Opinion ID: 317782
Heading Depth: 1
Heading Rank: 5

Heading: The Fee of Counsel for the Debtor

Text: 56 The Bankruptcy Judge allowed the attorneys for the debtor, Frank C. Whalen and the law firm of Kohrman and Jackson, a compensation award of $162,500. In addition to the grounds referred to above, the appellants object to the fee allowance for these attorneys on the following grounds: 1) Some of the compensated services were performed not for the debtor but for its principal shareholder, Gerald Levine; 2) These attorneys performed ministerial and administrative services not properly compensable as professional services; 3) These attorneys duplicated services performed by the attorneys for the debtor-in-possession; and 4) The compensation award to these attorneys was clearly excessive. 7 57 The legal services alleged to have been performed for the personal benefit of Gerald Levine constitute one of the most troublesome issues raised on this appeal. Gerald Levine was the principal stockholder of Cle-Ware, owning 165,992 out of 394,000 shares issued as of October 13, 1971. On that date he entered into an agreement with several persons known collectively as the 1300 Group whereby Levine sold his stock and transferred his voting rights. The contract provided for the sale of Levine's stock at $10 per share for a total of $1,659,920 and a collateral agreement for the employment of Levine by Cle-Ware under its new management. Repayment of Levine's debt to Cle-Ware of $40,000 was delayed over a five year period. Levine reaped these benefits from the transaction while unsecured creditors with claims exceeding $15 million were paid only five cents on the dollar in cash under the terms of the Plan of Arrangement. So far this record discloses, Levine received all these benefits without assuming personal liability for any attorney's fees. 58 Appellants assert that these attorneys were compensated for 573 1/3 hours spent on the negotiation and sale of Levine's Cle-Ware stock to the 1300 Group. Beginning in April 1971, these attorneys met occasionally with the members of the 1300 Group to negotiate what became the ultimate agreement with the group. Thereafter, there were frequent conferences among these attorneys, members of the group and Levine. 59 It is undisputed that the debtor corporations were not parties to the Levine-1300 Group agreement and that Levine was represented by the same counsel who here seek compensation as attorneys for the debtor. Further, the record reveals that all the time devoted by counsel to fashioning this agreement was included in their application for allowance as attorneys for the debtor. 60 It is clear that attorneys entitled to fees for services in bankruptcy and Chapter XI proceedings will have their fees reduced proportionately where their services were partly performed on behalf of private clients. 3A Collier on Bankruptcy P62.12, at 1493 (14th ed. 1971) states: 61 'While an attorney's association with other parties in interest does not necessarily prevent his appointment as counsel for the estate, yet it may cause him to suffer a reduction of his compensation out of the estate on the ground that certain services are considered to have been rendered for the benefit of his private clients rather than for the estate.' Further, Collier adds: 62 'Where there is such a multiplicity of beneficiaries of one particular service, courts are anxious to see in the estate only a kind of secondary beneficiary of efforts made primarily for, and therefore to be compensated by, the directly interested creditors.' Id. 63 Similarly, the record in this case indicates that a major portion, if not all, of the disputed 573 1/3 hours represents time spent by these attorneys rendering legal services for Levine and not for the debtor. On remand, these disputed items should be reviewed item-by-item before a determination is made as to which, if any, are properly chargeable to the debtor. No compensation should be allowed for any services found to have been rendered to Levine as an individual. 64 The appellants' second objection to the compensation award to the attorneys for the debtor is that the award represents compensation for ministerial and administrative services not properly compensable as professional services within the meaning of General Order 42. General Order 42 provides as follows: 'No allowance of compensation shall be made to any attorney for a receiver, trustee or debtor in possession except for professional services.' 8 65 The standards of professional services are set forth in 3A Collier on Bankruptcy P62.12, at 1481-82 (14th ed. 1971): 66 'The services for which an attorney for a receiver or trustee may claim compensation are scarcely more susceptable of exhaustive definition than are the administrative duties of his client. Only professional services, it is true, are entitled to compensation, and General Order 42 is clear enough not to leave any room for a charge for non-professional services, such as services of a commercial or clerical nature, or as accountant, even if this charge be made at a rate which in no wise differs from the rate the officer would have to pay if the services were rendered by a non-lawyer. However, within the scope of the term 'professional services' the conceivable variety of legal services is co-extensive with the activities of the officer himself . . . The allowance of compensation for such services may be said to be governed by one leading test: wherever the officer (trustee or receiver) is by the statute either directed or in his sound discretion permitted to act, and where the compliance with his duties or the exercise of his privileges require legal advice or assistance, the estate is chargeable with a reasonable allowance of the officer's attorney, if retained by leave of court, in respect of all services reasonably warranted by the circumstances of the case.' 67 Judge Learned Hand observed in In re Eureka Upholstering Co., 48 F.2d 95, 96 (2d Cir. 1931): 68 'In conclusion, we cannot ignore the curious notion which this application discloses, that an attorney may recover for what are not legal services at all. For example, in the petition at bar are items for arranging for the sale of the assets, hiring truckmen to carry back concealed property to the bankrupt's place of business, safeguarding the property, going along with the truck, checking up what was found, stirring up a criminal prosecution, getting hold of an accountant, collecting accounts due, inquiring of a pledgee of accounts as to any equity, examining the bankrupt's papers, and more of the sort. The implication behind these claims is that the receiver's attorney may recover, as for legal services, for discharging the duties of the receiver himself. This is an error, . . ..' 69 This objection primarily is applicable to Exhibit B of the application of the attorneys for the debtor-in-possession, infra. The appellants assert that the following activities of counsel for the debtor are not compensable as professional services: 1) customer relations and investigation; 2) meetings with employees of subsidiaries; 3) continued representation of the debtor as corporate counsel; 4) furnishing information and documents to the Securities and Exchange Commission; and 5) work with a public relations specialist. 70 We emphasize that counsel for the debtor are not entitled to be compensated for any services outside the scope of the customary duties of counsel for the debtor as detailed at the end of this Section V. When the Bankruptcy Court approved counsel for the debtor-in-possession, those attorneys, and not the attorneys for the debtor, became the only attorneys who could be compensated for rendering legal services for the operation of the bankrupt estate. On the record before us, this court cannot determine on this appeal whether any or all of the five activities enumerated above should be classified as professional services. This issue is to be determined on remand. We observe, however, that all of the five enumerated above, even if classified as professional services, appear to involve services in the administration of the bankrupt estate. As such, they are not compensable to counsel for the debtor. 71 On remand, the District Court should review each of the items for which these attorneys request compensation to determine whether (1) they constitute professional services, and (2) if so, which counsel should be compensated for such services as falling within the scope of their respective duties. The compensation of attorneys for the debtor should be limited to legal services which it is the duty of the attorneys for the debtor to provide. In no event should compensation be allowed to any attorney for services other than professional services. 72 The appellants' third objection to the compensation award to the attorneys for the debtor is that the award represents compensation for duplicated services. The appellants contend that the total award was bound to skyrocket once the Bankruptcy Court permitted allowance of compensation to separate sets of attorneys for the debtor and the debtor-in-possession. Appellants cite several cases wherein courts reduced fees where it was found that separate sets of attorneys performing overlapping services burdened the estate. See, e.g., Official Creditors' Committee of Fox Market, Inc. v. Ely, 337 F.2d 461 (9th Cir. 1964); In re Solar Mfg. Corp., 215 F.2d 555 (3rd Cir. 1954). 73 With respect to the employment of several attorneys which results in duplication of services, 3A Collier on Bankruptcy P62.12, at 1506 (14th ed. 1971) states: 74 'Only one reasonable attorney's fee is provided for, irrespective of the number of attorneys employed. There is no such statutory protection against duplication or multiplication of legal services rendered to the trustee or receiver. In this respect, however, the courts have reached results in harmony with the statutory principle. They have not only denounced duplication of services generally, applying as a sanction the denial of compensation, but they decided to allow in much the same way one attorney's fee only, wherever several attorneys rendered the estate services that could have been rendered by a single attorney.' 75 Counsel for the debtor and counsel for the debtor-in-possession cannot be compensated for rendering the same service. In the item-by-item review on remand of the applications submitted by both sets of attorneys, fees to debtor's counsel should be limited to those legal services which they provided and which are within the scope of their duties. Similarly, the District Court should allow fees to counsel for the debtor-in-possession for those legal services which they provided and which are within the scope of their duties. 76 The appellants' final objection to the compensation award to the attorneys for the debtor is that the Bankruptcy Judge abused his discretion in allowing $162,500 in fees since this amount was clearly excessive and inconsistent with the economical spirit of the Bankruptcy Act. In support of this objection, the appellants assert that counsel for the debtor requested compensation at an hourly rate of about $71 9 (2,517 hours for a requested $180,000). Further, these rates are alleged to be substantially higher than the prevailing rate recommended by the local bar association. 77 Although the Bankruptcy Judge noted the factors to be taken into consideration in determining the reasonableness of a fee stated in local Bankruptcy Rule 12(c) and referred to a relevant disciplinary rule of the local bar association, he apparently accepted the proffered hourly rate without receiving evidence on what it should be. The Bankruptcy Judge attributed 'the incomparable skill and expertise of these learned scholars and able practitioners (counsel for the debtor)' as being the primary factor in resuscitating Cle-Ware. The 'masterful job' of these attorneys resulted in general creditors receiving five cents on the dollar with a stock option or the possibility of fifteen to twenty cents on the dollar for those who elected to take deferred payments. 78 Assuming, without deciding, that this was a 'masterful job,' the Bankruptcy Judge clearly erred in making the compensation award without 'opinion evidence touching the reasonableness of the fee.' See In re Barceloux, 74 F.2d 288, 294 (9th Cir. 1935). At the hearing to be conducted on remand, opportunity should be provided the litigants to introduce such opinion evidence. 79 Consistent with the above reasoning, we find it difficult to conceive any situation which would justify awarding these attorneys compensation in excess of the hourly rate recommended by the local bar association for such bankruptcy work, however 'masterful' the job. Attorneys who take bankruptcy work do so with advance knowledge that they cannot expect the highest of fees, especially in cases such as this, where the general creditors are paid only five cents on the dollar in cash and face the prospect of receiving no more than twenty cents on the dollar. 80 We reemphasize that the attorneys for the debtor can be compensated only for those services normally performed by an attorney serving in that capacity. These include the following: the preparation and filing of the schedules and statement of affairs, the petition for arrangement and all other applications and orders which were required except those relating to the operation of the business; appearances on behalf of the debtor in court proceedings; attendance at meetings of creditors to consider the proposed arrangement; preparation of the application and order for confirmation and attendance at hearings thereon; offering of the required proof of the 'feasibility' of the arrangement and that it was in the best interests of creditors; and representation of the debtor in other hearings involving the adoption of the arrangement. 10 81 Accordingly, we reverse the order of the District Court affirming the compensation award to counsel for the debtor, Whalen and the firm of Kohrman and Jackson, and remand for a hearing on the objections raised by the appellants and for determination of a reasonable fee consistent with the principles herein stated. 82