Opinion
Case Nos. 01-55472-JRG and 01-55473-JRG, Jointly Administered for Administrative Purposes Only.
April 5, 2005
ORDER ON FINAL FEE APPLICATION OF WINSTON STRAWN AND MURPHY SHENEMAN JULIAN ROGERS
I. INTRODUCTION
Before the court is the final fee application of debtors' counsel Winston Strawn LLP (WS). In addition, Winston Strawn has filed a fee application on behalf of Murphy Sheneman Julian Rogers (MSJR), predecessor counsel to the debtors.
Through its final fee application, WS and MSJR (collectively referred to as debtors' counsel) seek final approval of $2,249,459.20 in fees and $265,366.03 in expenses for the period from November 8, 2001 through December 12, 2003. On March 23, 2004, the court ordered an audit of debtors' counsel's fee request. Having reviewed the audit report and the comments of debtors' counsel, as well as the United States Trustee (UST) and the creditors' committee, the request for final approval of fees and expenses is granted in part and denied in part as herein stated.
II. GENERAL BACKGROUND
Condor was part of the electronic warfare industry. It was a provider of technologically advanced signal collection and specialized electronic countermeasure products. In the past its sales had reached $80-$100 million. Condor was represented by the law firm of MSJR since the time it filed its Chapter 11 petition on November 8, 2001. WS was substituted in place of MSJR as counsel to the debtors by the court's order entered March 4, 2003.
According to the final fee application, MSJR represented the debtors from November 8, 2001, until February 14, 2003. WS acquired virtually all of the attorneys of MSJR, including those attorneys who are responsible for representing the debtors in this bankruptcy case. The court is treating the request for fees incurred on or before February 14, 2003, as that of MSJR and fees after that date as that of WS. Where general reductions on a percentage basis are made for a particular category of fees, the court has made no allocation between the two firms.
On filing, Condor intended to reorganize by pursuing a plan and disclosure statement, which was filed with the petition. However, problems soon arose over the valuation of Condor as a stand-alone business and over the debt structure of the plan. Eventually Condor was sold to EDO Acquisition IV, Inc. (EDO). In the meantime, the creditors' committee sought to pursue litigation against shareholders and directors of Condor and opposition was presented. The court granted the committee most of the authority it sought and many of the claims eventually settled. Because of the issues that swarmed around MSJR's participation in the plan and disclosure statement, as well as the committee's ability to pursue litigation, the court denied $227,733.30 in fees that MSJR had requested.
This general background is abridged. A complete discussion can be found in the court's "Order On Contested Fee Applications Of Murphy, Sheneman, Julian Rogers," filed October 22, 2003. In its reply to the comments of the UST and creditors' committee, debtors' counsel complains that the committee has been successful in "promoting it `story' of what happened." Debtors' counsel states that these "disingenuous statements, subtle misrepresentations, and exaggerations . . . have become commonly accepted `case legends,'" and that "certain `facts' have become `true' through constant repetition." However, at no time has debtors' counsel taken the court up on its offer to hold an evidentiary hearing nor has it presented the court with any new evidence to rebut these so-called "case legends." In coming to the conclusions it has, the court has drawn reasonable inferences using the evidence before it with respect to disputes regarding prior fee applications.
III. FEES
By way of its final application, WS and MSJR seek $2,249,459.20 in fees for services from November 8, 2001 through December 12, 2003. This amount does not include the $227,733.30 in disallowed fees that MSJR sought in the first and second fee applications. According to its statement in the final fee application, debtors' counsel will not seek allowance of the fees previously disallowed on the first and second fee applications. Because the court disallowed fees in particular billing categories for the period commencing on November 8, 2001 and ending on May 31, 2002, the fees in these billing categories were separated and not included in other categories of the audit. [See Audit Report, "Recomputation of Fees and Expenses," pages 3-4; Exhibit Z.]
The billing categories on the first and second fee applications referred to are R, R01, R02, R03, R04, R05, R06, G01, N05, and N06.
All references to audit report and exhibits are found in the "Review and Analysis of Final Fee Application Submitted by Winston Strawn," which was filed with the court on July 29, 2004.
In addition, the audit reveals a difference of $647.50 between the requested amount and the computed amount. The discrepancy is a result of the activity not equaling the entry hours. [See "Recomputation of Fees and Expenses," page 3; Exhibit A.] Thus, the court considers the fees before it for approval on a final basis are $2,248,811.70.
A. Fees Debtors' Counsel Agrees To Delete.
Debtors' counsel acknowledges that certain categories of fees questioned by the audit report are appropriate to delete. These fees total $8,104.00 and include the following categories and amounts:
• post-petition double billing in the amount of $1,072.00 [See Exhibit B-1];
• pre-petition double billing in the amount of $585.00 [See Exhibit B-2];
• adjustment for time increments kept in a quarter of an hour in the amount of $54.00 [See Exhibit C];
• travel billed in excess of 50% of the hourly rate of the professional in the amount of $1,242.00 [See Exhibit H-1];
• non-working travel which exceeded the six-hour limit in the court's order of December 18, 2001, in the amount of $5,151.00 [See Exhibit H-2].
Debtors' counsel states that all other items mentioned or questioned in the audit are self-explanatory or can be dealt with by the furnishing of additional information or clarification of existing entries; it does not believe the time and effort in doing so in an across the board fashion is necessary or justified.
When given the opportunity to comment on the audit report, the court received two responses, one from the UST and the other from the creditors' committee. Debtors' counsel was given a further opportunity to respond to these comments.
The court must address the issues raised by the UST and the committee that warrant discussion. In addition, the court has a duty to review each request and determine whether the requirements of § 330 of the Bankruptcy Code are met. In re Busy Beaver Bldg. Ctrs., Inc., 19 F.3d 833, 840-45 (3rd Cir. 1994); In re Berg, 268 B.R. 250, 257 (Bankr. D. Mont. 2001). Section 330 of the Bankruptcy Code provides that the court may award to a professional person employed under §§ 327 or 1103, reasonable compensation for actual, necessary services rendered and reimbursement of actual, necessary expenses. In determining the amount of reasonable compensation, the court considers the nature, the extent, and the value of the of such services, taking into account all relevant factors. 11 U.S.C. § 330(a)(3).
In reviewing the audit report and comments, the court has concluded the following.
B. Additional Reductions Are Warranted For Services Related To The Plan And Disclosure Statement And The Committee's Motion To Pursue Litigation.
The court's October 22, 2003 order regarding MSJR's first and second fee applications discussed at length the amount of MSJR's fees accrued through May 31, 2002, on the committee's motion to pursue litigation against shareholders and directors, and on MSJR's "dual-track" approach concerning the plan and disclosure statement while the sale of the business to EDO was pending. In doing so the court sustained the objections of both the UST and the committee. The result was that only $10,000.00 in fees was allowed with respect to the committee's motion to pursue litigation. As for the "dual-track" approach, the court agreed that there was little value in MSJR's work in this area, especially given the amount MSJR was paid pre-petition for preparing the plan and disclosure statement. Thus, only 20% of the fees with respect to the plan and disclosure statement was allowed.
The court requested that the auditor separate out entries that were related to the plan and disclosure statement and the committee's motion to pursue claims. The court believes that further reductions with respect to these categories are warranted. In addition, where some of the services provided were not likely to benefit the estate or were not necessary, the court may award less compensation than requested. In re Smith, 317 F.3d 918, 926 (9th Cir. 2002).
The audit highlights that $13,928.50 in fees were incurred after May 31, 2002, with respect to the committee's motion to sue the shareholders and directors. [See Exhibit S.] Taking into account entries for which fees have been denied because debtors' counsel acknowledges they were double-billed, [see Exhibit B], the total fees incurred with respect to the committee's motion to sue the shareholders and directors are $13,888.00.
Considering the sale of Condor was finalized June 25, 2002, the additional amount of work performed was neither necessary nor reasonable. As stated in the court's order of October 22, 2003, "[i]t must be noted that the potential defendants, directors and shareholders, were represented by their own experienced and extremely competent counsel." These attorneys continued to provide the court with their well-presented legal positions and MSJR's participation did little to benefit the estate. Despite the presence of competent counsel to assist the affected parties and the sale of the debtors' assets, MSJR continued to participate in the motion beyond monitoring and providing information on request. MSJR's continued involvement is questionable because its position, that a lawsuit against shareholders and directors would affect the reorganization, was no longer viable after the sale. Thus, the court will grant MSJR an additional $2,000.00 with respect to the committee's motion and deny the remaining $11,888.00 in fees.
With respect to the plan and disclosure statement, the audit report identified a number of entries related to the failed plan and disclosure statement that were outside the specific categories of fees previously denied on the first and second fee applications. [See Exhibit W.] A total of $11,921.25 in additional fees is revealed in Exhibit W. After reviewing the entries, the court notes that $9,980.25 in fees incurred prior to the sale of EDO relate to the plan and disclosure statement. Consistent with the court's October 22, 2003 order regarding MSJR's fees, the court will allow 20% of the $9,980.25 in fees billed, $1,996.05, and deny the balance of $7,984.20 in fees.
See footnote 3, supra.
C. Fees For The Retention And Compensation Of Professionals Will Be Reduced.
The report highlights that with respect to MSJR's and WS's retention and compensation, $175,384.25 in fees were incurred. [See Exhibit Q-1.] For other professionals' retention and compensation, $113,913.00 in fees were incurred. [See Exhibit Q-2.] Debtors' counsel incurred $14,263.00 in fees with respect to Nightingale Associates' retention and compensation as financial advisor to the debtor. [See Exhibit Q-3.] Finally, $10,792.00 was spent on objections to other professionals' retention and compensation. [See Exhibit Q-4.] A total of $314,352.25 in fees in connection with the employment and compensation of professionals is sought. Taking into account the double-billed items, [see Exhibit B], the total fees related to these retention and compensation categories are $313,805.25.
Prior to the audit, the UST stated in its limited objection that MSJR had agreed to a $25,000.00 reduction from the category entitled "Contested Fees." However in its comments to the audit, the UST states that the fees related to retention of professionals and compensation are excessive under the circumstances, especially because some of the fees were incurred in connection with unsuccessful defenses of the fee applications.
In the committee's comments to the audit report it seeks specific reductions for the fees related to employment and fee applications. It suggests that: (1) no more than $75,000.00 of the $175,384.25 sought for debtors' counsel's employment and fee applications be allowed; (2) no more than $50,000.00 of the $113,913.00 sought for employment and compensation of other professionals be allowed; (3) no more than $3,000.00 of the $14,263.00 in fees sought in support of the Nightingale fee applications be allowed; and (4) the $10,792.00 incurred for the objections to other professionals retention and compensation be disallowed in its entirety.
Debtors' counsel responds that its offer of a $25,000.00 reduction for this category was in exchange of a final resolution of the UST's concerns. However, the UST has now further commented that the fees are excessive. It also responds that committee's counsel incurred $155,044.83 with respect to professional fees. Debtors' counsel asserts that if the court follows the committee's suggestion, debtors' counsel will receive only $128,000.00 in fees for the category related to professional fees.
With respect to fee applications, § 330 of the Bankruptcy Code contemplates compensation for the preparation of fee applications. 11 U.S.C. § 330(a)(6); In re Smith, 317 F.3d at 927-28. As with all compensation requested, the court must determine an amount that is reasonable. Some courts have utilized a benchmark such as 5%. In re Bass, 227 B.R. 103, 109 (Bankr. E.D. Mich. 1998); In re Spanjer Bros., Inc., 203 B.R. 85, 93 (Bankr. N.D. Ill. 1996). Such benchmarks are helpful but the circumstances of each case should control. In addition, courts have found that a chapter 11 debtor's attorney was not entitled to compensation for defending its fee application against objections. In re St. Rita's Assocs. Private Placement, 260 B.R. 650 (Bankr. W.D.N.Y. 2001).
The court concludes the comments of the UST and the committee are well-taken with respect to this category of fees. Excluding the Nightingale retention and compensation category and the double-billed fees reflected on Exhibit B, the total fees related to professionals' retention and compensation are $299,542.25, or a little more than 13% of the total fees requested in the final application. Given the circumstances of the case, the court concludes an amount equal to 7.5% of the total fees requested in the final fee application, or $168,709.44, would provide debtors' counsel with reasonable compensation with respect to this category of fees. Such a reduction is warranted given the requested fees include debtors' counsel's failed defense and prosecution of various objections to fees. Thus, the court will not approve $130,832.81 of the requested fees.
With respect to Nightingale's retention and compensation, the court concludes that $2,500.00 is adequate compensation. The debtors sought Nightingale's assistance in its capacity of financial advisor. As detailed in the court's "Order On Contested Fee Applications Of Nightingale Associates," filed October 22, 2003, the court denied Nightingale a total of $510,367.65 in fees for its failure to make Rule 2014(a) disclosures. However, the court did allow Nightingale's fees that were related to the sale and wind-up of Condor.
For that reason, the court does not believe a complete denial of debtors' counsel's fees for this category is warranted. However, the court must acknowledge that committee's counsel incurred fees with respect to bringing the Rule 2014(a) disclosure problem to the court's attention and pursuing Nightingale for a further recovery of fees. During this period, debtors' counsel assisted Nightingale in opposing the committee's objection to Nightingale's fees. Thus, a reduction in the amount of $11,763.00 is warranted given the outcome of Nightingale's employment and compensation.
D. Insufficient Evidence Exists To Reduce Fees Sought For Key Employee Retention Plan (KERP) Motions.
Both the UST and the committee comment on the amount of fees spent on the KERP motions. [See Exhibit T.] However, the court will not reduce any fees related to this category. First, the court did not issue any rulings on any of the KERP motions brought before the court. The KERP was entered into as a stipulated judgment and was the product of negotiations between the creditors' committee and the debtors. Any subsequent disputes with respect to payments to be made under the KERP were the result of incomplete negotiations. A reduction in fees by the court would be the product of speculation at best. Thus, the court will not reduce any fees in this category.
E. Fees For Vaguely Described Activities Will Be Disallowed.
The audit report highlights a number of entries for which the description of the activity appears vague. [See Exhibits D-1 and D-3.] Time entries are not simply to record the number of hours worked; they also should detail the type of work done. Regardless of the method of compensation and regardless of the type of professional fees at issue, the court must evaluate the complexity and necessity of work done on behalf of the estate in order to determine appropriate compensation. In re Poseidon Pools of America, Inc., 180 B.R. 718, 729-31 (Bankr. E.D.N.Y. 1995).
Of particular concern to the court are entries with vague characterizations of the services performed, especially those which reference "confer," but make no mention of the person with whom the professional conferred. In reviewing the postpetition entries on Exhibit D, the court denies $680.50 in fees due to a lack of adequate description of services. F. Reduction In Fees For Intra-Office Conferences For Which More Than One Professional Billed Is Warranted.
The entries disallowed on Exhibit D-1 are: 5/5/2003, 5/9/2003 Knox; 11/8/2001, 6/25/2002, 6/25/2002, 7/18/2002, 9/12/2002, 2/26/2003, 4/21/2003, 5/2/2003, 5/7/2003, 10/21/2003, 11/6/2003, 12/10/2003 Rawlins; 10/22/2003 Sagerman.
The audit report identifies $236,449.93 in fees that are related to intra-office conferences and of that amount, $102,758.71 in fees is identified to involve more than one professional billing for the same intra-office conference. [See Exhibit F-1.] In addition, $137,485.83 in fees are identified for outside hearings or conferences in which more than one professional was present. [See Exhibit G-1.] Of that amount, $91,207.83 involves more than one professional billing for the particular meeting or conference. [See Exhibit G-1.]
The Bankruptcy Court for the Northern District of California maintains Guidelines for Compensation of Professionals. Guidelines 15 and 16 provide:
The District's Guidelines for Compensation and Expense Reimbursement of Professionals and Trustees are available on the District's Web Site at http://www.canb.uscourts.gov.
15. Conferences — Professionals should be prepared to explain time spent in conferences with other professionals or paraprofessionals in the same firm. Failure to justify this time may result in disallowance of all fees related to such conferences.
16. Multiple Professionals — Professionals should be prepared to explain the need for more than one professional or paraprofessional from the same firm at the same court hearing, deposition or meeting. Failure to justify this time may result in compensation for only the person with the lowest billing rate.
Consistent with the district's guidelines, the general rule is that no more than one professional may charge the estate for intra-office conferences and meetings absent an adequate explanation. In re Bennett Funding Group, Inc., 213 B.R. 234, 245 (Bankr. N.D.N.Y. 1997); In re A.A.D.C., Inc., 193 B.R. 448, 450-51 (Bankr. N.D. Ohio 1996); In re Poseidon Pools of America, Inc., 180 B.R. at 731. This is equally applicable to the attendance by more than one professional at an outside conference or hearing.
In its comments, debtors' counsel states that a review of the intra-office conferences in the audit report is an example of a word search run amok and that "conferences" and "telephone" calls are included without regard to context or justification. In addition, for meetings and court appearances, many of the billed time entries are of half an hour or less and in other instances the MSJR lawyer participated in only part of the meeting or call.
The court is well aware of the complexity of the debtors' situation. In a complex case such as this one, no single professional is going to possess all of the skills to accomplish the necessary tasks. The estate is better served where multiple professionals with the required expertise are utilized. In these circumstances, some communication is required.
The court accepts debtors' counsel's explanation with respect to multiple professionals at outside conferences and hearings. It does not appear to be a situation in which debtors' counsel was unreasonably overstaffing its participation in outside meetings or hearings.
As for intra-office conferences, MSJR's statement offers no explanation about why the number of intra-office conferences was necessary and reasonable. The audit report highlighted over 500 pages of entries related to intra-office conferences. For other professionals with a significant amount of intra-office conferencing and inadequate explanation, the court took the entries for the highest billing professional and then reduced those fees by 50%. Given the number of entries, the court believes a more reasonable approach in debtors' counsel's application is to take 25% of the $102,758.71 in intra-office conference fees that are highlighted on the report as involving more than one professional billing. This results in a reduction of $25,689.68, which the court finds to be on par with similar reductions taken in other professionals' fee applications for excessive intra-office conferencing.
G. Administrative/Clerical Activities By Paraprofessionals And Professionals Warrant Fee Reductions.
The audit report highlights a number of activities by paraprofessionals that appear to be clerical in nature. [See Exhibit I-1.] According to District Guideline 18:
18. Administrative Task — Time spent in addressing, stamping and stuffing envelopes, filing, photocopying or "supervising" any of the foregoing is not compensable, whether performed by a professional, paraprofessional or secretary.
Debtors' counsel's employment and retention is to be in accordance with § 330 of the Bankruptcy Code and the local guidelines of the court. Clerical services are overhead expenses and are not compensable under § 330(a). Sousa v. Miguel (In re United States Trustee), 32 F.3d 1370, 1374 (9th Cir. 1994). Services such as filing, assembling or compiling documents, organizing files, calendaring dates, making copies, faxing or transmitting, moving records, to name a few, are inherently clerical.
Debtors' counsel's response is that this audit category is the product of a word search and a review of the time entries demonstrates entries are for work that clearly requires "legal acumen." Cited as an example is the filing of the Condor and CEI Petition and First Day Pleadings with the San Jose Bankruptcy Court.
However, a review of the time entries discloses a number of entries that are clerical in nature. For example, arranging for the retrieval of an order from the court, [see Exhibit I-1: 1/23/02 Chan], calendaring dates, [see Exhibit I-1: 4/25/02 Kline], updating creditor's addresses and service lists, [see Exhibit I-1: 11/21/01, 10/28/03 Kline], or preparing envelopes, [see Exhibit I-1: 6/5/03 Kline], to name a few. Because many of the entries in Exhibit I-1 are clerical, the court will reduce the fees for this category by 50%, amounting to a reduction of $22,861.25.
As for professionals, the court has reviewed the entries on Exhibit I-2 and determined that $935.00 in fees should be denied as ///// clerical in nature. [See Exhibit I-2.]
The entries disallowed on Exhibit I-2 are: 2/15/02, 2/19/02, 3/13/03, 5/8/03 Knox; 12/28/01, 2/20/02, 2/25/02, 5/2/02, 6/18/02, 3/26/03, 4/16/03, 5/1/03, 5/1/03, 5/14/03, 6/2/03, 6/9/03, 6/12/03, 6/23/03, 6/27/03, 7/2/03, 12/11/03 Rawlins; 6/25/03, 6/26/03 Richardson; 5/23/02 Sagerman.
H. All Other Fees Requested Are Approved.
No further categories of fees are brought to the court's attention as requiring further scrutiny or specific discussion. The court has reviewed the remaining fee categories outlined in the audit report and concludes that no further reductions are warranted. The court denies a total of $220,738.44 in requested fees.
IV. EXPENSES
As for expenses, in the final application debtors' counsel seeks reimbursement for $265,366.03 in expenses. The audit report states that a recomputation of the expense request reveals a difference of $3.01. The auditor was unable to locate the source of the discrepancy. [See "Recomputation of Fees and Expenses," page 3.] As a result of the discrepancy, the court will consider the expenses to total $265,363.02.
A. Double-Billed Expenses Are Denied.
The audit report discloses that $368.33 in expenses were double-billed. [See Exhibit AA.] Debtors' counsel agrees the expenses double-billed should not be reimbursed. B. Fax Charges Must Comport With The Northern District's Guidelines.
The audit report highlights that $4,910.41 in expenses were incurred for fax transmissions. [See Exhibit EE-1.] In addition, $158.24 was incurred for outside fax transmissions. [See Exhibit EE-2.]
The District's Guidelines indicate that outgoing faxes should be charged as a phone call and incoming faxes as a photocopy. This Guideline was developed after a review of the practices of a wide variety of law firms. The practices involving outgoing and incoming faxes were so disparate that it became obvious that actual cost was not the determining factor for the charge. The District then adopted the Guideline inviting the bar to present data substantiating the actual cost. None has ever been presented.
In reviewing the entries, the court is unable to distinguish between outgoing and incoming faxes or to determine on what basis debtors' counsel charged for fax transmissions. For that reason, the court will deny 50% of the fax transmission expenses. Thus for fax transmissions, $2,455.20 in reimbursement is denied. In addition, the $158.24 for the outside fax service will be denied. No explanation concerning the reasonableness of these entries was provided to the court.
C. Miscellaneous Reductions In Expense Reimbursements For Noncompliance With The Northern District's Guidelines.
The audit report brings to the court's attention an expense incurred for parking in Los Angeles in the amount of $9.00 on April 9, 2002. [See "Findings," page 29.] The report states no information is given about the nature of the charge.
District Guideline 35 provides: "[P]arking for professionals . . . at their principal place of business is not reimbursable regardless of the day of the week or time of day." Given that no information is provided on the reason for the parking charge and that debtors' counsel is located in Los Angeles, the court denies the expense reimbursement of $9.00.
The audit report also points out that expense reimbursement for several lunches totaling $77.32 is sought. [See Exhibit GG.] Under Guideline 38: "The cost of lunches while a party is away . . . is not reimbursable." Thus, the court will deny this expense reimbursement.
There also is a hotel expense on June 25, 2002, in the amount of $90.75, which is not associated with any travel. [See "Findings," page 31; Exhibit JJ.] For the date the hotel expense was incurred, the professional's fee entries stated traveled to and from San Jose on the same date.
Thus, the court denies $3,158.84 in expense reimbursements for the above stated reasons.
V. CONCLUSION
The court approves on a final basis fees in the amount of $2,028,073.26, having denied $220,738.44 in fees. Expense reimbursement is approved in the amount of $262,204.18, the court having denied $3,158.84 in expenses. Total fees and expenses approved on a final bases are $2,290,277.44. All fees and expenses that are denied are done so on a final basis. Any fees and expenses debtors' counsel has received in excess of those approved herein are to be returned to the reorganized debtor.