Source: http://www.groklaw.net/articlebasic.php?story=20071217130104772
Timestamp: 2018-02-25 09:52:38
Document Index: 531482666

Matched Legal Cases: ['§ 330', '§ 330', '§ 330', '§ 330', '§ 328', '§ 328', '§ 328', '§ 328', '§ 328', '§ 328']

Groklaw - Transcript of Dec. 5th Bankruptcy Hearing Arrives - The Improvidence Standard
Transcript of Dec. 5th Bankruptcy Hearing Arrives - The Improvidence Standard
Monday, December 17 2007 @ 01:28 PM EST
The transcript [PDF] is here now of the December 5th bankruptcy hearing, so we can get answers to all our questions. Also, there is an Affidavit of Ordinary Course Professional filed by Hal Anderson (he's with their financial advisors, Soltis), and a certificate of no objection to Berger Singerman's October bill, which means they will get paid. Steve Martin is already working on doing the text version for us of the transcript. The hearing only lasted 20 minutes, our eyewitnesses told us, so it won't be long.
The main thing I note in a quick reading is that the US Trustee Joseph McMahon got a number of changes to proposed orders. For example, one change was that the accountants, Tanner, had to file a supplemental declaration waiving the prepetition debt owed them of $9,000. And apparently there was considerable discussion and revisions in the form of the order about the retention of Boies Schiller. Here's the part that Mr. McMahon wished to note for the record:
MR. MCMAHON: We have agreed on a proposed order and not to -- there are other changes in the form, but I do want to note one for the record and that is that we have agreed to I guess a resolution on the standard of review that's going to be applied to the fees that are sought by Boies Schiller with connection with the engagement; meaning that any litigation recovery fees will be subject -- and also any transactional recovery fees, using terms defined in the engagement letter, that involve a transaction where either Novell or IBM is a direct party will be subject to the standard of review contained in Section 328(a), the improvidence standard, Your Honor.
Ah! The improvidence standard! It's good to know the US Trustee's Office has read and comprehended the SCO-Boies Schiller retainer agreement and has a clue. I'd say the gravy train just lost a few cars.
Non-Novell and non-IBM transactions/recoveries will be subject to the reasonableness standard of Section 330. He goes on to say that any recovery that the SUSE arbitration and the Gray trademark case will be billed on an hourly basis and under 330 as well. What is he talking about?
Here's a case where the ruling explains a bit the difference between the improvidence standard of Section 328 and the reasonableness standard of Section 330 :
II. Whether The Bankruptcy Court Abused Its Discretion By Reviewing Houlihan's Fee Under § 330(a) Of The Bankruptcy Code
Section 330(a) of the Bankruptcy Code allows a court to award less than the total amount of compensation requested by a professional for work performed in connection with a bankruptcy proceeding. 11 U.S.C. § 330(a)(2). In determining the appropriate amount of compensation under § 330(a), a court must conduct an analysis based on reasonableness. 11 U.S.C. § 330(a)(3). However, once the Bankruptcy Court has determined that the terms and conditions of a professional's compensation are reasonable, it may thereafter reduce that compensation only if it determines, under § 328(a), that "such terms and conditions prove to have been improvident in light of developments not capable of being anticipated at the time of the fixing of such terms and conditions." In re Federal Mogul-Global Inc., 348 F.3d 390, 397 (3d Cir. 2003)....
IV. Whether The Bankruptcy Court Abused Its Discretion By Finding That Houlihan's Monthly Fee Was Improvident Within The Meaning of § 328(a) Of The Bankruptcy Code
Although the Bankruptcy Court's Opinion contains an extensive discussion of the reasonableness of Houlihan's compensation, its conclusion appears to be based primarily on a finding that duplication of services by Lazard and Houlihan rendered Houlihan's previously approved monthly fee improvident within the meaning of § 328(a). See In re NorthWestern, 325 B.R. at 353-54.
Under § 328(a), only "developments not capable of being anticipated at the time of the fixing of [the] terms and conditions" of engagement may render a previously approved term improvident. 11 U.S.C. § 328(a). To support its finding of improvidence under § 328(a), the Bankruptcy Court found that the duplication of services by Lazard and Houlihan could not have been foreseen by the Bankruptcy Court at the time it approved the Committee's application to retain Houlihan. Id. at 354. However, as the Bankruptcy Court pointed out in its Opinion, the duplicative services that concerned it were clearly set forth in the respective engagement agreements of the two firms. Id. at 351. Thus, whether or not those services were inappropriately duplicative, the potential for duplication was certainly not unforeseeable. The Court concludes, therefore, that the Bankruptcy Court abused its discretion by basing its reduction of Houlihan's monthly fee on a clearly erroneous finding of fact.
I gather, then, that 328 is a kind of protection, so that if the bankruptcy court approves something really fast and later finds out it wasn't such a great idea, it can reduce fees. Note though the importance of not approving things too fast, as well, and of objecting when the bills start to show up. In this matter, Mr. McMahon and Boies Schiller have agreed on what the right standard should be.
However, I'm not positive that is necessarily a good thing. Note here in this 2002 DOJ article about Chapter 11 issues that 328 is actually a narrower standard, depending on circumstances and who is playing it:
Section 328 Retentions
This issue sometimes arises in context of indemnification, but may arise in other contexts as well. Professionals propose to be retained under Section 328, as opposed to Section 327, to limit the court review of any compensation they receive under Section 330.
This position threatens to read the safeguards of Section 327 and 330 out of the Code. Advocates of this position argue that, for a professional retained under Section 328, review of compensation is limited to a determination of whether the "terms and conditions" of the compensation were "improvident in light of developments not capable of being anticipated at the time of the fixing of such terms and conditions." This standard is a more narrow standard than the "reasonableness" standard under Section 330. (6)
Of course, the arithmetic may come out the same regardless of whether the court adjusts the hourly rate or orders the reduction of the overall compensation request. The distinction between the terms of compensation and the total compensation ultimately awarded becomes more clear when a structured fee arrangement is approved. For example, a contingency fee for a personal injury lawyer or a success fee for an investment banker must satisfy the test of reasonableness under Section 328, and the ultimate compensation awarded must satisfy the test of reasonableness under Section 330.
Critics of this interpretation would argue that it introduces the very uncertainty that structured fee arrangements are intended to eliminate. However, the reliance on Section 328 to avoid this uncertainty itself creates certain anomalies. It is hard to see why certain fee arrangements are subject only to review under an "improvidence" standard in Section 328, while a request for compensation based on hourly billing rates is subject to a test of reasonableness under Section 330.
So, it's about arithmetic. And it's a complex issue, because the law firm can hardly be viewed as disinterested, in that they take a cut of any winnings. So that is the context, I think, trying to get the arithmetic to come out right. No doubt there have been many cases since 2002 that have fine tuned and addressed the issues raised that Mr. McMahon knows about and we don't that make 328 the best choice in these circumstances. To understand it better, I think we need to read Section 327 too. Here's the relevant part, I think:
The problem with contingency arrangements is sometimes what shouldn't happen does happen, and the law firm pressures a client to agree to a settlement because the law firm wants to get paid. It can even be unconscious, but it isn't always, in my experience. So I gather the desire here is to make sure that in the final analysis, any settlement or transaction is actually going to benefit the estate, not just the lawyers. See how much actually went on in just a 20-minute hearing? I told you back on the 5th that we needed to wait and read the transcript to be sure of what happened with regard to Boies Schiller, and you see now what I was talking about. The lawyers and the judge are talking in shorthand, because they know the lingo.
And here's the reasonableness standard of 330:
(4) (A) Except as provided in subparagraph (B), the court shall not allow compensation for—
Finally, to get the complete picture, here's Section 328, the improvidence standard:
So, I guess it's a good thing, or in the context of the bankruptcy's court's general largesse, it's as good as it gets. We didn't even get to the Cattleback deal discussion. On page 10 of the transcript, SCO's lawyer tells the court that it was partly done pre-petition. That's assuming they are being truthful, and it tips the court in favor of approving it, I believe. The problem with the motion, which SCO admits is "unusual", is that there was no consideration and now they wish to cure this "defect". A cynic might view it more like an attempt to hustle some money out of the estate, but let's stick to the portrayal in the hearing. The motion is to "clarify" that when the sale goes through, "the net proceeds from the sale were going to be remitted up to the Debtor." Net. So because objections were filed by several parties, there have been several supplemental declarations filed to "fill in the gaps". The novation the witnesses at the hearing told us about is this: it was to establish that the "pre-petition claims owed to Ocean Tomo" would be paid by Cattleback and not by SCO. Right. And like with the Boies Schiller thing, it is being submitted under Certification by Counsel, which means they are on the hook a bit if they lied.
Novell's Mr. Lewis next tells the court that Novell never really opposed the sale necessarily; they just didn't know enough about it. Now they know more, but they don't necessarily concur in everything:
For example, we have questions about the Debtor's explanation of solvency, but at least we know what the Debtor's explanation is and we have that information in front of us. This is not the biggest issue in the case, and we don't want to stand in the way of a sale that now appears to be for a decent price, and there doesn't appear to be anything unusual about it that would concern us based upon what we've seen. So while we again -- I don't necessarily concede or concur on all of the facts in the declaration, this is not the occasion to go to the mat over something. And so that's where we are. And so that's where we are. And the additional information I believe Mr. O'Neill mentions is being submitted is really in connection with some of the U.S. Trustee's concerns. Ours are now satisfied.
Heavens. Well. Thank goodness the U.S. Trustee is there, then. The court then adds for the record what Mr. Lewis didn't explicitly state:
THE COURT: And the Court understands, Mr. Lewis, and the record reflects that you're not waiving any rights to challenge facts in the declarations that have been filed.
MR. LEWIS: Thank you, Your Honor. I appreciate that.
I know. I bet you're thinking, just who is this entity or person who wishes to buy this patent? Therein lies the tale, I expect. Might it be that it's someone friendly to Linux and that is the explanation? Let's imagine for a moment that we are Novell. If you found out that Acacia, for example, was the proposed buyer, you'd feel one way about it, and you'd notice every little procedural and factual issue to try to block. But Open Invention Network buys up patents too, to protect the Linux ecosystem. If you found out that OIN was the proposed buyer, you might not care if the facts of it being pre-petition were true or not. Many of your objections might, indeed, melt away. No? Those are both imaginary scenarios, but you get the overall idea.
12/10/2007 - 275 - Affidavit of Ordinary Course Professional (related document(s)192 ) Filed by Hal Anderson. (TAS, ) (Entered: 12/11/2007)
12/12/2007 - 276 - Certificate of No Objection (No Order Required) Regarding Second Interim Application of Berger Singerman, P.A. for Compensation for Services and Reimbursement of Expenses, as Co-Counsel to the Debtors in Possession for the Period from October 1, 2007 through October 31, 2007 (related document(s)224 ) Filed by The SCO Group, Inc.. (Attachments: # 1 Certificate of Service and Service List) (O'Neill, James) (Entered: 12/12/2007) 12/17/2007 - 277 - Transcript of Hearing held on December 5, 2007 before the Honorable Kevin Gross. (related document(s)239, 253 ) (BJM) (Entered: 12/17/2007)
While I was looking up Bankruptcy Code sections, Steve got the transcript done. Thank you!
Debtor(s). Chapter 11
Bankruptcy #07-11337 (KG)
TRANSCRIPT OF OMNIBUS HEARING
For The Debtors: James E. O'Neill, Esq.
Rachel Werkheiser, Esq.
(Via Telephone) Arthur Spector, Esq.
For Novell, Inc.: Adam Lewis, Esq.
Sean Greecher, Esq.
& Taylor, LLP
For IBM: Laurie Selber Silvestein, Esq.
Potter Anderson Corroon, LLP
For the U.S. Trustee: Joseph McMahon, Esq.
For Alan Petrofsky Alan P. Petrofsky
Audio Operator: Al Lugano
Transcribing Firm: Writer's Cramp, Inc.
THE COURT: Good morning, everyone. You may be seated.
ALL: Good morning, Your Honor.
THE COURT: Thank you. Good morning, Mr. O'Neill.
MR. O'NEILL: Good morning, Your Honor, James O'Neill appearing on behalf of the SCO Group. And with me is my colleague Rachel Werkheiser.
THE COURT: Ms. Werkheiser, Good morning.
MS. WERKHEISER: Good morning.
MR. O'NEILL: Your Honor, for today's hearing, last night we filed an amended agenda --
MR. O'NEILL: -- and a few declarations.
THE COURT: Yes, I have it right here.
MR. O'NEILL: I do have an folder, Your Honor, which I'd like to hand up which has some of the revised orders that we're going to be going through today and copy of the amended agenda.
THE COURT: You certainly may.
MR. O'NEILL: May I approach?
THE COURT: Yes. Thank you, Mr. O'Neill. Good morning.
MR. O'NEILL: The matters on today's agenda, Your Honor, we've spoken a lot with the parties here in the Courtroom today and worked to resolve all of our differences with respect to the matters before the Court today. I'd like to address them just by going down the amended agenda, if I could.
THE COURT: Yes, why don't we do that.
MR. O'NEILL: Your Honor, #1 on the agenda is the Debtor's Motion to Retain the Mesirow firm. The Court has already acted on that and an order has been entered.
MR. O'NEILL: Item #2, Your Honor, is the Debtor's Motion -- the Cash Management Motion. And Your Honor, this had been approved on an interim basis before subject to final hearing. We've been working with the Office of the United States Trustee on this matter and have agreed upon a final form of order which is acceptable to the U.S. Trustee, and that's in your folder.
THE COURT: Excellent. And I'm going to enter that order.
MR. O'NEILL: Thank you very much, Your Honor.
THE COURT: In fact, I can enter all of these orders at the conclusion rather than take time now.
MR. O'NEILL: That's fine, Your Honor. Your Honor, Item #3 is the Debtor's application to employ the Tanner LC
firm as accountants. Again, Your Honor, the U.S. Trustee raised a couple of information requests which have been responded to. Tanner filed a supplemental declaration yesterday --
MR. O'NEILL: -- we do have a slightly revised form of order. The only revision from the one filed with the motion is to reference to supplemental declaration. And I believe with that declaration that the retention can be approved.
THE COURT: Thank you very much. Mr. McMahan?
MR. O'NEILL: And I think that resolves the U.S. Trustee's but I will leave it to Mr. McMahon.
THE COURT: Good morning, Mr. McMahon.
MR. MCMAHON: Your Honor, good morning, Joseph McMahon for the United States Trustee. In a supplemental declaration, Tanner notes that it is waiving a pre-petition claim of approximately -- a little bit more than $9,000.
MR. MCMAHON: I just wanted to note that for the record.
THE COURT: Thank you, Mr. McMahon. Thank you, sir.
MR. O'NEILL: That's item #3 on the agenda. Your Honor, item #4 on the agenda is Mr. Petrofsky's Motion for an Order Deeming Electronic Filing Appropriate. I believe that Mr. Petrofsky is on the phone. From --
THE COURT: Yes, he is. I see that.
MR. O'NEILL: From reviewing the motion, Your Honor, the Debtor doesn't have any objection to Mr. Petrofsky's request that he be permitted to e-file pleadings. If that's the extent of the relief requested, the Debtor has no objection to that.
THE COURT: Mr. Petrofsky, good morning.
MR. PETROFSKY: Good morning, Your Honor. This is Al Petrofsky appearing pro se.
THE COURT: Yes, sir. Would you like to be heard on and perhaps provide just a little more explanation of the relief you're seeking?
MR. PETROFSKY: Yes. Thank you. Well, any order that enables me to register as (indiscern.) would be acceptable to me. If the Debtor has been saying that they think the wording of the proposed order too broad then I'd be happy to discuss different wording with them.
THE COURT: Mr. O'Neill, were you concerned about the breadth of the proposed order?
MR. O'NEILL: Let me just take a quick look at the honor -- the order --
THE COURT: Yes, and I'm going to take another look, too. (Pause in proceedings)
MR. O'NEILL: Your Honor, the order as filed with Mr.
-- or as submitted with Mr. Petrofsky's motion is fine. It merely would accord Mr. Petrofsky the ability to register for ECF and to e-file documents.
MR. O'NEILL: And so we have included Mr. Petrofsky's order in the folder which you have before you --
THE COURT: Oh, thank you.
MR. O'NEILL: -- and again we have no objection to entry of the order in this form. We just were a little unclear from the language of the motion, but if electronic filing is that which Mr. Petrofsky seeks, that's fine with us.
THE COURT: I'm going to enter the order, Mr. Petrofsky.
MR. PETROFSKY: Thank you, Your Honor.
THE COURT: Thank you. And you understand, Mr. Petrofsky, that you are limited to filing documents on your own behalf and not for others?
MR. PETROFSKY: Yes, Your Honor.
THE COURT: Good. Okay, thank you.
MR. O'NEILL: Going forward on the agenda, Your Honor, item #5 is a Debtor's Application to Employ the firm of Boies Shiller and Flexner, LLP as special counsel. This matter has been before Your Honor for some time. We had some discussion at earlier hearings about it. We've been continuing to work with the Office of the United States Trustee. We have agreed
upon a revised form of order for this retention, and the Boies Shiller firm has also agreed that it will file a supplemental declaration filling in some information requests from the Office of the United States Trustee. That declaration we anticipate will be filed later today, and then when the declaration is filed and the U.S. Trustee has had a chance to take a look at it, we will be submitting under Certification of Counsel the form of order that we've agreed upon with respect to this retention. And I believe that that will resolve the concerns and objections raised by the Office of the United States Trustee, but I will turn it over to Mr. McMahon to confirm.
THE COURT: Thank you. Thank you, Mr. O'Neill. Mr. McMahon.
MR. MCMAHON: Your Honor, good morning.
THE COURT: Good morning again.
MR. MCMAHON: We have agreed on a proposed form of order and not to -- there are other changes in the form, but I do want to note one for the record and that is that we have agreed to I guess a resolution on the standard of review that's going to be applied to the fees that are sought by Boies Shiller with connection with the engagement; meaning that any litigation recovery fees will be subject -- and also any transactional recovery fees, using terms defined in the engagement letter, that involve a transaction where either
Novell or IBM is a direct party will be subject to the standard of review contained in Section 328(a), the improvidence standard, Your Honor. With respect to any transactional recovery fees where Novell and/or IBM is not a direct party and/or any hourly fees that are referenced in the application, Your Honor, for certain of the arbitration matters, the Gray arbitration and the Souci arbitration --
MR. MCMAHON: -- those matters will be billed on an hourly basis. Again, the other half of the transactional universe, the non-Novell, non-IBM and the hourly rate stuff will be subject to reasonableness review under Section 330. That is the one change I do want to note for the record. There are others but -- and they'll be reflected in the form of order.
MR. MCMAHON: Thank you.
THE COURT: Okay. Thank you very much, Mr. McMahon.
MR. O'NEILL: Your Honor, James O'Neill. And again, we will be submitting that under -- that order under Certification of Counsel. Item #6 on the agenda is the Debtor's Motion to Approve the Employment at CFO Solutions to furnish a chief financial officer. This matter has also been before the Court --
MR. O'NEILL: -- for some time as we continue to have discussion with the Office of the United States Trustee. We have concluded those discussions successfully. Yesterday, Kent L. Thomas filed a declaration in support of approval of this motion, and we have agreed upon a form of order, and that form of order is in your folder.
MR. O'NEILL: And I believe that that resolves any concern and the objection raised by the United States Trustee.
THE COURT: Thank you. And the order is acceptable to the Court.
MR. O'NEILL: Thank you. That's item #6. Item #7, Your Honor, is the Debtor's Motion for Approval of Incipient Controversy. Your Honor, this is an unusual motion, but as the Court is aware from review, there was a transaction that happened pre-petition --
MR. O'NEILL: -- in part and the -- a patent owned by the Debtor was spun off into a wholly owned subsidiary in order to have a sale completed. The filing intervened, and there was no consideration pre-petition for the exchange, and so in order to cure this defect and make sure that the Debtor was fairly compensated for this asset, we brought this motion on to clarify that the proceeds from the sale -- the net proceeds from the sale were going to be remitted up to the Debtor.
There were several parties that filed objections to the motions and raised various issues. We have filed several supplemental declarations which sought to fill in the gaps, and we believe with the filing of those, we have filled in the gaps. There's one additional piece that we're waiting on today which is going to be a novation agreement which will clarify that a pre- petition claims owed to Ocean Tomo, the broker, are going to be paid by the subsidiary and not by the Debtor after the sale. We're waiting for execution of that agreement, which we expect to happen today. And similar with the Boies Shiller Motion to Retain, we will be submitting this order under Certification of Counsel after the novation agreement has been signed and the U.S. Trustee has had a chance to take a look at it. But we are agreed, and I believe that the objections have been resolved with the filing of the declarations to provide the additional information. I will note for the record we did hear from 363 Group who withdrew their objection, but the balance of the objections I believe are resolved with the filing of the declarations. And once we get the executed novation agreement, we should be in a position to submit a consensual order to the Court which will resolve this motion.
THE COURT: Excellent. Mr. Lewis, you've come a long way.
MR. LEWIS: Thank you, Your Honor, Adam Lewis of Morrison & Foerster, with Sean Greecher of Young Conaway --
MR. LEWIS: -- who comes along to make sure I don't do anything bad. He's very good at that. I actually was here on the East Coast already anyhow --
MR. LEWIS: -- and given some of the developments, I just felt it was best that we be here.
THE COURT: The Court appreciates it.
MR. LEWIS: Mr. McMahon -- I'm sorry, Mr. O'Neill correctly states where we are. The Court will recall we filed some objections, the gist of which was we didn't necessarily oppose the sale, we just didn't know enough about it - -
MR. LEWIS: -- and we wanted more information. We've gotten a lot of that information in these declarations. I don't know that we necessarily concur in everything that's said. For example, we have questions about the Debtor's explanation of solvency, but at least we know what the Debtor's explanation is and we have that information in front of us. This is not the biggest issue in the case, and we don't want to stand in the way of a sale that now appears to be for a decent price, and there doesn't appear to be anything unusual about it that would concern us based upon what we've seen. So while we again -- I don't necessarily concede or concur on all of the facts in the declarations, this is not the occasion to go to
the mat over something. And so that's where we are. And the additional information I believe Mr. O'Neill mentions is being submitted is really in connection with some of the U.S. Trustee's concerns. Ours are now satisfied.
THE COURT: Certainly, Mr. Lewis. Thank you, sir.
MR. O'NEILL: And Your Honor unless the Court has any questions, I believe that resolves the matters that we have. As I mentioned, we will follow up. Today we expect the additional Singer -- the -- Stewart Singer's declaration for the Boies Shiller retention --
MR. O'NEILL: -- and the novation agreement to finalize the Motion to Approve the Compromise, and we'll get those two things done and file those two orders under Certification of Counsel.
THE COURT: Thank you very much Mr. O'Neill, and I'll be here and I'll be looking for them, and we'll take action promptly.
MR. O'NEILL: Thank you, Your Honor, we certainly
THE COURT: I appreciate very much counsel's efforts. It was a lot of work, I know, to bring matters to a resolution and the Court is grateful.
MR. MCMAHON: Thank you, Your Honor.
THE COURT: Thank you, counsel. We will stand in recess.
MR. O'NEILL: Thank you, Your Honor.
(Court adjourned)
(signature of Lewis Parham)
Signature of Transcriber 12/12/07