Source: http://ca10.washburnlaw.edu/cases/2002/10/01-1263.htm
Timestamp: 2019-01-22 04:10:43
Document Index: 3348133

Matched Legal Cases: ['§ 326', '§ 326', '§ 158', '§ 330', '§ 326', '§ 330', '§ 330', '§ 328', 'art, 122', '§ 330', '§ 330', '§ 704', '§ 330', '§ 328']

01-1263 -- Connolly v. Harris Trust Co. Of California -- 10/31/2002
| Keyword | Case | Docket | Date: Filed / Added | (61164 bytes) (62981 bytes)
In re: MINISCRIBE CORPORATION,
THOMAS H. CONNOLLY, Trustee,
HARRIS TRUST COMPANY OF CALIFORNIA, as Indenture Trustee for the MiniScribe Corporation 7 1/2% Convertible Subordinated Debentures Due 2012,
No. 01-1263
(D.C. No. 00-M-2328)
Gregory L. Williams and Donald J. Quigley, Block Markus Williams, Denver, Colorado, for Appellant.
David P. Hutchinson, Otten, Johnson, Robinson, Neff & Ragonetti, Denver, Colorado, and James M. Breen, Chapman and Cutler, Chicago, Illinois, for Appellee.
The bankruptcy court made a number of interim fee payments to Connolly as trustee. In his final fee application, he sought additional compensation that would have resulted in a total fee of $3,044,953. This was the maximum fee permitted at that time under the percentage fee scheme (the "cap") outlined in 11 U.S.C. § 326(a) (1986).(1) Appellee Harris Trust Company, representing MiniScribe's debenture holders, opposed the request, as did the United States trustee.
The bankruptcy court carefully analyzed Connolly's fee request and issued an extensive order and opinion approving the statutory maximum payment. Connolly v. Harris Trust Co. (In re MiniScribe Corp.), 241 B.R. 729 (Bankr. D. Colo. 1999). The court determined that during his administration, Connolly had disbursed $101,492,332 through his accounts. This amount, which included settlements of fraud actions that the trustee and other litigants had brought against third party defendants, would be used in calculating the statutory maximum under the "cap" set out in § 326(a).
Alternatively, the court applied a "common fund"or "percentage of the fund" analysis to arrive at an appropriate fee. If the trustee were allowed his claimed fee of $3,044,954, the total adjusted costs for raising and administering the "common fund" of the bankruptcy estate would be $10,864,402, approximately 10.7 percent of the total funds ($101,492,456) that had been administered by the trustee. This percentage, the bankruptcy court determined, was well within the range of permissible costs on a percentage basis.
The bankruptcy court held further hearings on remand and took up the fee issues in a second published decision, Connolly v. Harris Trust Co. (In re MiniScribe Corp.), 257 B.R. 56 (Bankr. D. Colo. 2000). It recalculated the size of the estate, leaving a figure of $67.4 million attributable to Connolly's efforts.
The district court's first order was not a final, appealable decision under 28 U.S.C. § 158(d), because it remanded the case to the bankruptcy court for "significant further proceedings" of a discretionary nature. Office of Thrift Supervision v. Overland Park Fin. Corp. (In re Overland Park Fin. Corp.), 236 F.3d 1246, 1251 (10th Cir. 2001). Connolly's appeal from the district court's second, final order, however, permits us to address issues pertaining to both orders, as he requests. See Masunaga v. Stoltenberg (In re Rex Montis Silver Co.), 87 F.3d 435, 437-38 (10th Cir. 1996).
In a case under chapter 7 . . . the court may allow reasonable compensation under section 330 of this title of the trustee for the trustee's services, payable after the trustee renders such services, not to exceed fifteen percent on the first $1,000 or less, six percent on any amount in excess of $1,000 but not in excess of $3,000, and three percent on any amount in excess of $3,000, upon all moneys disbursed or turned over in the case by the trustee to parties in interest, excluding the debtor, but including holders of secured claims.
In re Butts, 281 B.R. 176, 178 (Bankr. W.D.N.Y. 2002).
Am. Bankr. Inst., American Bankruptcy Institute National Report on Professional Compensation in Bankruptcy Cases (G.R. Warner rep. 1991), at 206.
We have found no cases in this circuit that discuss whether a common fund or other percentage-based rationale may be used in setting trustee compensation under § 330. Connolly cites a case specifically endorsing a common fund or percentage-based approach for trustee compensation, In re Guyana Development Corp., 201 B.R. 462 (Bankr. S.D. Tex. 1996). Harris Trust responds with a case in which a trustee's common fund argument was rebuffed, In re Marvel Entertainment Group, 234 B.R. 21 (Bankr. D. Del. 1999).
In Guyana Development, the bankruptcy court rejected a lodestar approach and awarded the trustee a percentage based fee analogous to a common fund recovery, measured by the maximum permitted under 11 U.S.C. § 326. The methodology employed in Guyana Development has been seriously criticized, however, because the court applied a "sliding scale" approach that essentially incorporated the maximum permitted compensation (calculated on a percentage basis by statute) into the calculation of a "reasonable fee." See In re Neill, 242 B.R. 685, 689 (Bankr. D.N.D. 1999); Marvel Entertainment, 234 B.R. at 38-39. For this reason, we do not find Guyana Development persuasive.
Turning to the statutory language, § 330 requires a court awarding trustee's fees to consider "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 this title." 11 U.S.C. § 330(a)(1). The "cost of comparable services" factor plays an "overarching role" in assessing the reasonableness of a trustee's fee, given the nature and extent of the services rendered. Staiano v. Cain (In re Lan Assoc. XI, L.P.), 192 F.3d 109, 124 n.9 (3d Cir. 1999).
Connolly argues that the "cost of comparable services" factor should take into account the fact that attorneys can and do receive a common fund or percentage-based recovery in non-bankruptcy cases. See, e.g., Brown v. Phillips Petroleum Co., 838 F.2d 451, 454 (10th Cir. 1988). This argument, however, begs an essential question: whether the services provided by a trustee are "comparable" to those provided by an attorney in such cases. It is far from clear that they are. Trustees do not have to be attorneys; indeed, the two serve considerably different functions. See Guyana, 201 B.R. at 479 & n.11. An attorney who serves as a trustee, in fact, may not be paid attorney's fees for performing duties that properly belong to his role as trustee. 11 U.S.C. § 328(b).
Section 330 also requires the court to consider "the time spent on such services." If reasonable compensation for a trustee were predicated solely on a common fund recovery, this factor could improperly be shortchanged.(2)
While it cannot be denied that results obtained is a factor to be considered in assessing the reasonableness of trustee compensation, see, e.g., In re Rauch, 110 B.R. 467, 473-74 (Bankr. E.D. Cal. 1990), we believe this factor is better considered as merely one of the Johnson criteria for determining the multiplier, if any, to be applied to the lodestar amount, rather than the sine qua non of the reasonableness calculation.
The lodestar test is presently used as the dominant method for assessing fees in fee-shifting disputes in federal court. See generally, Gisbrecht v. Barnhart, 122 S. Ct. 1817, 1825 (2002). Strictly speaking, trustee's fees in bankruptcy do not involve a fee-shifting rationale. This court has long applied the Johnson lodestar factors to assess "reasonableness" of attorney's fees in a variety of contexts, however, and has also specifically determined that the test applies to attorney fee determinations under § 330(a)(1). Rubner & Kutner, P.C. v. United States Trustee (In re Lederman Enters., Inc.), 997 F.2d 1321, 1323 (10th Cir. 1993) (attorney's fees); see also generally First Nat'l Bank of Lea County v. Niccum (In re Permian Anchor Servs., Inc.), 649 F.2d 763, 768 (10th Cir. 1981). Other courts have applied an adjusted lodestar test, based on the Johnson factors, to trustee compensation under § 330(a). See, e.g., Garb v. Marshall (In re Narragansett Clothing Co.), 210 B.R. 493, 497 (1st Cir. BAP1997); In re Draina, 191 B.R. 646, 649 (Bankr. D. Md. 1995). We therefore apply the adjusted lodestar test here.
A Chapter 7 trustee does perform a variety of functions in his role, including investigating, liquidating, and distributing estate assets. In re Colburn, 231 B.R. 778, 783 (Bankr. D. Ore. 1999) (citing 11 U.S.C. § 704). Where the trustee has performed work that differs in complexity, a solution is to adjust his fee as a whole, to arrive at a "blended" rate. Garb, 210 B.R. at 499. We agree that the appropriate approach here was a unified rate for all of the trustee's services.
In its second decision, the bankruptcy court lowered the multiplier to 2.57, relying on the multiplier used for the attorney fee award in Gottlieb v. Wiles, 150 F.R.D. 174 (D. Colo. 1993), subsequently reversed for application of a common fund award in Gottlieb v. Barry, 43 F.3d 474 (10th Cir. 1994). The 2.57 multiplier, unchallenged by Harris Trust, finds some support in other lodestar multiplier cases. See, e.g., In re Computron Software, Inc., 6 F. Supp. 2d 313 (D.N.J. 1998) (applying, in securities fraud class action, lodestar test as cross check for common fund recovery and finding 2.5 multiplier "fair"); In re Biskup, 236 B.R. 332, 337 (Bankr. W.D. Pa. 1999) (applying fee that worked out to 2.76 multiplier for exceptional work by trustee in discovery and preservation of asset in bankruptcy case). Given the strong findings by the bankruptcy court in support of its determination that the results achieved were sufficiently extraordinary to justify a multiplier, and the reasoning of the district court flowing from these findings, we cannot conclude, based on our standard of review, that the district court erred by applying a 2.57 lodestar multiplier.
No. 01-1263 - Connolly v. Harris Trust Company
My first disagreement with the majority is that I do not think the considerations set forth in Johnson v. Georgia Highway Express, Inc., 488 F.2d 714, 717-19 (5th Cir. 1974), are "criteria for determining the multiplier." Op. at 17. The appropriate use for almost all the factors listed in Johnson is to determine the attorney's hourly rate and the reasonableness of the number of hours expended on the case; to consider those factors again in setting a multiplier would constitute double counting. Indeed, Johnson itself does not discuss the use of a multiplier.
As for the one Johnson criterion relied upon by the majority in approving the multiplier here--"the results achieved," Op. at 21--I question whether that is an appropriate consideration in this case. A bonus for extraordinary results looks a lot like a contingency fee; in both circumstances the fee depends upon the result. To use a multiplier for "extraordinary results" in effect grants a contingency enhancement for any recovery beyond "expected" results. Yet the Supreme Court in Burlington v. Dague, 505 U.S. 557 (1992), rejected the use of a contingency enhancement in setting a reasonable attorney fee under federal fee-shifting statutes. Although the statute providing for a trustee's fee might be distinguished from such fee-shifting statutes, the discussion of contingency enhancements in Dague should give a court pause before approving any result-based enhancement in setting a "reasonable fee." The Court wrote:
We note at the outset that an enhancement for contingency would likely duplicate in substantial part factors already subsumed in the lodestar. The risk of loss in a particular case (and, therefore, the attorney's contingent risk) is the product of two factors: (1) the legal and factual merits of the claim, and (2) the difficulty of establishing those merits. The second factor, however, is ordinarily reflected in the lodestar--either in the higher number of hours expended to overcome the difficulty, or in the higher hourly rate of the attorney skilled and experienced enough to do so. Taking account of it again through lodestar enhancement amounts to double counting.
Id. at 562-63 (citations omitted).
The analysis is essentially the same when the multiplier relates only to recovery that exceeds the expected result. Like the situation considered in Dague, the risk of not recovering more than the expected result arises from (1) "the legal and factual merits of the claim [or claims]" for more than the expected result and (2) "the difficulty of establishing those merits." 505 U.S. at 562. Regarding the second factor, to the extent that the result is extraordinary because of the talent and energy of counsel, the lodestar computation should have already taken that talent and energy into consideration in setting the hourly rate and fixing the reasonable number of hours expended. As for the first factor, to the extent that the result is extraordinary because of the relative lack of merit of the claims for more than the expected result, awarding a multiplier encourages the expenditure of excessive resources on claims that, because of their lack of merit, present a relatively small opportunity for better-than-expected results.
*. After examining the briefs and appellate record, this panel has determined
1. Both sections 326 and 330 were amended in 1994 as part of the Bankruptcy Reform Act of 1994, Pub. L. No. 103-394, 108 Stat. 4106; however, the amendment does not apply to this Chapter 7 case, filed prior to the amendment. Pritchard v. United States Trustee (In re England), 153 F.3d 232, 234 n.2 (5th Cir. 1998).
2. The fact that attorneys and other professionals working for the trustee are sometimes paid on a contingent fee basis, even though § 330 also applies to them, is not dispositive. The bankruptcy code specifically permits a trustee to employ an attorney on a contingent fee basis. 11 U.S.C. § 328(a). No such specific authorization, however, is provided in the case of trustees.
URL: http://ca10.washburnlaw.edu/cases/2002/10/01-1263.htm.