1995 #34, VanDyke, 10-2-95

In re: JOHN W. VAN DYKE, JR., Bankr. No. L-88-01173S, Chapter 11

MEMORANDUM OF DECISION RE: FEE APPLICATIONS OF THE AHLERS LAW FIRM, ATTORNEY IRWIN, AND THE DANN LAW FIRM

The matters before the Court are the fee applications filed by Ahlers, Cooney, Dorweiler, Haynie, Smith & Allbee, P.C., counsel for the Unsecured Creditors Committee; Dann, Pecar, Newman, Talesnick & Kleiman, P.C., special counsel for the co-trustees; and the Law Offices of L. Jay Irwin III, P.C., counsel for the co-trustees. These are core matters under 28 U.S.C. § 157(b)(2). This Memorandum of Decision and accompanying Orders shall constitute the Court's findings and conclusions under F.R.Bankr.P. 7052. The Court's Memorandum of Decision in Adversary No. 95-5010 is incorporated herein by reference.

As set forth below more fully, the Court concludes that the fee application of the Ahlers firm shall be awarded $24,777.17 for services rendered and expenses incurred through February 1, 1993. Services rendered and expenses incurred after February 1, 1993 shall be paid only after other administrative expenses and unsecured claims, excluding the subordinated unsecured claims of Earl Geiger and Geiger Corporation, are paid in full and shall be paid pro rata with the fees awarded to Attorney Irwin.

The fee application of Attorney Irwin shall be awarded in full but shall be paid only after other administrative expenses and unsecured claims, excluding the subordinated unsecured claims of Earl Geiger and Geiger Corporation, are paid in full and shall be paid pro rata with the post-February 1, 1993 fees of the Ahlers firm.

The fee application of the Dann firm shall be allowed and paid in full as an administrative expense.

I.

Fee Application of Ahlers, Cooney, Dorweiler, Haynie, Smith & Allbee, P.C., counsel for the Unsecured Creditors Committee. With Court approval, the Unsecured Creditors Committee employed as counsel the firm of Ahlers, Cooney, Dorweiler, Haynie, Smith & Allbee, P.C. ("the Ahlers firm"). By four orders entered between October 31, 1989 and January 17, 1991, the Ahlers firm sought and was paid compensation totaling $41,411.87. The compensation awarded covered services to October 1990, about one year after confirmation on November 20, 1989.

On March 23, 1995, the Ahlers firm filed a fee application for services from October 9, 1990 through December 31, 1994 and sought another $74,125.00 for services plus $5,189.74 in expenses.

Creditors John and Mary Tokheim filed an objection on April 10, 1995 on the grounds that some services rendered were not actual and necessary as required by 11 U.S.C. § 330(a) because they were identical to services performed by the co-trustees' attorney. Creditor Heritage Bank, N.A., filed an objection on April 19, 1995 on the same grounds as the Tokheims. Creditor Gerald L. Weiner filed an objection May 1, 1995. He made the same argument as the other objectors. He also complained that he was not served with the fee application or a notice.

On May 8, 1995, the Ahlers firm responded to the objections with a general denial. George Weiner filed a response to the Ahlers firm's response on May 9, 1995. He continued to complain that he had not been served with the fee application and notice.

The Tokheims filed a brief in support of their objection on June 26, 1995. They stated that the time spent by the Ahlers firm was excessive and of no benefit to the estate under In re Reed, 890 F.2d 104 (8th Cir. 1989). They specifically argued that some services, such as reading documents and reviewing files, indicated no purpose. They further argued that time spent on other more specific services did not benefit the estate materially. As an example, the Tokheims stated the Ahlers firm spent 41 hours on a Motion to Invoke Standby Trust where Tokheims were the moving party and where grounds for invoking the trust were indisputable. The Tokheims further argued that the total fees sought were excessive. As an example, the Tokheims stated that the Ahlers firm wanted compensation for 145.9 hours related to the Consolidated Freightways property sale but that Attorney Rosemary Sheehan, counsel for a potential purchaser, already had been compensated for clearing title and other sale-related services. Finally, the Tokheims argued that a tremendous amount of time was spent resisting their claim (167.3 hours or $15,057.00) with no benefit to the estate. The Tokheims also noted there was duplicate billings on Tokheim-related matters by Attorney Jeffrey L. Lamberti of the Ahlers firm and Attorney L. Jay Irwin III, counsel for the co-trustees.

A hearing on the fee application was held June 29, 1995. Appearances included Terry M. Anderson for the Tokheims, Michael J. Eason for the Ahlers Law Firm, Wil Forker for Heritage Bank, N.A., and Gregg E. Williams for Gerald L. Weiner. Attorney Lamberti testified that he continued in the case after the Unsecured Creditors Committee ceased to function at the direction of the Court and the United States Trustee. He stated his services rarely duplicated those of Attorney Irwin because Attorney Irwin solely was responsible for the Tokheim litigation while Attorney Lamberti's services focused more on the liquidation of estate property and resolution of other matters.

Fee Application of Dann, Pecar, Newman, Talesnick & Kleiman, P.C., Special Counsel for the Co-trustees. After the standby trust was activated, co-trustees Vernon H. Henjes and Earl Geiger employed the law firm of Dann, Pecar, Newman, Talesnick & Kleiman, P.C., ("the Dann firm") as special counsel to handle the condemnation proceeding against the estate's Taco Bell property in Indiana. The co-trustees paid the Dann firm $7,359.95 for services and expenses from March 25, 1993 through February 28, 1995. By Application filed May 12, 1995, the co-trustees sought approval of those fees already paid, as well as approval of an additional $3,245.60 for the Dann firm's services and expenses from March 1, 1995 to May 2, 1995. An itemization of services was filed with the Application.

Creditors John and Mary Tokheim filed an objection to the Dann firm's fee application on June 5, 1995. The grounds for the objection were not set forth.

A hearing on the fee application was held June 29, 1995. Appearances included Attorney Anderson for the Tokheims and John D. Mayne and Shelly Erwin for the co-trustees. Attorney Mayne presented a letter prepared by the Dann firm that explained the work the firm had performed related to the condemnation action in Indiana. Attorney Anderson argued that the Dann firm's bill should be the responsibility of the purchaser of the condemnation action at the May 1, 1995 auction. Attorney Mayne argued that an assumption of this liability was not a stated condition of the sale.

Fee Application of the Law Offices of L. Jay Irwin III, Counsel for the Co-trustees. After the standby trust was activated, co-trustees Vernon H. Henjes and Earl Geiger employed the Law Offices of L. Jay Irwin III, ("Attorney Irwin") as special counsel to handle matters related to the Tokheims' claims. The Co-trustees paid him $41,317.97 during 1993, 1994, and 1995. Attorney Irwin filed an application to have the Court approve these fees on March 30, 1995. In his application, Attorney Irwin argued that court approval of his fees was not required under § 3.03 of the Plan.

The Tokheims filed an objection to Attorney Irwin's fee application on April 10, 1995 on the grounds that Attorney Irwin should be required to file an itemization of services and expenses. A hearing was held May 1, 1995. Attorney Irwin was directed to give an itemization to current counsel for the co-trustees and counsel for the Tokheims. The Court then allowed the Tokheims to file additional objections. The Tokheims did not file additional objections.

A hearing on the fee application was held June 29, 1995. Appearances included Attorney Anderson for the Tokheims, Attorneys Mayne and Erwin for the co-trustees, and Attorney Irwin, pro se. At the hearing, the Tokheims argued that the co-trustees did not have authority to employ Attorney Irwin without court approval. Attorney Irwin stated his work for the co-trustees was related almost exclusively to the Tokheims' claims. Attorney Irwin acknowledged that he and the co-trustees had not been successful in significantly reducing the Tokheims' claims through litigation or settlement.

Summary of the Confirmed Plan Regarding Counsel. Section 11.06 of the Plan states the Unsecured Creditors Committee shall survive post-confirmation and may continue

until all payments called for under the Plan have been made. The post-confirmation Creditors' Committee may hire counsel whose fees will be subject to the approval of the Court.

Section 3.01 of the plan states administrative claims, including those of the Unsecured Creditors Committee's attorneys, shall be paid in full within 15 days after their allowance by the Court or upon such other terms as may be agreed upon by the claimant and the Debtor or Trustees. Section 3.03 of the plan states the co-trustees may

retain Special Counsel to pursue the liquidated or non liquidated claims of Debtor against others, or to defend claims against Debtor. The reasonable fees and expenses of said Special Counsel shall be borne by the estate or Trust in sums approved by the Court or Trustee as administrative type claims [emphasis added].

Section 3.01 of the Plan indicates that interim fees will be paid only upon the Court's approval. It states, "Nothing contained herein shall prohibit the payment of interim fees and expenses pursuant to order of the Court."

II.

The standards for allowing compensation and reimbursement to professionals employed by the estate are based on 11 U.S.C. § 330(a) and case law from the Court of Appeals for the Eighth Circuit. Section 330 was amended on October 22, 1994. The pre-amendment version is applied here because the applicants were employed by the estate before the amendment and because the majority of services were rendered before the amendment.

Section 330 of the Bankruptcy Code states the Court may award to an estate professional

(1) reasonable compensation for actual, necessary services rendered by such . . . attorney . . . based on 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 [bankruptcy case].

(2) reimbursement for actual, necessary expenses.

The applicant bears the burden of establishing entitlement to an award and documenting the appropriate hours expended. H.J. Inc. v. Flygt Corp., 925 F.2d 257, 260 (8th Cir. 1991).

Federal Rule of Bankruptcy Procedure 2016(a) sets forth what information a fee application must include if compensation and reimbursement are sought from the estate:

1. a statement of the payments already made or promised to the applicant;

2. the source of the compensation paid or promised;

3. the particulars of any sharing agreement;

4. the services rendered;

5. the time expended;

6. the expenses incurred; and

7. the amounts requested.

Time records should reflect the actual time spent rendering each particular service. In re McDaniel Enterprises, Inc., Bankr. No. 88-10199, slip op. at 4 (Bankr. D.S.D. April 9, 1991). The applicant bears the burden of establishing entitlement to an award and documenting the appropriate hours expended. H.J. Inc., 925 F.2d at 260.

Inadequate documentation may warrant a reduced fee. [Cites omitted.] Incomplete or imprecise billing records preclude any meaningful review by the . . . court of the fee application for "excessive, redundant, or otherwise unnecessary" hours[.]

Id. (citing Hensley v. Eckerhart, 461 U.S. 424, 434 (1983)).

The fee application and a notice must be served on the United States Trustee. 11 U.S.C. § 330(a); F.Rs.Bankr.P. 2016(a), 2002(a)(7), and 2002(c)(2). However, a notice of the application must be served on all creditors and other parties in interest. F.R.Bankr.P. 2002(a)(7).

A case by case, item by item review of the application is appropriate. In re Marolf Dakota Farms Cheese, Inc., Bankr. No. 89-50045, slip op. at 8 (Bankr. D.S.D. October 19, 1990)(cites omitted). "[U]ncertainties should be resolved against the [applicant], if arising because of imprecise record-keeping without adequate justification. H.J. Inc., 925 F.2d at 261 (quoting International Travel Arrangers, Inc. v. Western Airlines, Inc., 623 F.2d 1255, 1275 (8th Cir. 1980)); In re Hanson, Bankr. No. 386-00136, slip op. at 7 (Bankr. D.S.D. March 8, 1989).

Services rendered by an estate professional must benefit the estate to be compensated from the estate. In re Reed, 890 F.2d 104, 105-06 (8th Cir. 1989). As this Court previously noted,

[a]lthough the phrase "benefit the estate" is not defined in Reed, . . . the court emphasizes the distinction between services that benefit the estate and those that benefit only the debtor. One court has noted that compensation for services that "benefit the estate" was a standard established under the Bankruptcy Act but that there was no evidence that Congress intended to modify that reasoning when it adopted § 330(a). In re Ryan, 82 B.R. 929, 932 (N.D. Ill. 1987). Another court, after comparing § 330(a) with its pre-Code predecessor, concluded that the "benefit the estate" standard is subsumed by the "reasonable compensation for actual, necessary services" standard set forth in § 330(a). In re Lifschultz Fast Freight, Inc., 140 B.R. 482, 485-86 (Bankr. N.D. Ill. 1992). Most notable, neither court, like the court in Reed, limited "benefit to the estate" to monetary benefit.

In re Brandenburger, 145 B.R. 624, 628-29 (Bankr. D.S.D. 1992). In essence, the tangible benefit conferred on the estate and its creditors is a proper measure of the appropriate compensation. Moreover, the fees awarded should be reasonable in light of the results obtained. H.J. Inc., 925 F.2d at 260-61.

III.

Improper Service of Ahlers Firm's Fee Application. The Ahlers firm complied with F.Rs.Bankr.P. 2016(a) and 2002(a)(7) by serving Gerald Weiner's attorney with a notice of its fee application. The firm was not obligated to serve Mr. Weiner with a copy of the application itself. Mr. Weiner's objection regarding improper service will be denied.

Adequacy of the Itemization of Services in the Ahlers Firm's Fee Application. The Ahlers firm's itemization of services attached to their fee application does not contain adequate descriptions for many of the services rendered. For example, the itemization is replete with entries such as "Telephone conference with Rick Malm" and "Attention to and Review of Letter From Attorney Meine." While the Court occasionally knows or can decipher the purpose of a telephone call or letter from the record, most often entries such as these make it impossible for the Court to determine whether a particular service was necessary and of benefit to the estate and whether the fee charged is reasonable.

Since the Ahlers firm's application contains many entries that do not adequately set forth the purpose of particular letters, telephone calls, and conferences, as required by F.R.Bankr.P. 2016(2), a 25% deduction on all services will be made. No deduction will be made on corresponding costs, however. The Court is satisfied that the costs incurred were actual and necessary.

Necessity and Reasonableness of Services by the Ahlers Firm. Showing that all their post-confirmation services were reasonable, necessary, and of benefit to the estate was a heavy burden for the Ahlers firm. Most of the unsecured claim holders "disappeared" when Earl Geiger bought their claims post-petition. Moreover, the few remaining unsecured creditors had their own attorneys. The United States Trustee's office did not fill vacancies on the Committee, although the plan, as noted above, provides that the Committee may continue until all payments are made and may employ counsel post-confirmation.

This Court's January 28, 1993 discussion with Attorney Lamberti on whether he should continue in the case after Earl Geiger became a co-trustee was limited to advising him to consult with the U.S. Trustee on whether the Committee needed to be reconfigured. The Court was unable to find anything in the record that indicated Attorney Lamberti should continue as Committee counsel regardless of the lack of Committee members. However, the Court acknowledges that after February 1, 1993, when Earl Geiger was appointed as a co-trustee, Attorney Lamberti did render services in the case and, in essence, became the lead de facto attorney for the co-trustees.

Even assuming that the Ahlers firm became the co-trustees' de facto counsel, there is limited evidence that most services performed by the Ahlers firm after the trust was activated were directed toward completion of the plan as confirmed. Instead, counsels' and the co-trustees' efforts seemed directed toward cutting deals and disputing the Tokheims' claims rather than following the plan and trust provisions. The Court cannot condone the delays and detours that the co-trustees and their counsel took post-confirmation. During co-trustees Geiger and Henjes' tenure, only one piece of estate property was liquidated and that too generated litigation. Finally, some services performed by the Ahlers firm and Attorney Irwin, counsel for the Unsecured Creditors Committee, were duplicative. Since the Unsecured Creditors Committee ceased to exist after February 1, 1993, Attorney Lamberti and Attorney Irwin essentially both represented the co-trustees. While Attorney Lamberti initially may have focused his attention on administering assets while Attorney Irwin focused on the Tokheim litigation, those distinctions blurred during the last several months that both attorneys were involved in the case and everyone's attention was focused on the Tokheims' claims.

Until February 1, 1993, however, the Court cannot find that the Tokheims or the other creditors questioned Attorney Lamberti's post-confirmation activities. It was clear to the other creditors and their counsel that Attorney Lamberti was continuing his work in the case and there was no reason to suspect that he did not expect compensation from the estate.

On the other hand, the case took a decided downturn on February 1, 1993 when Earl Geiger became a co-trustee. The case no longer appeared to be postulated on complying with the plan and trust but on negotiating new deals and promoting litigation. The Court concludes that at this point the case essentially progressed at the direction of Earl Geiger personally and not at the direction of the co-trustees in their fiduciary capacity. The terms and deadlines imposed by the plan and trust -- as extended by the same stipulation that gave rise to Earl Geiger's appointment -- were still ignored by the co-trustees and their counsel. If compliance with the plan and trust was impossible, as Attorney Lamberti suggested, the co-trustees promptly should have sought another modification.

Therefore, the Court finds that after February 1, 1993, the Ahlers firm's services essentially were for the benefit of Earl Geiger personally and not for the estate's benefit. Thus, any services rendered and expenses incurred by the Ahlers firm after February 1, 1993 through December 31,1994, shall be compensated only after other administrative expenses and unsecured claims, excluding the subordinated unsecured claims of Earl Geiger and Geiger Corporation, are paid in full and shall be paid pro rata with the fees awarded to Attorney Irwin. Compensation for services rendered and expenses incurred by the Ahlers firm before February 1, 1993 shall be paid as allowed above [25% deduction on compensation for inadequate itemization of services] and shall retain their administrative priority under 11 U.S.C. § 507 and Section 3.01 of the plan.

The Court did not review the Ahlers firm's application on an item by item basis after February 1, 1993 to determine whether adequate descriptions were provided and whether all services rendered and expenses incurred met the criteria of § 330(a). Since the post-February 1, 1993 fees will be subordinated to other claims and pro rated before payment, such scrutiny by the Court was meaningless to the estate.

Necessity for the Co-Trustees to Obtain Court Approval to Employ Attorney Irwin. Even assuming that the plan or trust required the co-trustees to obtain court approval before hiring Attorney Irwin, the Court does not find that a basis for denying him compensation. Attorney Irwin was hired as special counsel to handle specific, non bankruptcy litigation. He was not bankruptcy counsel charged with insuring that the co-trustees complied with F.R.Bankr.P. 2014(a). Further, any objection to the co-trustees employing Attorney Irwin without court approval could and should have been raised earlier. Accordingly, the Court will not penalize Attorney Irwin for the co-trustees' decision not to get his employment pre-approved by the Court. The Tokheims' objection on that point will be overruled.

Necessity and Reasonableness of Services by Attorney Irwin. It is clear that Attorney Irwin was hired after Earl Geiger became a co-trustee only to handle the litigation against the Tokheims. To date, the Court has witnessed little evidence that the Tokheims' claims were improper or unreasonable. The protracted litigation surrounding these claims yielded nothing for the estate. The litigation depleted estate funds to pay attorney fees and it unnecessarily delayed resolution of the case. Finally, as noted above, some services performed by the Ahlers firm and Attorney Irwin were duplicitous, especially since the Unsecured Creditors Committee ceased to exist and the case became focused on the Tokheims' claims when Attorney Irwin was employed.

Again the Court must find that all of Attorney Irwin's services were rendered primarily for Earl Geiger's personal benefit and not for the estate's benefit. Attempts to resolve the Tokheims' claims by settlement or litigation after February 1, 1993 were arduous and complicated by Earl Geiger's and Tom Van Dyke's personal interest in the Charter Oak Bank. Once the Court entered a decision on the Tokheims' claims in mid-1994, the co-trustees and their counsel continued to ignore the plan and trust terms and deadlines and the co-trustee's contentions about the Tokheims' claims continued. Again, the Tokheims had to commence litigation to force an auction of remaining assets. Accordingly, compensation and reimbursement from the estate for services rendered and expenses incurred by Attorney Irwin will be allowed in full but shall be paid only after other administrative expenses and unsecured claims, excluding the subordinated unsecured claims of Earl Geiger and Geiger Corporation, are paid in full and shall be paid pro rata with the post-February 1, 1993 fees of the Ahlers firm.

The Court did not review Attorney Irwin's application on an item by item basis to determine whether adequate descriptions were provided and whether all services rendered and expenses incurred met the criteria of § 330(a). Since his fees will be subordinated to other claims and pro rated before payment, such scrutiny by the Court was meaningless to the estate.

Necessity and Reasonableness of Services by the Dann Firm. The Court concludes that services rendered by the Dann firm benefited the estate and, therefore, shall be allowed in full. The firm's efforts in Indiana regarding the condemned Taco Bell property produced funds for the estate. There is no evidence that the compensation sought is unreasonable or that unnecessary services or expenses were included on their itemization. Further, the Dann firm's claims will not be subordinated to other claims since there is no evidence that the firm acted for the benefit of anyone other than the bankruptcy estate. Finally, the Dann firm's fees are not the responsibility of the party who purchased the condemnation action. That responsibility was not a condition of the sale and it would be unfair to impose that burden after the purchase.

Appropriate orders will be entered.

So ordered this 2ndday of October, 1995.