half without prejudice to reconsideration of this portion of the award of compensation in the light of the ultimate outcome of the adversary proceeding.

Finally, the court is of the opinion that in this case the overall request for compensation and reimbursement for expenses should be reduced by the sum of $25,000 because of what the court perceives as a complete disregard by the law firm of its ethical obligation to exclude from its fee requests, excessive, redundant or otherwise unnecessary fees and charges. When the court cannot reasonably rely on the attorney to adhere to his or her ethical obligations in this respect, the court may resort to measures designed to promote integrity in the submission of requests for compensation and reimbursement for expenses. Such action appears to be necessary and appropriate in this instance in view of the fact the court has very little confidence in the accuracy of the fee request in any respect.

In accordance with the foregoing, compensation for services rendered from March 9, 1989, through February 28, 1990, is fixed at the sum of $207,571.63, and reimbursement of expenses incurred during the same period is fixed at the sum of $11,190.29, provided, however, the overall amount of $218,761.92 is reduced by the sum of $25,000.00, resulting in a net allowance for compensation and expenses of $193,761.92.

Dated:

By the court -

Judge

Copies to:

Duncan N. Darrow

W. Thomas Bunch

Joseph Terry

John Tobin

Joseph M. Scott, Jr.