Opinion
Bankr. No. 03-10194.
September 27, 2005
DECISION RE: BANK'S ALLOWED ATTORNEYS' FEES UNDER § 506(b)
The matter before the Court is the Section 506(b) Motion for Allowance of Attorneys' Fees, Service Tax and Costs of Oversecured Creditor filed by First Dakota National Bank and the objections thereto filed by Trustee John S. Lovald. This is a core proceeding under 28 U.S.C. § 157(b)(2). This Decision and accompanying order shall constitute the Court's findings and conclusions under Fed.R.Bankr.P. 7052 and 9014(c). As set forth below, First Dakota National Bank shall be paid from the estate as part of its secured claim under § 506(b) attorneys' fees and costs of $180,706.20, which is a reduction from the requested allowance of $195,076.15.
I.
First Dakota National Bank ("Bank") had held a pre-petition security interest in Debtor's assets. The Bank's secured claim and interest were paid in full after Debtor's assets were sold post-petition. Reserved was the issue of what amount of attorneys' fees the Bank could include as part of its secured claim under 11 U.S.C. § 506(b). On April 5, 2005, the Bank filed a Section 506(b) Motion for Allowance of Attorneys' Fees, Service Tax and Costs of Oversecured Creditor. As set forth in the motion, the Bank utilized the services of two law firms in connection with its loans to Debtor. For the firm of Johnson, Heidepreiem, Minor, Marlow Janklow, L.L.P. (Michael S. Marlow, principal attorney), the Bank sought $87,593.25 for compensation of services, $5,722.96 for reimbursement of expenses, and $5,387.46 for sales tax, for a total of $98,703.67. For the firm of Cadwell Sanford Deibert Garry, L.L.P. (Scott Perrenoud, principal attorney) the Bank sought $89,908.00 for compensation of services, $1,117.66 for reimbursement of expenses, and $5,346.82 in sales tax, for a total of $96,372.48. For both firms combined, the Bank sought a total of $195,076.15.
The Bank recently requested payment of a pre-payment penalty. That matter, and related attorneys' fees and costs, will be addressed separately.
Chapter 7 Trustee John S. Lovald objected to the Bank's request on several grounds. A hearing was held June 21, 2005. Testimony was received from Wayne Williamson, the Bank's Vice President. The parties submitted written closing arguments. Trustee Lovald's arguments included as attachments some additional exhibits. The matter was then taken under advisement.
Earlier objections by Trustee Lovald and the United States Trustee were resolved by the Bank's providing an itemization of the fees sought.
Nothing was filed by the Bank indicating they objected to these additional exhibits.
The contractual fee allowance language in the Bank's loan and security documents were not identical. The pertinent paragraphs are set forth below:
Business Loan Agreement dated May 14, 2001.
TEXT
Security Agreements dated May 14, 2001, and March 15, 2002.
II.
Section 506(b) of the Bankruptcy Code allows fully secured creditors to recover certain charges, including reasonable attorneys' fees and costs, in addition to principal and interest. United States v. Ron Pair Enterprises, Inc., 489 U.S. 235, 240 (1989). To recover these fees and costs, the creditor has the burden to establish: (1) it is oversecured in excess of the fees requested; (2) the parties' agreement provides for the fees; and (3) the fees requested are reasonable. First Western Bank Trust v. Drewes (In re Schriock Construction, Inc.), 104 F.3d 200, 201 (8th Cir. 1997) (citing In re Foertsch, 167 B.R. 555, 562 (Bankr. D.N.D. 1994) (cites therein omitted)) (cited in McGehee v. Cox (In re Griffin), 310 B.R. 610, 617 (B.A.P. 8th Cir. 2004)); In re Cushard, 235 B.R. 902, 906 (Bankr. W.D. Mo. 1999) (creditor bears burden of proving reasonableness of fees sought under § 506(b)); In re Kroh Bros. Development Co., 105 B.R. 515, 520 (Bankr. W.D. Mo. 1989) (creditor bears burden of proving reasonableness of the request).
The "touchstone" for determining the reasonableness of the fees is what the creditor would have spent if the creditor were paying rather than passing the fees and costs onto the debtor. In re Smoots, 230 B.R. 140, 143-44 (Bankr. D. Minn. 1996). The Court thus must consider whether the actions taken by the creditor were reasonable and prudent under the circumstances and whether the itemized fees themselves are reasonable. White v. Coors Distributing Co. (In re White), 260 B.R. 870, 880 (B.A.P. 8th Cir. 2001) (quoting therein Cushard, 235 B.R. at 906-07); Kroh Bros., 105 B.R. at 521. Attorneys' fees incurred by a creditor are inherently unreasonable if they are "not cost-justifiable either by the economics of the situation or necessary in order to preserve the creditor's interest in light of the legal issues of the case." Foertsch, 167 B.R. at 562. Fees may be disallowed if the services rendered were not necessary or were the result of excessive caution or overzealous advocacy. Kroh Bros., 105 B.R. at 521.
In light of the considerations discussed above, the court then applies the lodestar formula, White, 260 B.R. at 880, which is the number of hours reasonably expended by the attorney multiplied by a reasonable hourly rate. P.A. Novelly v. Palans (In re Apex Oil Co.), 960 F.2d 728, 731.
Because this lodestar amount presumably reflects (1) the novelty and complexity of the issues, (2) the special skill and experience of counsel, (3) the quality of representation, and (4) the results obtained, these factors normally cannot serve as independent bases for increasing the fee award above the lodestar amount. See, e.g., Pennsylvania v. Delaware Valley Citizens' Council for Clean Air, 478 U.S. 546, 565, 106 S.Ct. 3088, 3098, 92 L.Ed.2d 439 (1986) ( Delaware I); Blum v. Stenson, 465 U.S. 886, 898-900, 104 S.Ct. 1541, 1548-1550, 79 L.Ed.2d 891 (1984). The Supreme Court, however, has stated that upward adjustments of the lodestar figure are permissible "in certain `rare' and `exceptional' cases, supported by both `specific evidence' on the record and detailed findings by the lower courts." Delaware I, 478 U.S. at 565, 106 S.Ct. at 3098.
Apex Oil Co., 960 F.2d at 731-32. A reasonable hourly rate is considered to be the prevailing market rate in the community. Forshee v. Waterloo Industries, Inc., 178 F.3d 527, 532 (8th Cir. 1999) (quoting therein Blum v. Stenson, 465 U.S. 886, 895 (1984)).
The reasonableness of a creditor's attorney's fees are determined as part of the claims process. In re Alanis, 316 B.R. 323, 325 (Bankr. W.D. Ark. 2004).
If the fees and expenses were based on the creditors' right to collect the fees under the respective pre-petition mortgages or deeds of trust, the right to payment would be part of a pre-petition claim, even though the fees and charges were not incurred until after the debtors filed their respective bankruptcy petitions.
Id. The creditor is not required to get pre-approval of its post-petition charges or fees before including them in its proof of claim. Id. If the debtor does not like the fees included in the claim, then he can file an objection to the claim. Id.
Section 506(b) does not specifically require a creditor to file an application in the format governed by Fed.R.Bankr.P. 2016(b). Atwood v. Chase Manhattan Mortgage Co. (In re Atwood), 293 B.R. 227, 231 (B.A.P. 9th Cir. 2003). The format, though, is useful, and some courts have read Rule 2016(b) broadly enough to include a request for costs and fees that are part of a creditor's proof of claim under § 506(b). Id. at 2313-2.
III.
In his objection and written closing arguments, Trustee Lovald made several specific objections. Each is addressed below. The lien priority litigation costs were outside the scope of the contractual language. Trustee Lovald argued the bankruptcy estate should not have to pay the Bank's attorneys' fees and costs related to the lien priority litigation because the Bank could have protected itself from such disputes by purchasing title insurance that covered mechanics' liens and by more closely monitoring the disbursement of funds to contractors. The Bank countered that this legal work was well within the scope of the contractual language and reasonable in light of Debtor's financial picture when the litigation began.
Trustee Lovald did not contend that the Bank's attorneys' hourly rates were inappropriate or that any specific costs were excessive.
The Court is satisfied the contractual language in the Bank's various loan and security agreements with Debtor covers the lien priority litigation in which the Bank was involved. Though broader insurance may have avoided some of the Bank's involvement, the Court cannot deem it a reason to reduce the Bank's allowed 506(c) costs where there was no agreement between the parties the Bank would protect the priority position of its mortgages through insurance. Instead, the mortgages provided Debtor would protect the Bank's position from liens of higher or equal priority.
The Bank has acknowledged that if it recovers anything from a guarantor or its title company, the bankruptcy estate would hold a subrogation claim. The Bank is even willing to assign those claims. Thus, the Bank will not be allowed a double recovery.
The facts in Robert J. Williams, Inc. v. Official Unsecured Creditors' Committee (In re Connolly), 238 B.R. 475 (B.A.P. 9th Cir. 1999), cited by Trustee Lovald in his objection, are distinguishable from the facts presented here. In Connolly, the court held a preference action under 11 U.S.C. § 547(b) existed independent of any underlying agreement between the debtor and creditor and the creditor therefore could not recover attorneys' fees and costs for defending against that complaint. Here, the lien priority litigation more clearly arose from the parties' agreement and the general construction project; the litigation itself was not a product of bankruptcy law.
The facts in In re Cushard, 235 B.R. 902 (Bankr. W.D. Mo. 1999), also cited by Trustee Lovald, are likewise distinguishable. In Cushard, the Court disallowed fees for unnecessary legal services rendered for the mortgagee while it was fully protected. In this case, while most parties, including the Bank, presumed the Bank was adequately protected, that position was not assured until after the case was converted to Chapter 7 and a sale of assets was completed.
Services rendered by the Bank's two different firms were often duplicitous. Trustee Lovald has charged that the work of the Bank's state court counsel for the mechanics' lien foreclosure action, Attorney Marlow, and the work of the Bank's bankruptcy counsel, Attorney Perrenoud, sometimes overlapped. The Bank countered that it segregated the work each attorney would do to avoid duplication and Attorney Marlow's role was substantially reduced after this Court entered its decision regarding the mechanics' liens.
The Court has reviewed the two firms' time. While some effort may have been made to reduce duplicitous services, it was difficult to discern where the dividing line in the two firms' legal work occurred. After the bankruptcy case was filed, it appears Attorney Marlow often served as a conduit for information between the Bank and the other lenders, and he acted as a sounding board for Attorney Perrenoud on bankruptcy issues. While the Court does not find Attorney Marlow's services were not valuable to the Bank or the sums he charged were unreasonable, the record discloses few post-petition bankruptcy law issues Attorney Perrenoud could not have handled alone. In other words, Attorney Marlow's involvement post-petition was likely valuable to the Bank, the other lenders, and Attorney Perrenoud, but they often were not necessary.
With one exception discussed below, it is not possible from the present record for the Court to clearly identify each time entry that included duplicative post-petition services by Attorney Marlow. The time entries, though relatively thorough, simply do not provide that kind of detail. Accordingly, the Court will decrease by 20% the Bank's requested reimbursement for Attorney Marlow's post-petition fees to account for the unnecessary services and related costs. The Bank will remain responsible for payment of those sums to Attorney Marlow's firm.
The 20% reduction in Attorney Marlow's post-petition compensation for services has been calculated as follows:
$87,593.25 total compensation sought -26,665.20 less allowed pre-petition compensation -810.00 less post-petition compensation disallowed below __________ $60,118.05
× 20% = $12,023.61 reduction for duplicative post-petition services.
The 20% reduction in Attorney Marlow's post-petition reimbursement of expenses has been calculated as follows:
$ 5,722.96 total reimbursement sought — 1,978.73 less allowed pre-petition reimbursement __________ $ 3,744.23 × 20% = $748.85 reduction for expenses related to duplicative services
Attorney Perrenoud rendered some pre-petition services for the Bank in anticipation of a bankruptcy but the Court finds that the services of both he and Attorney Marlow at that time were necessary.
The one exception when it was possible to clearly identify duplicative legal services by Attorney Marlow and Attorney Perrenoud was when both participated in the March 31, 2004, examinations under Fed.R.Bankr.P. 2004 of Roger Hansen and Gene Paulson. Hanson and Paulson were two unrepresented parties who had proposed their own plan and disclosure statement and who also had sought the Court's appointment of a Chapter 11 trustee. The examinations were made shortly before the originally scheduled hearings on their disclosure statement and motion to appoint a trustee. Both matters eventually were rendered moot by the conversion of the case to Chapter 7. Trustee Lovald contended these exams "may have been interesting, but were outside the scope of the work authorized by the loan agreement attorneys' fee language."
The Court concludes that the Rule 2004 examinations of Paulson and Hanson by the Bank's attorneys were necessary and reflected legal services the Bank would have been willing to pay for if it were paying rather than Debtor. Smoots, 230 B.R. at 143-44. Paulson and Hanson had a plan and disclosure statement on the table. Though their proposal may not have had wide-spread support or a high probability of confirmation, it was not without merit. That the Bank wanted to better understand this proposal and assess Hanson and Paulson's ability to run the company post-confirmation, as they had proposed, was not unreasonable.
Two attorneys, however, did not need to conduct the exams. As the bankruptcy law attorney, Attorney Perrenoud could and should have rendered that service without additional legal support. An appropriate reduction to Attorney Marlow's fees for this duplication is, however, adequately reflected in the general 20% reduction made above to his firm's post-petition compensation and expenses.
Services rendered by the Bank's two firms when communicating with the participating lenders group were often duplicitous or unnecessary. Trustee Lovald has also charged the fees allowed under § 506(b) should not include the attorneys' communications with the Bank's participating lender group. The Bank has responded that these conferences were held only as needed and by keeping the other lenders informed, it precluded the necessity of their each hiring their own counsel.
Based on the present record, the Court concludes the conferences and communications between the Bank's attorneys and the other lenders were neither excessive nor unnecessary. As participants on a very large loan, the other lenders were entitled to be kept apprised of the loan's status, and they had the right to offer their input to the attorneys. To the extent Attorney Marlow and Attorney Perrenoud did not both need to participate in the post-petition conferences with the other lenders, the appropriate reduction for duplicative services is already reflected in the 20% deduction made above to Attorney Marlow's firm's post-petition fees.
Legal services related to enforcement of the loan guaranties was outside the scope of the contractual language. Trustee Lovald argued the Bank should not get legal fees for both trying to collect from Debtor and trying to collect from the guarantors. The Bank provided some case law to the contrary.
The Court will sustain the Trustee's objection. The contractual language in the parties' loan and security agreements refers to enforcement of or collect under that particular agreement, not any collateral guaranties. In fact, each commercial guaranty contains a contractual provision that the guarantor will pay any attorneys' fees and costs associated with the enforcement of the guaranty.
If the Bank had wanted Debtor to pay the costs of enforcing the guaranties, or if the Bank had wanted the guarantors to foot the bill for its unsuccessful collection efforts on the original agreements with Debtor, the agreements should have stated that. They did not. That is what the lenders did in Hassen Imports Partnership v. KWP Financial VI (In re Hassen Imports Partnership), 256 B.R. 916, 925-26 (B.A.P. 9th Cir. 2000), which was cited by the Bank. In Hassen Imports, the contractual language referenced attorneys' fees incurred related to compelling payment of the note "or any portion of the indebtedness evidenced" by the note. Similarly, the contractual language in In re Hyer, 171 B.R. 67, 69 (Bankr. W.D. Mo. 1994), referenced enforcement of the security agreement or collection of the obligation referenced in the agreement. Thus, the contractual provisions presented in those cases were broader than the agreements between Debtor and the Bank.
In his objection, Trustee Lovald identified three guarantee-related services: $337.50 on June 4, 2003, $810.00 on August 26, 2003, $337.50 on August 27, 2003, for a total of $1,485.00, all on Attorney Marlow's firm's itemization. (No related costs were identified.) Accordingly, Attorney Marlow's firm's compensation will be reduced by $810.00, and the tax thereon will be adjusted accordingly. The Bank will remain responsible for payment of these sums to Attorney Marlow's firm.
Legal research regarding a pre-payment penalty was outside the scope of the contractual language. The Bank has filed a separate motion seeking additional funds from the bankruptcy estate under § 506(b) based on a 2% prepayment charge in Debtor's $9,000,000 note with the Bank. That matter has not yet been set for hearing or otherwise resolved. The Bank's request for attorneys' fees and costs associated with this claimed penalty will be resolved when the penalty issues are resolved.
An appropriate order will be entered.
The total compensation for services, reimbursement of expenses, and sales tax allowed the Bank for Attorney Marlow's firm under § 506(b) is as calculated below:
$87,593.25 total compensation sought -12,023.61 reduction for duplicative post-petition services. — 810.00 reduction for guaranty related services __________ $74,759.64 allowed compensation under § 506(b)
$ 5,722.96 total reimbursement sought — 748.85 reduction for expenses related to duplicative services __________ $ 4,974.11 allowed reimbursement under § 506(b)
$74,759.64 × 6% = $4,485.57 allowed taxes on compensation $ 4,974.11 × 2.3% = $114.40 allowed taxes on expenses
(The percentage was calculated from taxes paid on all reimbursement divided by the total reimbursement.)