357 B.R. 563
Case No. 02-51420-MM.United States Bankruptcy Court, N.D. California.
December 29, 2006.
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Javed Ellahie, The Ellahie Law Firm, San Jose, CA, for Debtor.
MEMORANDUM DECISION AND ORDER ON APPLICATION OF SPECIAL COUNSEL, BERLINER COHEN, FOR FINAL ALLOWANCE OF COMPENSATION AND REIMBURSEMENT OF EXPENSES
MARILYN MORGAN, Bankruptcy Judge.
INTRODUCTION
Before the court is the application of Berliner Cohen, special litigation counsel to the chapter 11 debtor, Dimas LLC, for final allowance of compensation in the amount of $727,673.50 and expense reimbursement of $34,347.15. For the reasons set forth herein, compensation of $586,207 and expense reimbursement of $16,515.61 are allowed on a final basis. Requested fees totaling $64,152.50 is disallowed, of which $8,549 is denied without prejudice. Fees in the amount of $77,314 are reserved for a later determination.
FACTUAL BACKGROUND
Adrienne Rakitin and her late husband, Demitri Rakitin, acquired the real property commonly known as 1499 Country Club Drive, Milpitas, California in August 1985. The property consists of a
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24-acre undeveloped hillside parcel. The history of the Rakitins’ quest to develop the property is complex and convoluted. In November 1992, the Rakitins obtained from the City of Milpitas approval of a six-lot vesting tentative map and planned unit development subdivision on the property. The Rakitins intended to retain one of the six lots as their residence. In July 1994, they obtained approval of the final subdivision map, which had to be recorded no later than November 17, 2002, or the subdivision rights would expire, and the property could not be subdivided. Before the final subdivision map could be recorded, however, the Rakitins needed construction financing for some improvements.
The Rakitins filed a chapter 11 petition in 1994 to stop a foreclosure sale of the property. The case was converted to a chapter 7 in 1996. One of the junior trust deed holders obtained relief from the automatic stay in 1997 and completed a foreclosure sale. The Rakitins filed a lawsuit in Santa Clara County Superior Court for wrongful foreclosure and other causes of action. Attorney Steven Finley represented the Rakitins in that litigation.
In 1997, the Rakitins approached Daniel Snyder for assistance in refinancing and developing the property. With the expectation that they would enter into a joint venture agreement to develop the property, Snyder advanced funds to the Rakitins to cover their personal living expenses, to finance the litigation against the junior secured creditor, and to pay other secured
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creditors. Dimitri Rakitin passed away in 1998.
Adrienne Rakitin reached a settlement of the wrongful foreclosure action in March 2000. The settlement provided for a reconveyance of title and a reduction in the secured debt. To facilitate the settlement, Ms. Rakitin formed a family limited liability company to hold title to and develop the property. In March 2000, Ms. Rakitin created Dimas, LLC with her sons, Peter Rakitin and Paul Rakitin (collectively, “Rakitin”). Snyder financed the expenses of the formation of Dimas. Ms. Rakitin has served as the managing member since Dimas’ formation. Snyder, Dimas, and Ms. Rakitin entered into a joint venture agreement in July 2000 to develop the property. The joint venture agreement provided for the division of profits and for reimbursement of Snyder’s advances upon the sale of the lots. It also provided that Snyder would serve as project manager.
Despite these numerous obstacles, Rakitin obtained financing arranged by Investment Grade Loans (“IGL”), a hard money lender, in August 2000. Snyder advanced the funds necessary to close
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escrow on the IGL loans. Dimas took title to the property concurrent with the close of escrow. On August 7, 2000, Dimas executed three notes serviced by IGL in the amounts of $2,350,000, $251,600, and $108,400, respectively. Three trust deeds securing the notes were recorded in Santa Clara County on August 10, 2000. The beneficial interest in the first deed of trust was held in fractionalized shares among fifteen investors, including Andrew A. Lewis, the principal of IGL. Lewis was the beneficiary under the second deed of trust that secured his broker’s commission. He assigned the beneficial interest in the second deed of trust to Bank of Los Altos as security. Although Bank of Los Altos executed a release of the assignment on January 5, 2004, the release was never recorded. The third deed of trust secured a finder’s fee in favor of third parties. Lewis acquired the beneficial interest in the third deed of trust by assignment in August 2001.
In September 2000, Dimas entered into a joint venture agreement with an investor group including John Ho, Milpitas Countryside Estates Development, Inc. (MCED), and others. John Ho became the project and construction manager for the property. In July 2001, MCED recorded a fourth deed of trust for $1.2 million on the property. Dimas asserts that the MCED deed of trust was unsupported by adequate consideration. It also asserts that the joint venture agreement provided that MCED would keep the mortgage payments on the property current.
Asserting that Dimas and Ms. Rakitin had breached their joint venture agreement, Snyder filed a lawsuit in Santa Clara County Superior Court in January 2001. By that time, Snyder had advanced over $200,000 to Dimas. The parties promptly settled the lawsuit in February 2001 with a payment schedule, mutual releases, and a dismissal with prejudice. Dimas made the payment to Snyder under the settlement. Rakitin, however, was required to secure her payment obligation with a junior trust deed on the property but failed to do so. Based on a breach of the settlement terms, Snyder filed a new action in Santa Clara County Superior Court in September 2001 against Dimas, Ms. Rakitin, John Ho, and MCED. Snyder also recorded a lis pendens on the property.
The obligations secured by the first, second, and third deeds of trust matured by their terms on March 1, 2002. Dimas contends that MCED breached its agreement with Dimas to maintain the mortgage
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payments, causing Dimas to default. When Dimas defaulted on the obligations, Lewis commenced non-judicial foreclosure proceedings by recording notices of default. The balance under
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the third deed of trust at the time was $125,296.39.
Dimas filed a chapter 11 petition on March 13, 2002 to stop the foreclosure sale. At the time the case was commenced, the property was encumbered by three trust deeds controlled by IGL, a fourth deed of trust with MCED as beneficiary, and a lis pendens recorded by Snyder. IGL filed a motion for relief from the automatic stay of § 362(a) to exercise the power of sale in the third deed of trust. Dimas and IGL entered into a stipulation whereby IGL agreed to rescission of the notices of default on the first and second deeds of trust and full reconveyances of the deeds of trust if Dimas deposited $3.285 million in escrow by September 3, 2002 and released the undisputed portion to IGL no later than September 4, 2002. If Dimas failed to comply with the stipulation, IGL could proceed with a foreclosure sale under the third deed of trust. In order to refinance the debt to pay off IGL, Dimas had to remove the fourth deed of trust by MCED and the lis pendens by Snyder.
On Dimas’ application, the court appointed Berliner Cohen on May 8, 2002 as special counsel to represent the debtor “in connection with any cause of action applicant may have against its creditor.” The employment application stated that the debtor “is involved with ongoing litigation involving breach of contract, fraud, and a complex real estate contract dispute.” The application also provides that special counsel’s professional services shall include:
• To provide applicant with legal advice regarding any claims for contractual breach and fraud applicant may have against its creditors;
• To take all necessary steps to determine if there is liability on the part of applicant’s creditor for breach of contract and fraud;
• To investigate and institute litigation, through trial and judgment, and/or settle or compromise any such claim on behalf of applicant.
Dimas commenced an adversary proceeding on May 31, 2002 against John Ho, MCED, and others, Adversary No. 02-6237, to void the fourth deed of trust on the property so Dimas could obtain refinancing. Dimas also asserted claims for misrepresentation, negligence, interference with prospective economic advantage, among others. Berliner Cohen conducted discovery and an analysis of the claims against MCED. To facilitate a prompt refinance, in July 2002, Dimas and MCED entered into a stipulation that allowed MCED to submit a demand in escrow for $250,000 and to pursue the balance as an unsecured claim in the chapter 11 case. Pursuant to the stipulation, the parties reserved all other claims. Rakitin now disputes that Dimas authorized counsel to enter into the stipulation. MCED
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reconveyed the fourth deed of trust upon execution of the stipulation. Dimas thereafter voluntarily dismissed the complaint against John Ho and MCED on September 11, 2002. The proceeding having been dismissed, the clerk’s office closed the file the next day. Berliner Cohen subsequently submitted an application for default judgment against John Ho. However, the court declined to enter the default judgment because the adversary proceeding already had been voluntarily dismissed. In October 2002, Berliner Cohen obtained an amended order of dismissal to reflect that only MCED, and not Ho, was dismissed from the adversary proceeding. Ho answered
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the complaint on January 29, 2003. Through inadvertence, the clerk’s office did not reopen the file because of the entry of the dismissal.
Berliner Cohen substituted in as counsel for Dimas and defended the pre-petition lawsuit by Snyder in Santa Clara County Superior Court. Dimas prevailed in a motion to expunge the lis pendens and obtained an attorneys’ fee award. It also obtained an agreement from Snyder to dismiss the action. Notwithstanding the removal of the fourth deed of trust and the lis pendens, Dimas could not obtain financing.
Dimas failed to timely make the $3.285 million escrow deposit in accordance with the terms of the stipulation with IGL, and, on September 9, 2002, the court granted relief from the stay to allow IGL to foreclose. On September 10, 2002, Lewis conducted a foreclosure sale of the property under the third deed of trust. On the date of the foreclosure sale, Dimas tendered to the trustee’s agent $150,000, an amount it estimated was sufficient to exercise the equity of redemption under the third deed of trust. The trustee’s agent rejected the tender, stating that the payoff demand was over $3.3 million because the beneficiary had cured the defaults on the senior deeds of trust and was adding those amounts to the obligation secured by the third deed of trust. Lewis acquired the property by credit bidding $3,015,000, the undisputed portion of the secured debt. After the foreclosure sale took place, Lewis sought to obtain assignments of the fractionalized interests in the first trust deed. Lewis successfully recorded the final subdivision map before the November 17, 2002 expiration date. He also filed an unlawful detainer action to have Ms. Rakitin evicted from the property, where she had been living.
On November 18, 2002, Berliner Cohen commenced on behalf of Dimas an adversary proceeding against IGL, MCED, John Ho, and others, Adversary No. 02-54453, to set aside the foreclosure sale and recorded a lis pendens on the property. The litigation was very acrimonious.
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Berliner Cohen successfully defended two motions to dismiss the proceeding. Lewis filed a motion to expunge the lis pendens, asserting that Lewis had cured the defaults on the first and the second deeds of trust and included those amounts in his payoff demand. Accepting Lewis’ undisputed representations that he had cured the defaults on the senior liens, the court granted Lewis’ motion to expunge the lis pendens on the property.
During the course of discovery by Berliner Cohen in the adversary proceeding, Dimas learned that Lewis did not actually make any advances to cure the defaults on the first and the second deeds of trust before the foreclosure sale took place. Upon Dimas’ motion for summary adjudication, the court determined that the trustee failed to comply with the strict statutory requirements for credit bidding because Lewis had overstated the amount of the debt. In so doing, Lewis precluded Dimas from exercising the equity of redemption prior to the foreclosure sale. The court granted partial summary adjudication in Dimas’ favor.
Ms. Raktin became increasingly impatient with the pace of the wrongful foreclosure litigation. She insisted that Berliner Cohen pursue theories that were applicable to the earlier foreclosure sale but not relevant to the current litigation. Rakitin retained personal counsel, Steven Finley, in 2003 to facilitate communications with special counsel, to assist with legal research, and to urge special counsel to file another motion for summary adjudication. Snyder paid Finley’s retainer on behalf of
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Rakitin. Rather than facilitate communication, however, Finley’s involvement appeared to exacerbate the difficulty of an already challenging engagement. It added an additional layer of communication, much of which constituted an exchange of ad hominem accusations. For unknown reasons, Dimas declined to have Finley substitute as counsel for Dimas at that time.
Berliner Cohen filed on Dimas’ behalf a second motion for summary adjudication in February 2004. After conducting two hearings on the motion and requesting the submission of supplemental briefs, the court found that Dimas’ tender on the date of the foreclosure sale was sufficient, that the trustee’s refusal of the tender was wrongful and effectively denied Dimas the right to exercise the equity of redemption, and that, as a matter of law, the trust deeds could not be merged because the intervening second deed of trust was held by a different party. The court granted partial summary adjudication on Dimas’ claim for relief based on redemption, set aside the foreclosure sale, restored title to the property
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to Dimas, but reserved ruling on damages and other issues. The court set the matter for trial in January 2005.
After title to the property was restored to Dimas, Lewis renewed his motion for relief from stay because the status quo had been restored, i.e., the trust deeds remained in default. The court consolidated the relief from stay proceeding with the adversary proceeding for purposes of trial. In January 2005, Dimas and Lewis participated in a judicially supervised settlement conference. Following a two-day settlement conference and extensive negotiations, the parties entered into a settlement of the adversary proceeding that was premised on the formation of a new limited liability company to develop the property. The concept was that the new limited liability company would procure financing that would pay off the compromised obligation to Lewis, and Lewis and Dimas would share the proceeds from the sale of the developed lots. Berliner Cohen prepared the settlement agreement. The settlement was never consummated, however, in part because Lewis could not obtain lender approval of a mutually acceptable project manager. In an effort to bridge the impasse, Lewis proposed to serve nominally as project manager but delegate his duties to Peter Rakitin. However, Ms. Rakitin refused, asserting that Lewis was enlisting Dimas’ participation in defrauding the bank. She urged Berliner Cohen to assert bank fraud against Lewis, but it declined because full disclosure of the LLC’s operations would be made to the bank.
Dimas and Lewis reconvened to discuss alternative proposals. After extensive negotiations over a period of time, the parties entered into a second settlement agreement. The second settlement provided that Lewis would relinquish his security interest in the property upon receipt of $3.1 million from the proceeds of a loan that Dimas would obtain. Lewis would receive an additional $900,000 from the proceeds of the sale of the lots, but he refused to subordinate to a new lender, necessitating a carve-out from the new lender’s security. Berliner Cohen expended considerable effort addressing the carve-out, which was a non-standard term. If Dimas failed to pay the initial installment by a date certain, Lewis would receive title to the property upon payment of $1.8 million to Dimas. The parties subsequently negotiated several extensions and a reduction in the payoff amount to Lewis. Nonetheless, Dimas failed to procure a loan that enabled it to timely perform under the second settlement agreement. Upon Dimas’ failure to timely perform, Lewis deposited $1.8 million in escrow. In
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accordance with the terms of the
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second settlement agreement, the $1.8 million was disbursed to Dimas in October 2005, and it conveyed title to the property to Lewis. On November 13, 2006, Dimas confirmed a chapter 11 plan that provides for the distribution of the proceeds of the second settlement agreement. It is anticipated that the estate will have a surplus that will be distributed to the members of Dimas after creditors are paid.
Throughout the settlement negotiations, there was substantial disagreement between Berliner Cohen and Dimas over how best to proceed. There was also internal disagreement among the members of Dimas. The attorney client relationship eroded over the course of this difficult representation. Berliner Cohen withdrew from representation as special counsel to the debtor by order dated January 4, 2006. Finley has substituted in as special counsel for Dimas to try the claims against MCED.
Berliner voluntarily reduced its fees by $50,000 in December 2003 in order to reduce the accounts receivable on its books. It has filed four fee applications that seek approval of compensation and expense reimbursement in the amounts set forth below.
Rakitin has lodged voluminous objections to Berliner Cohen’s fees, asserting generally that the fees are patently unreasonable and that the applicant has failed to demonstrate that its services were necessary or conferred a benefit on the estate.
The court has previously authorized that Berliner Cohen may be paid $496,789.40 in compensation and $22,454.38 in expenses reimbursement on an interim basis. To date, fees in the amount of $230,884.10 and costs in the amount of $11,892.77 remain outstanding.
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LEGAL DISCUSSION
Section 330 of the Bankruptcy Code provides that the court may award to a trustee, an examiner, or a professional person employed under §§ 327 or 1103 reasonable compensation for actual, necessary services rendered and reimbursement of actual, necessary expenses. In determining the amount of reasonable compensation, the court considers the nature, extent, and value of the professional’s services, taking into account all relevant factors, including whether the services were necessary to the administration of, or beneficial at the time at which the service was rendered toward the completion of, a case and whether the services were performed within a reasonable amount of time commensurate with the complexity, importance, and nature of the problem, issue, or task addressed. 11 U.S.C. § 330(a)(3). The applicant bears the burden of establishing entitlement to an award and demonstrating that the fees are reasonable. Hensley v.Eckerhart, 461 U.S. 424, 437 (1983).
When the applicant undertook this representation, there was no guarantee of success and a substantial risk of non-payment. This case involved complex real estate litigation invoking a difficult area of California non-judicial foreclosure law. This proceeding has presented particular challenges to the lawyers for the parties as well as for the court. Having presided over multiple hearings on a motion to expunge lis pendens, two dismissal motions, a motion for preliminary injunction to enjoin a sale of the property by Lewis, and
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two motions for summary adjudication in which special counsel was involved, it appears that, throughout this litigation, the applicant produced a quality work product, acted professionally, and vigorously advocated the interests of its client. The adversary proceeding progressed at an appropriate pace considering discovery and research conducted.
The time records reflect extensive discussions and consultations with Dimas’ managing member, Ms. Rakitin. After the disposition of each motion, the time records also reflect that special counsel worked with its client to develop the strategy going forward as the case evolved. At many times during the litigation, the situation was fluid and required a creative, resourceful approach in response. It appears that special counsel was quite candid in assessing the weaknesses, as well as the strengths, of Dimas’ case. The client and the estate benefitted from the expertise of special counsel. While the litigation was contentious and the engagement arduous, the applicant also had the benefit of a client representative that was well-informed, sophisticated, proactive, and engaged in developing the strategy
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for the litigation. At the same time, Dimas’ managing member was recalcitrant and very demanding. She micromanaged every aspect of the litigation and required an inordinate amount of attention. As evidenced by the objections to the applicant’s fee applications, where special counsel’s advice was not well received, Rakitin would assert that the communication was unnecessary, unsolicited, and not helpful. Complex litigation is costly, and this case is no exception. At this juncture, Dimas has consummated a settlement and confirmed a plan that will result in full payment of all allowed claims against the estate. All of this would not have been possible without the efforts of special counsel.
Having reviewed the applications, the objections by Rakitin, and the replies by the applicant, the court concludes that the applicant’s services have conferred a substantial benefit to the estate, and the applicant has sufficiently demonstrated so. The court will now address the more specific objections.
A. Compensation for Services That Are Inadequately Described IsDenied Without Prejudice
It is incumbent on the applicant to describe the services performed in sufficient detail to enable the court to make a meaningful assessment whether those services were actual, necessary, and beneficial to the estate and whether they were performed within a reasonable amount of time. Paragraph 13 of the Guidelines for Compensation and Expense Reimbursement of Professionals and Trustees for the United States Bankruptcy Court, Northern District of California (“Fee Guidelines”) provides that each time entry should identify, at a minimum, the person performing the services, the date, the services performed, and the subject matter involved. To enable the court to determine whether the services are compensable, the timekeeper should identify the other party to the conference, meeting, telephone call, or correspondence as well as the subject matter of the research, analysis, or other task. Where the time entry omits some critical element describing the services performed, the court is unable to determine whether the services were actual and necessary and whether the compensation sought is reasonable. Consequently, compensation for those deficient entries is not allowable. The time entries for which the descriptions are inadequate are set forth in Exhibit 1 attached hereto. The fees attributable to those entries total $7,305 and are disallowed without prejudice to resubmission with amplified detail.
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In general, time entries containing such a vague characterization as “attention to” are not compensable when they fail to sufficiently describe the task being performed because it is unclear
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precisely what task the timekeeper is doing. However, where the time entry specifically identifies the activity, such as those set forth in the table below, and the amount sought is reasonable, compensation for those services will be allowed.
B. Clerical Services Are Not Compensable
Services that are clerical in nature are not properly chargeable to the bankruptcy estate. They are not in the nature of professional services and must be absorbed by the applicant’s firm as an overhead expense. Fees for services that are purely clerical, ministerial, or administrative should be disallowed.Missouri v. Jenkins, 491 U.S. 274, 288 fn. 10 (1989); Sousa v.Miguel, 32 F.3d 1370, 1374 (9th Cir. 1994). Paragraph 18 of the Fee Guidelines expressly provides that time spent performing administrative tasks is not compensable.
Some of the services performed by the applicant, such as indexing, organizing, and copying
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documents, conducting PACER searches to locate an order or other pleading, uploading pleadings to CM-ECF, and filing pleadings, constitute administrative tasks that are purely clerical in nature. The time entries for these clerical services total $7,161 and are set forth in Exhibit 2 attached hereto. Compensation for these entries is disallowed.
C. Periodic Increases in Hourly Rates Are Permissible
Rakitin has objected to Berliner Cohen’s periodic increases in hourly rates. Where counsel bills the estate on an hourly basis, it is contemplated that there will be periodic upward adjustments of the hourly rates to keep pace with the market. Moreover, the fee agreement attached to the employment application expressly discloses the hourly rates “at this time” and
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states that the billing policies and procedures “are subject to change.” This objection is overruled.
D. Project Categories Exceeding $20,000 Are Permissible
Rakitin has objected to Berliner Cohen’s fee applications to the extent that the project categories exceed $20,000. Although the District’s Fee Guidelines provide that “[t]he maximum amount that should be included in a single category should generally be $20,000,” it provides further that “[t]his cap may be exceeded where further breakdown is impractical.” In the exercise of its discretion, the court will allow the applicant to bill in project categories that exceed $20,000. Any further breakdown is impractical and unnecessary. Having reviewed the applications, it appears that the project categories are appropriate, and that the applicant’s narratives are sufficiently detailed, given the sensitive nature of contested litigation, to provide an adequate understanding of the services rendered.
E. Management of Dimas’ Funds in the Applicant’s Trust AccountIs Compensable Unless Clerical
Rakitin has objected to the time expended by the applicant in connection with the administration of the settlement proceeds that were deposited into the applicant’s trust account. Based on a review of the relevant time entries, it appears that compensation for some of the services is allowable. Where the entries involve meetings or discussions with Rakitin or other estate professionals to ensure that Rakitin
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receives funds that were requested, the services are professional in nature and are compensable. Compensation for only those administrative services that are purely clerical in nature is disallowed. Those time entries total $337.50 and are set forth in the table below.
In addition, Rakitin objected to an entry, which is set forth below, in which the applicant combined compensable professional services in meeting with the client with non-compensable clerical services in connection with Dimas’ funds in the applicant’s trust account.
A total of $37.50 will be deducted from this entry for the services related purely to the administrative function. Consequently, a total of $375 will be disallowed for services related to estate assets in the applicant’s trust account.
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F. Compensation for Participation by Multiple Attorneys inHearings Is Disallowed Without Prejudice
Rakitin has objected to the time entries for which multiple attorneys participated in meetings, conferences, or hearings. Normally, it is appropriate for only one attorney from a firm to attend a meeting, conference, or hearing. Otherwise, unnecessary duplication of services results in excessive billings that are not compensable. § 330(a)(4). Where, however, the services involve meetings or conferences with the client, an inference arises that the client consented at the time, and in fact desired, the participation by more than one attorney. Many of the time entries to which Rakitin objects are meetings with Ms. Rakitin, the managing member of Dimas. There certainly are circumstances in which the contribution of more than one attorney is valuable to the client and to the estate, particularly in complex litigation. One example is the participation of two attorneys in the judicial settlement conference. If the client deemed it objectionable for more than one attorney to bill time for a particular meeting or conference, it is incumbent on the client to voice its objection at the time of the meeting or conference. There is no evidence in the record that Rakitin objected to the participation by more than one attorney in the meetings or conferences in which she was present. Not having done so at the time, the objections are now waived. Compensation for the participation of multiple professionals in meetings or conferences in which the client participated is allowed.
Where the client did not participate in the conference or hearing, however, the time is not compensable. The time entries for services in which more than one professional participated without the client are set forth in the table below. For each of the time entries, at least one other professional in the firm who has a lower billing rate participated in the same conference. Where the attorney with the lower billing rate billed fewer hours to the hearing than the attorney with the higher rate, only the number of hours during which there was an overlap in services is disallowed. Absent an explanation, compensation for participation by multiple attorneys is not allowable. The fees attributable to these services total $1,244 and are disallowed without prejudice to resubmission with an explanation of the necessity of the services.
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G. Compensation for Unauthorized Discussions with Accountant IsDisallowed
Rakitin objected to all the time entries related to the applicant’s communications with the accountant for the estate, Al Reuter, asserting that these discussions were unauthorized. However, Dimas retained the services of Berliner Cohen as special litigation counsel to assist it in resolving a complex real estate dispute. In pursuit of the broad objectives of the
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litigation, it was both reasonable and necessary for the applicant to engage in discussions with other estate professionals to gather information, to weigh alternative strategies, and to conduct an analysis, including a financial analysis. Absent an explicit instruction to refrain from communicating with Reuter, it was reasonable for the applicant to do so.
In a letter to Ms. Long of Berliner Cohen dated July 23, 2002, Ms. Rakitin instructed that counsel should not communicate with Mr. Reuter but instead should communicate directly to the client. As a result of that written directive, communications with Mr. Reuter made after the date of that letter, July 23, 2002, were expressly unauthorized by the client and are not compensable from the estate. Until the date of that letter, however, the services involving communications with Reuter were reasonable and compensable. After that date, unless the communication was at the direction of the client, the services were unauthorized. The time entries relating to communications with Reuter after the client had withdrawn authority to communicate directly are set forth in Exhibit 3 attached hereto. The fees incurred in this category total $3,047 and are disallowed.
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H. Fees for Non-Compensable Services That Are Clumped in SameEntry With Compensable Services Are Disallowed
Rakitin has objected to some of the applicant’s time entries on the basis that they are clumped. In seeking compensation, attorneys should not clump disparate services in a single time entry. See In re Dutta, 175 B.R. 41, 46-47 (B.A.P. 9th Cir. 1994). Clumping renders it difficult to determine whether each task was completed within a reasonable amount of time. In general, each discrete task should be separately described in its own time entry. See id.; Fee Guidelines, Paragraph 14. Based on a review of the time entries to which Rakitin objects on the basis of clumping, those entries do not appear, in fact, to involve unrelated, disparate services. Instead, the services appear generally to relate to the same subject matter of the litigation for which Berliner Cohen was employed to prosecute on behalf of Dimas. For example, the services in a single time entry appear to relate to the same hearing, motion, discovery, or other issue, and the descriptions are sufficient for purposes of judicial review. Compensation for the services is allowable.
Where services that are non-compensable are clumped with services that are otherwise compensable, compensation for the services that are non-compensable is disallowed. For example, a portion of the time entries set forth in the table below is disallowed on the basis that clerical services are included.
A portion of the time entries set forth in the table below is also disallowed on the basis that they include time billed for conferences with Al Reuter, the estate’s accountant, after the debtor’s managing member directed the applicant on July 23, 2002 not to communicate with Mr. Reuter.
A total of $916 is disallowed for services that were inappropriately clumped.
I. Compensation for Only Those Services That Exceed the Scopeof Employment Is Disallowed
Rakitin has objected to several categories of services on the basis that they exceed the scope of Berliner Cohen’s employment as special litigation counsel and invade the province of general bankruptcy counsel. The services include commenting on Dimas’ proposed plan of reorganization, objecting to Investment Grade Loans’ motion for relief from stay, discussions with Mark Bostick, counsel for unsecured creditor Suzanne Decker, Trustee of the bankruptcy estate of Adrienne Rakitin, and discussions with a prospective buyer and lender for the property. Rakitin also objects to time spent addressing the tax implications of the settlement agreement. The time entries for these services are set forth in Exhibit 4 attached hereto. In addition, Rakitin objects to the applicant’s services rendered in connection with the adversary proceeding filed against IGL, Lewis, MCED, and John Ho to set aside the foreclosure sale, Adversary No. 02-5453, with the Superior Court action against Snyder, and with the unlawful detainer action against Ms. Rakitin on the basis that these services exceed the scope of employment.
The scope of Berliner Cohen’s appointment was broad. It was appointed as special counsel to represent the debtor in and to handle all aspects of litigation involving breach of contract, fraud, and a complex real estate contract dispute. The property was in foreclosure proceedings at the time Dimas
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retained Berliner Cohen. It was also encumbered by a disputed fourth deed of trust and a lis pendens. The entire bankruptcy case has been driven by the litigation involving the property, which is the debtor’s sole asset. Resolution of the disputes with the holders of the junior encumbrances, MCED and Snyder, was the only way to refinance the senior encumbrances. In turn, resolution of the dispute with the senior secured creditor was the only circumstance under which the chapter 11 case would move forward. The real estate issues were at the center of the case and dictated the course of it. Berliner Cohen was charged with resolving the debtor’s claims with respect to the property. It did not act without authority. On the contrary, it appeared to have been closely and actively monitored by the managing member of the debtor. Moreover, general bankruptcy counsel is responsible for and capable of ensuring that there is no duplication of services when the assistance of special counsel is enlisted. The court will address each of the categories of services to which Rakitin has objected.
1. Plan of Reorganization
In this case, the terms of any proposed plan would be dictated by a disposition of the property or the proceeds of a settlement with respect to the property. The applicant’s services were essential to structuring the terms of a plan in this case. All of the applicant’s time entries concerning the plan involve conferences with the managing member of Dimas. An inference arises on that basis that the debtor was aware of, consented to, and requested the services. Any objection to the services on the basis that they were beyond the scope of employment is waived.
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2. Discussions with Unsecured Creditor
It appears from the time entries that the applicant was responding to inquiries initiated by Mark Bostick, counsel for unsecured creditor Suzanne Decker, Trustee of the bankruptcy estate of Adrienne Rakitin. It also appears that either Ms. Rakitin or general bankruptcy counsel was informed and aware of the communications with Bostick at the time they occurred. Given that this was a litigation driven case, special counsel was likely as aware, if not more, than general counsel of the status of the case and its impact on unsecured creditors. These services appear authorized and reasonable and are allowed.
3. Motion for Relief from Stay
As special litigation counsel specializing in real estate issues, assisting general counsel in preparing opposition to a motion for relief from stay is clearly within the scope of the applicant’s
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employment. The applicant prepared a portion of the points and authorities in opposition to the motion for relief from stay. It appears that its assistance was requested and coordinated with general counsel, and the stay proceeding was ultimately consolidated for trial with the adversary proceeding. Moreover, the applicant engaged in discussions with the managing member of the debtor concerning the stay motion, so she was aware of their involvement and had the opportunity to voice her opposition at that time but apparently declined to do so. The services appear to be within the scope of employment, and compensation therefor is allowed.
4. Discussions with Prospective Brokers, Buyers, and Lenders
Rakitin has objected to time entries for discussions with a group of physician investors interested in acquiring the property, Laroy Smith, and Edsel Williams concerning a proposed refinance of the debt on the property. Dimas engaged Berliner Cohen to assist it in resolving serious problems involving its interest in the property. Refinancing the debt and sale of the property were potentially viable avenues of resolving those problems. Moreover, the property was involved in contentious litigation. Any potential lender or purchaser would want to discuss the status of and prospects of prevailing in the litigation with the attorneys most knowledgeable as part of its due diligence. These services appear reasonably to be within the scope of the applicant’s appointment and are compensable.
5. Tax Implications of Settlement Agreement
Rakitin has objected to a communication by the applicant to other estate professionals and the members of Dimas concerning the potential tax implications of the settlement agreement with Lewis. Diligent counsel would highlight to the client’s attention any issue of concern that it identifies or that comes to its attention, even if outside its area of expertise and communicated with a disclaimer. While not specifically tax counsel, Berliner Cohen was well within its scope of employment to review, comment upon, and critically analyze the issues raised by the settlement agreement that resolved the litigation for which it served as primary counsel. This communication is within the applicant’s scope of employment, and compensation therefor is allowed.
6. Adversary Proceeding to Set Aside Foreclosure Sale
Rakitin has asserted that the applicant’s services related to the adversary proceeding against IGL, Lewis, MCED, and John Ho to set aside the foreclosure sale exceeded
West Page 584
the scope of employment. The
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services contemplated at the time of appointment included:
• To provide applicant with legal advice regarding any claims for contractual breach and fraud applicant may have against its creditors;
• To take all necessary steps to determine if there is liability on the part of applicant’s creditor for breach of contract and fraud;
• To investigate and institute litigation, through trial and judgment, and/or settle or compromise any such claim on behalf of applicant.
This scope of employment is very broad and is sufficiently broad to encompass the proceeding to set aside the foreclosure sale. This objection is not well taken and is overruled.
7. Superior Court Action by Snyder
Rakitin has asserted that the services related to defending the pre-petition lawsuit by Snyder in Santa Clara County Superior Court exceeded the scope of employment of special counsel. The employment application acknowledged that the debtor was at that time “involved with on going litigation involving breach of contract, fraud and a real estate contract dispute.” It specifically disclosed the action by Snyder pending in Santa Clara County Superior Court. This objection based on the scope of employment is not well taken and is overruled.
8. Unlawful Detainer Against Ms. Rakitin
Rakitin has objected to $3,321.50 in fees related to the unlawful detainer action that Lewis prosecuted against Ms. Rakitin after the foreclosure sale on the property. The unlawful detainer action resulted in Ms. Rakitin’s removal on Christmas eve 2002 from the property where she had been residing. Rakitin also objects to an additional $642 incurred in connection with Ms. Rakitin’s vacating the property after title was transferred to Lewis in October 2005. These services exceeded the scope of the applicant’s appointment as special counsel. Moreover, services that benefit only the principal of the debtor but not the debtor are not chargeable to the estate. In re OfficeProducts of America, Inc., 136 B.R. 964, 972 (Bankr. W.D. Tex. 1992). Dimas did not benefit from these services, so compensation for them in the amount of $3,963.50 is disallowed.
There is only a limited number of other time entries, which are set forth in the table below, that appear to exceed the scope of Berliner Cohen’s employment. These time entries total $456, and compensation for them is disallowed.
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West Page 585
J. Services That Are Unnecessary and Do Not Benefit the EstateAre Not Compensable
Rakitin has objected to several categories of services that it asserts were unnecessary and did not benefit the estate. To establish its entitlement to compensation, counsel must demonstrate that the services were necessary or reasonably likely to benefit the estate at the time they were rendered. In reMednet, 251 B.R. 103, 108 (B.A.P. 9th Cir. 2000). The necessity of the services is dictated in part by the reasonableness of the request in view of the governing law and the probability of success. See Unsecured Creditors’ Comm. v. Puget Sound, Plywood,Inc., 924 F.2d 955, 959 (9th Cir. 1991). The court will address the categories of services to which Rakitin has objected on the basis of the necessity of the services.
1. Amendment to Complaint
The applicant incurred fees to prepare an amended complaint that Rakitin asserts was never filed. These entries relate to a proposed amendment to the complaint against John Ho and MCED to void the fourth deed of trust in Adversary No. 02-6237. The amendment was never filed, and the proceeding was voluntarily dismissed. The time entries for these services are set forth in the table below.
Since the estate did not benefit from these services, the fees in the amount of $255 are disallowed.
2. Application for Default Judgment
Rakitin asserts that the applicant incurred fees to prepare an application for default judgment that was unnecessary because the adversary proceeding had already been dismissed. The applicant, on behalf of Dimas, voluntarily dismissed the adversary complaint against MCED and John Ho, Adversary No. 02-5237, on September 11, 2002. Thereafter, the applicant filed an application for default judgment against defendant John Ho. The time entries for these services are set forth in Exhibit 5 attached hereto. After the court declined to enter the default judgment, the applicant amended the dismissal to reflect that only MCED, and not Ho, was dismissed from the adversary proceeding. Ho answered the complaint on January 29, 2003. In any event, preparation of the application for default judgment against Ho did not benefit the estate first, because the adversary proceeding had been dismissed, and secondly, because Ho answered the complaint. Fees totaling $3,695 incurred in connection with these services are disallowed.
3. Participation in Fee Hearing for Education Purposes
Ms. Long of Berliner Cohen attended a fee hearing in the bankruptcy court on September 17, 2002, incurring $255 in fees. There was no hearing on fees in this case on that date. Rakitin contends that this participation was for the purpose of educating the attorney about the bankruptcy court’s fee procedures. Compensation for this time from the estate is disallowed.
West Page 586
4. Contribution to Santa Clara University Law Clinic
Rakitin has objected to the applicant’s services in connection with attempts to persuade her to comply with an agreement to make a contribution to the Law Clinic at Santa Clara University School of Law in exchange for Professor Mertons’ expert testimony in the adversary proceeding. The time entries are set forth in the table below. This activity is similar to counsel’s collection efforts, which are administrative in nature and not compensable from the estate. Fees in the amount of $455 incurred in this collection effort are disallowed.
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5. Contacting NBC Affiliate
The applicant incurred $105 in legal fees on December 22, 2003 to contact the local NBC affiliate concerning Ms. Rakitin’s plight in an effort to garner public support. Rakitin has objected to compensation for this time expended on the basis that the services were not authorized and were unnecessary. Ultimately, the contact did not result in any sympathy for Ms. Rakitin or any favorable press coverage on behalf of Dimas. These services did not result in any benefit to the estate, and compensation therefor is disallowed.
6. Motion to Seal Documents
Rakitin has objected to $686 in fees incurred to prepare a motion to seal from the public record the declarations filed by Rakitin in support of its objections to Berliner Cohen’s fee applications. Berliner Cohen asserted that the declarations were scurrilous and sullied the firm’s reputation. Rakitin objected to the motion, and the court denied the motion based on the overriding interest in public access to court records. The motion to seal documents did not benefit the estate, and compensation therefor is disallowed.
K. Analysis of Claims Against John Ho and Milpitas CountrysideEstates Is Compensable
Rakitin has objected to compensation for services related to analyzing the estate’s claims against John Ho and MCED. Rakitin asserts that the services were unnecessary because the adversary proceeding against Ho and MCED had already been dismissed. The time entries are set forth in the
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table below.
West Page 587
Although the complaint against MCED and Ho to void the fourth deed of trust in Adversary No. 02-5237 had been dismissed, MCED and Ho were also defendants in the adversary proceeding against Investment Grade Loans and Lewis, Adversary No. 02-5453, to set aside the foreclosure sale. To date, the claims against MCED and Ho remain unresolved, and the matter is set for trial in February 2007. The services described above are appropriate and are compensable.
Rakitin has also objected to services related to the applicant’s negotiations with MCED to remove the fourth deed of trust on the property on the basis that the stipulation had not been authorized by the debtor. The time entries for these services total $1,181.50 and are set forth in the table below. Removal of the MCED deed of trust was necessary to allow any refinance to go forward. In addition to the release of the fourth deed of trust, the stipulation provided that MCED could submit an escrow demand in the amount of $250,000. MCED now asserts a claim in the amount of $467,000, and Dimas disputes that MCED is entitled to a claim even in the amount of $250,000. Whether the applicant was authorized to enter into the stipulation with MCED is one of the factual issues in dispute for the trial set in February. This issue is reserved pending the outcome of that trial.
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L. Disclosure of Confidential Information is Proper
Rakitin has objected to Berliner Cohen’s disclosure of confidential attorney-client communications in support of its response to Rakitin’s objections to its fees. However, there is an exception to the privilege where the communication is “relevant
West Page 588
to an issue of breach, by the lawyer or by the client, of a duty arising out of the lawyer-client relationship.” Cal. Evid. Code § 958. The general rule is that counsel may reveal confidences where it is necessary to get paid or to defend charges of improper conduct. In reRindlisbacher, 225 B.R. 180, 183
(BAP 9th Cir. 1998) (citingUnited States v. Ballard, 779 F.2d 287, 292 (5th Cir. 1986),cert. denied, 475 U.S. 1109 (1986); Inre Featherworks Corp., 25 B.R. 634, 645 (Bankr. E.D.N.Y. 1982), aff’d on othergrounds, 36 B.R. 460 (E.D.N.Y. 1984)). Counsel is released from the duty of non-disclosure where necessary to protect counsel’s own rights, such as when counsel’s integrity, good faith, authority or performance of duties is questioned. Rindlisbacher, 225 B.R. at 183. The client also waives the privilege when it discloses the information, as Rakitin has done here. Id. at 184. The court concludes that the disclosure by Berliner Cohen of confidential client communications in this context is proper.
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M. There Is No Disqualifying Conflict
Rakitin asserts that Berliner Cohen had a conflict of interest and is not entitled to payment of any fees incurred after April 19, 2005, which is over $150,000. During the period of time that Ms. Rakitin was urging Berliner Cohen to assert bank fraud charges against Lewis in connection with the first settlement agreement, Berliner Cohen threatened to withdraw from representation. The bases that Berliner Cohen cited for withdrawal were mandatory withdrawal, because the client was asserting a position without probable cause, and permissive withdrawal, because the client insisted on presenting a claim not warranted by existing law or it was unreasonably difficult to carry out the employment effectively. Berliner Cohen did not withdraw at that time because Ms. Rakitin indicated that Dimas would oppose withdrawal, and the concerns were resolved when Lewis and Dimas resumed negotiations toward a new settlement.
This argument is a red herring. The cases on which Rakitin relies, In re McGregory, 340 B.R. 915 (B.A.P. 8th Cir. 2006), andIshmael v. Millington, 241 Cal. App. 2d 520 (Cal.Ct.App. (3rd
Dist.) 1966), are inapposite to these facts. They deal with the classic case of dual representation of conflicting interests. Rakitin’s reliance on Rule 3-310 of the Rules of Professional Conduct of the State Bar of California is misplaced in that the rule also addresses the representation of interests adverse to the client. Berliner Cohen’s disagreement with its client over the course to proceed does not rise to the level of a disqualifying conflict of interest. See People v. Hart, 20 Cal. 4th 546, 604 (1999) (disagreement over reasonable tactical decision is not an irreconcilable conflict), cert. denied, 528 U.S. 1085 (2000); People v. Memro, 11 Cal. 4th 786, 858 (1995) (same), cert. denied, 519 U.S. 834 (1996). Moreover, the disagreement was promptly resolved when Dimas and Lewis returned to the bargaining table. The argument that there is a conflict of interest warranting disgorgement is a trumped up allegation to serve as an expedient tactic to avoid paying Berliner Cohen a substantial portion of the fees earned. There is no disqualifying conflict of interest.
N. Interim Payment from Post-Petition Retainer Was Authorized
Rakitin has objected to Berliner Cohen’s drawdown on a post-petition retainer of $38,000 as an interim payment on Berliner Cohen’s first interim fee application. The basis of the objection is that the
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court’s
West Page 589
order awarding the fees expressly authorized payment “from its post-petition income,” but the retainer was paid from pre-petition escrow funds that were returned to the debtor. The first interim application specifically requested approval of the post-petition retainer and authority to pay its fees from that retainer. The court issued an Order Approving Interim Application of Special Counsel for Interim Compensation on March 14, 2003. It was clearly understood by all the parties that there is no post-petition income in this case. While there is some confusion resulting from the language in the order, it was clearly the court’s intention to authorize interim payment of fees from the post-petition retainer. This objection is overruled.
O. Services Allegedly Unauthorized Are Reasonable
Rakitin has objected to several categories of services on the basis that Dimas did not authorize the services. Generally, the categories are communications with potential lenders to be secured by the property, with other members of Dimas besides the managing member, and with a potential mediator for the wrongful foreclosure adversary proceeding. The time records for these services are set forth in Exhibit 6 attached hereto. However, the services need not be expressly authorized to be reasonable and within the scope of employment. As previously discussed, it is prudent and within the scope of employment for the applicant to explore the debtor’s alternatives with prospective lenders, namely Edsel Williams and Laroy Smith. The applicant also had a duty on the debtor’s behalf to provide information and to respond to due diligence inquiries to facilitate a refinance that would solve the debtor’s problem.
With respect to the applicant’s communications with Dimas member Peter Rakitin, the client is the debtor, not Adrienne Rakitin. While Adrienne Rakitin may be the managing member of Dimas, counsel owes its professional duties to the entity. Fulfilment of those duties may necessitate communications with the other non-managing members of the LLC, particularly if there is difficulty or a breakdown in communication with the entity’s designated representative, in this case, its managing member. These communications appear reasonable and are compensable.
Finally, with respect to the applicant’s communications with a prospective mediator, consensual settlement is favored, and mandatory settlement conferences are required in the Superior Court. Although Dimas had not consented to mediation, it was reasonable for counsel to explore the option.
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Services related to that pursuit are compensable.
P. Fees for Participation in Settlement Conference andPreparation of Settlement Agreements Are Reasonable andCompensable
Rakitin has objected to compensation for the applicant’s services to participate in the judicial settlement conference and to prepare the first and the second settlement agreements. The entries for these services are set forth in Exhibits A-9 and A-17 to the second interim application, Exhibits A-1 and A-3 to the third interim application, and more specifically in Exhibit 7 attached hereto. The bases for the objection are that the services were unnecessary and duplicative because two attorneys in the law firm participated in the conference and the drafting of the agreements, and the fees are excessive.
Rakitin contends that the recitals that the applicant drafted were unnecessary because
West Page 590
they ultimately were removed from the first settlement agreement. However, a substantial amount of time was devoted to incorporating Ms. Rakitin’s proposed recitals to the settlement agreement before the mutual decision was made to omit them altogether. Preparation of the second settlement agreement was made difficult by the carve-out provision and the refusal of Lewis or the new lender to subordinate to the other. The settlement involved not only complex real estate issues but also contentious discord among the parties. Both attorneys were present in the settlement conference, and Rakitin was aware of their participation. Many of the time entries to which Rakitin objected involved conferences with Ms. Rakitin. The first settlement was tenuous, and many of the details were not addressed in the settlement conference, necessitating substantial negotiations during the drafting phase. Although the original settlement was never consummated, it did pave the path for the second settlement that was ultimately reached and that resolved the litigation. Resolution of the litigation fixed the claim of the senior secured lender, dictated the course of the case, and enabled the debtor to confirm a plan. The voluminous declarations filed by the parties demonstrate the complexity and the difficulty of the issues addressed in both the first and the second settlements. The services relating to attendance at the settlement conference and preparation of the settlement agreements appear necessary and reasonable under the circumstances, and the compensation sought therefor is allowed.
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Q. Services Related to Termination of Berliner’s Employment andTurnover of Files Are Not Compensable
Rakitin has objected to the applicant’s fees incurred in connection with the termination of its employment by the debtor and addressing related issues, including the turnover of client files. This objection is well taken because the estate derived no benefit from the services. Attorney efforts related to cultivating, negotiating the terms of, nurturing, and ultimately terminating the attorney-client relationship do not constitute client services. Rather, they are administrative functions the cost of which should be borne by the firm as overhead. The time entries for these services total $7,433.50 and are set forth in Exhibit 8 attached hereto. The fees related to the termination of Berliner’s employment and the transition of client files are disallowed.
R. Post-Termination Services Are Not Compensable
Rakitin has objected to those fees incurred after the effective date of termination of employment. The applicant was formally relieved of its duties as special counsel to the estate by order effective January 4, 2006. Although there were earlier discussions concerning withdrawal from representation by Berliner Cohen, Dimas and Berliner Cohen apparently were unable to agree to the terms of a stipulation for withdrawal. Although Berliner Cohen expended $1,221.50 in fees to prepare a motion for withdrawal, those fees are disallowed because the motion was not presented to the court for consideration. Instead, the court granted a withdrawal motion on behalf of Berliner Cohen that was prepared by general bankruptcy counsel. Except for fees incurred in preparing the final fee application and the responses to the objections to the applicant’s fee, those fees that were incurred after the effective date of withdrawal, January 4, 2006, are disallowed. The time entries for these services, which total $5,778, are set for in Exhibit 9 attached hereto.
West Page 591
S. Preparation of Fee Application and Responding to Objectionto Fee Application Are Compensable Services, But Editing TimeRecords Is Not Compensable
Rakitin has objected to some of the applicant’s fees incurred in the preparation of its fee applications and in responding to the objections to the applications. In particular, Rakitin asserts that
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compensation for the time entries set forth in the table below, which relate to the applicant’s responses to Rakitin’s objections to its fees, should be disallowed.
The applicant is entitled to receive compensation for the time expended in the preparation of fee applications because attorneys are statutorily obligated to submit a detailed accounting of all services provided to the estate. In re Smith, 317 F.3d 918, 927-28 (9th Cir. 2002), cert. denied, 538 U.S. 1032 (2003); In reNuCorp Energy, Inc., 764 F.3d 655, 659 (9th Cir. 1985). This includes time expended in connection with attendance at the hearings on the fee applications since an actual hearing is required in this district. Fed.R.Bankr.P. 2002; B.L.R. 9014-1. However, the time the applicant expended to review and edit its time records and to manually project bill is not compensable from the estate. Where
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the applicant’s time entries require revision to conform to the court’s standards for submitting fee applications, the editing services are clerical functions that are not compensable, even if they are performed by a professional.In Re CF I Fabricators of Utah, Inc., 131 B.R. 474, 85 (D. Utah 1991). The applicant incurred $19,801 in fees to review and edit its time records and to manually divide its time records into project billing categories in order to comply with the court’s requirements. Those time entries are set forth in Exhibit 10 attached hereto, and compensation
West Page 592
for these entries is disallowed. The balance of the fees incurred in connection with the preparation of the fee applications is reasonable and is allowed.
Applicant’s time devoted to responding to Rakitin’s objections to its fees is also compensable. Although the Ninth Circuit has rejected a per se rule allowing compensation for fees incurred in litigating a fee application, In re Riverside-Linden InvestmentCo., 945 F.2d 320, 323 (9th Cir. 1991), such compensation is allowable if the applicant demonstrates that the fees are otherwise reasonable and necessary. In re Smith, 317 F.3d at 928. Here, the fees incurred in connection with responding to the fee objections also appear reasonable and are allowable. These services are necessary to the administration of the estate because they assist the court and the chapter 11 debtor in fixing the amount of administrative claims against the estate.
T. Compensation for Opposition to Motion to Expunge Lis Pendensis Allowed
Rakitin has objected to $21,228.50 in fees related to services in connection with opposing Lewis’ motion to expunge the lis pendens that Dimas recorded after the foreclosure sale. The basis for Rakitin’s objection is that Dimas did not prevail on the motion. However, counsel is not a guarantor of success in the case, and the reasonableness of compensation for services provided is not tied to whether the debtor prevailed. In reInterstate Dept. Stores, Inc., 128 B.R. 703, 706 (Bankr. N.D.N.Y. 1991). Here, the consequence of expungement was that Lewis would be able to sell the property, and Dimas would be unable to restore title even if it were able to set aside the foreclosure sale. The ruling on Lewis’ motion to expunge the lis pendens was based on the discovery conducted as of the time of the hearing on the motion. As the facts were developed, the court subsequently issued a preliminary injunction that precluded Lewis from selling the property before a disposition on the merits. Under the
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circumstances, the applicant’s efforts to oppose the expungement of the lis pendens were appropriate, reasonable, and compensable.
U. Trial Preparation Services Are Reasonable and Compensable
Rakitin has objected to $37,643.50 in legal fees incurred by the applicant in connection with preparation for the trial in the wrongful foreclosure action, Dimas v. Investment Grade Loans, etal., Adversary No. 02-5453, which was scheduled for January 2005. Although the parties had a judicial settlement conference scheduled for January 2005, the applicant incurred these fees between Fall 2004 and January 2005, at which time the parties reached the first settlement agreement. These services related to trial preparation in complex real estate litigation involving the debtor’s sole asset to which it had lost title. The stakes for the estate were very high. Settlement prospects are speculative by their nature. Arguably, it would have been malpractice for counsel not to prepare for an imminent trial date in a complex lawsuit. Except as addressed elsewhere herein, the fees related to trial preparation in the wrongful foreclosure action are reasonable and are allowed.
V. Communications With Rakitin’s Counsel Are Compensable
Rakitin has objected to $9,406.50 in fees incurred by the applicant in communications with Steve Finley, counsel for Rakitin, on the basis that the services were unnecessary. Having reviewed the time entries for those services, which are set forth in Exhibit A-2 to the applicant’s third interim application and Exhibit A-6
West Page 593
to the fourth and final fee application, it appears that those services were reasonable and made necessary by the demands of the client’s representative and managing member of Dimas. Except as otherwise provided in this decision, those fees are allowed as requested.
W. Fees That Rakitin Asserts Are Excessive Appear Reasonable
1. Adversary Proceeding to Void Fourth Deed of Trust(Adv. No. 02-5237, Dimas, LLC v. John Ho, et al.)
Raktin has objected to the entire first interim application, asserting that nearly $80,000 is excessive for an adversary proceeding that was dismissed. The applicant conducted discovery and an
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analysis of the debtor’s claims against MCED. In addition to prosecution of the adversary against MCED, the services rendered during the first application period included defense of the suit by Snyder, pursuit of a refinance that would have prevented the foreclosure sale by IGL, and analysis of the potential claims against IGL. The fees incurred in connection with the adversary proceeding against MCED do not appear excessive, and they are allowed.
2. Adversary Proceeding for Wrongful Foreclosure(Adv. No. 02-5453, Dimas LLC v Investment Grade Loans, et al.)
Raktin has objected to approximately $195,000 in fees incurred in the wrongful foreclosure action during the more than two year period covered by the second interim application. The objection is directed in particular to the fees related to the preparation of the complaint, discovery, preparation of the first motion for summary adjudication, and preparation of the second motion for summary adjudication. Although Rakitin asserts that nearly $12,000 in fees for the preparation of the complaint is excessive, the litigation involved complex real estate issues and multiple claims for relief. Because of the requirements of Fed.R.Civ.P. 11 that claims asserted in a pleading are warranted by existing law, counsel diligently conducted a thorough factual investigation and conducted substantial legal research before filing the complaint. The nearly $19,000 in fees incurred in conducting discovery yielded the favorable results on summary adjudication.
Rakitin has asserted that the work necessary for the second motion for summary adjudication was substantially completed during the preparation of the first motion and that the second motion did not result in any benefit to the estate. On the contrary, the issues addressed in the second motion for summary adjudication were expressly reserved upon the court’s ruling on the first motion for summary adjudication. Two hearings were held on the second motion to afford the parties additional time to develop the facts in support of the motion. The services were not duplicative and most certainly resulted in a significant benefit to the estate. The court set aside the foreclosure sale by Lewis and restored title to the property to the debtor. Absent this result, Dimas would not have been situated in as favorable a position for settlement negotiations with Lewis. The wrongful foreclosure proceeding was complex and contentious. The substantial services that the applicant rendered in the proceeding were of a high quality and benefitted the estate significantly. The associated fees are reasonable and are allowed.
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3. Multiple Extensions to Perform Under Settlement
The settlement agreement set a deadline within which Dimas must perform under its terms by making payment to
West Page 594
Lewis. Rakitin has objected to approximately $40,000 in fees incurred by the applicant to seek Lewis’ consent to several extensions of time for Dimas to perform and to obtain court approval of the stipulations. These services included an amendment to the funding motion. The extensions of the time for performance were critical to the debtor. The consequence of the failure to timely perform was that Dimas would be required to forfeit title to the property to Lewis. Berliner Cohen had serious concerns about the structure of the settlement and Dimas’ ability to perform. Consequently, it diligently communicated those concerns. Many of the time entries in this category are for discussions with Ms. Rakitin and with the broker to facilitate the funding. These services were reasonable, necessary, and compensable.
X. Entries That Are Allegedly Duplicative Appear Reasonable
Rakitin has objected to numerous time entries by the applicant, which are set forth in Exhibit 11 attached hereto, asserting that the services described are duplicative of services performed by another professional or by the same professional who is reporting the entry. Based on a review of the time entries, it appears that these services are, in fact, not duplicative. Rather, they appear to reflect an appropriate delegation of responsibilities among professionals with varying hourly rates as well as oversight of more junior attorneys by more senior ones. The services appear to be reasonable and appropriate, and compensation therefor is allowed.
Y. Entries That Are Allegedly Overstated Are Reserved
Rakitin has objected to numerous time entries by the applicant, asserting that the time reported has been overstated. These time entries are set forth in Exhibit W to the Declaration of Steven C. Finley in Support of Objection to Special Counsel’s Third Application for Interim Compensation and Reimbursement of Expenses, Exhibit A and Amended Exhibit C to the Declaration of Steven C. Finley in Support of Supplemental Objection to Special Counsel’s Second and Third Applications for Interim Compensation and Reimbursement of Expenses, and Exhibit 12 attached hereto. In some instances,
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Rakitin asserts that a conference or a meeting that has been reported did not take place. In support of the argument, Rakitin asserts that the applicant’s time entries do not conform to the personal records of Adrienne Rakitin. Rakitin has introduced into evidence her cell phone records and her calendar. The applicant bears the burden of proof as to the reasonableness of its fees.Hensley v. Eckerhart, 461 U.S. at 437. Because there is a factual dispute, the court reserves ruling as to the allowance of these fees totaling $76,132.50 pending an evidentiary hearing thereon.
Z. Certain Expenses Are Disallowed
1. Word Processing Charges
Berliner Cohen has billed the estate $13,850.54 for word processing charges. This expense item constitutes an overhead expense that is not chargeable to the estate, and paragraph 22 of the Fee Guidelines provides that it is not reimbursable. Reimbursement for word processing charges is disallowed.
2. Copying Expense for File Turnover Upon Termination ofEmployment
In its fourth and final fee application, Berliner Cohen requests reimbursement of copying expenses of $3,981. The time period covered by this application coincided with the termination of Berliner
West Page 595
Cohen’s employment by the estate and the turnover of client files. The original files are the property of the client, so the expense associated with the decision to retain copies of the files should be borne by the law firm. Because there is no breakdown of the copy expenses, it is presumed that all the charges incurred during this period were for the purpose of file duplication. Reimbursement of these copy charges is disallowed without prejudice to counsel providing a more detailed accounting of the charges. All other expenses are allowed as prayed.
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CONCLUSION
Based of the foregoing discussion, and good cause appearing, IT IS HEREBY ORDERED that:
1. Compensation of amount of $586,207 and expense reimbursement in the amount of $16,515.61 are approved and allowed on a final basis;
2. Berliner Cohen is authorized to withdraw and disburse the unpaid portion of this award of compensation and expense reimbursement in the total amount of $83,478.83 from funds on deposit by Dimas LLC in Berliner Cohen’s trust account.
3. A telephonic case management conference will be held on February 6, 2007 at 10:30 a.m. to discuss scheduling, time estimates, witnesses, and other issues in connection the evidentiary hearing on the reserved issues related to the time entries that Rakitin has asserted are overstated.
EXHIBIT 1
EXHIBIT 2
EXHIBIT 3
EXHIBIT 4
EXHIBIT 5
EXHIBIT 6
EXHIBIT 7
EXHIBIT 8
EXHIBIT 9
EXHIBIT 10
EXHIBIT 11
EXHIBIT 12