No. 97-40395 TSUnited States Bankruptcy Court, N.D. California
February 16, 1999
MEMORANDUM OF DECISION RE FEE APPLICATION
LESLIE J. TCHAIKOVSKY, United States Bankruptcy Judge.
This case was commenced on January 15, 1997 by the filing of a voluntary petition seeking relief under chapter 11 of the Bankruptcy Code. The debtor is a doctor’s professional corporation. The petition indicated that the debtor was represented by Willie E. Phillips (“Phillips”).
The file reflects that, from the onset of the case, Phillips neglected to follow the required procedures for prosecuting a chapter 11 case. The petition was filed as a “skeleton” petition: i.e., only the petition and a mailing matrix were filed. This is permitted. However, additional documents of critical importance: i.e., the schedules of assets and liabilities and statement of financial affairs (referred to collectively hereinafter as the “Schedules”), among other things, must be filed within 15 days thereafter. In addition, the attorney for the debtor must file a disclosure statement regarding fees received and promised within 15 days of filing the petition and must promptly apply for approval of his employment. None of this was done within the required time.
On February 8, 1997, the Court issued an order notifying the debtor that its case would be dismissed in 15 days unless the Schedules were filed (or a party in interest filed an objection to the dismissal and requested a hearing). On February 14, 1997, the Office of the United States Trustee (the “UST”) filed and gave notice of a motion to convert or dismiss the bankruptcy case and for review of Phillips’ attorneys’ fees.
The motion was based in part on the debtor’s failure to files the Schedules. In addition, the motion stated that, although the debtor had attended the intial debtor interview with the UST, he had failed to provide the information requested by the UST. The motion also noted that Phillips had failed to apply for approval of his employment and that a corporation may not appear in court except through counsel. Given Phillips’ failure to obtain court approval for his employment, moreover, the UST contended that any fees received before the filing of the case were excessive and should be returned to the debtor.
The hearing on the motion was noticed for March 17, 1997. On March 12, 1997, Phillips filed (1) an objection to the conversion or dismissal of the case, (2) an employment application, and (3) the Schedules. The employment application represented that Phillips had received a pre-petition retainer of $5,000 and that no further fees would be paid without court order. The UST filed an objection to the employment application, noting a variety of technical deficiencies in the case. In addition, given those deficiencies, the UST questioned Phillips’ competence to serve as chapter 11 counsel. Finally, the UST objected to Phillips’ request that he be appointed nunc pro tunc to the commencement date of the case without making the required showing, citing In re Atkins, 69 F.3d 970 (9th Cir. 1995).
The file notes and resulting order reflect that, at the close of the hearing, the Court required the remaining documents to be supplied to the UST by the close of business on April 10, 1997. The order also required the debtor to file monthly operating reports by the twentieth day of the succeeding month and to timely pay the UST’ quarterly fees. The hearing on the UST’s motion to convert or dismiss was continued to April 14, 1997. (The employment application was not set for hearing, and there are no file notes indicating whether the application was ever considered by the Court. The file does not contain any order with regard to the application.)
The notes from the April 14, 1997 hearing indicate that, by the time of the hearing, no monthly operating reports had yet been filed. No other deficiencies were noted. The notes indicated that the Court gave the debtor until the end of the week to file the monthly operating reports and continued the hearing on the UST’s motion to May 19, 1997.
On May 2, 1997, the UST filed a new motion to convert or dismiss the case or, in the alternative, to appoint an examiner. The motion was set for hearing on May 19, 1997. The motion represented that, among other things, the debtor had not provided the information required by one of the questions in the Schedules, had not provided complete monthly operating reports, and had provided financial information that appeared incorrect by comparison with other information provided by the debtor. On May 14, 1997, Phillips filed an opposition to the motion, agreeing to provide the missing information and asking that an examiner not be appointed. The notes from the May 19, 1997 hearing indicate that, at the hearing, Philips asked the Court to approve the employment of an accountant for the debtor and that the hearing on the UST’s motion was continued to June 2, 1997. The file reflects that, at the conclusion of the hearing, the Court signed another order requiring the debtor to comply with various responsibilities relating to the case and continuing the hearing to October 6, 1997. This order also set a September 2, 1997 deadline for the debtor to file a plan of reorganization. On September 2, 1997, Phillips filed an ex parte motion and obtained an order extending this deadline to September 8, 1997.
A plan and disclosure statement were filed on September 9, 1997. On September 12, 1997, the Court issued an order denying conditional approval of the disclosure statement with a detailed statement of the deficiencies in the plan and disclosure statement. The order gave the debtor 30 days — until October 12, 1997 — to amend the documents. The most serious deficiency reflected by the order was that the plan payments only totalled $300,000 whereas the claims appeared to total $356,000 and moreover required the payment of interest over the period of the plan.
In the meantime, the Court held a continued hearing on the UST’s motion to convert or dismiss on October 6, 1997. The file notes from that hearing reflect that the Court noted that it had given Phillips until October 12, 1997 to amend the plan and disclosure statement. As a consequence, the hearing on the UST’s motion was continued to November 17, 1997.
An amended plan and disclosure statement were filed on October 16, 1997. On October 26, 1997, the Court denied conditional approval of this disclosure statement too. The statement of deficiencies noted that the classification scheme was still “hopelessly confused and flawed” and that the discussion of the feasibility was inadequate. The Court gave the debtor until November 11, 1997 to amend the plan and disclosure statement.
On November 10, 1997, the UST filed a declaration in support of its continued motion to convert or dismiss the case. The declaration represented that the debtor was delinquent in paying two quarterly fees to the UST. On November 14, 1997, Phillips requested an extension of time to February 25, 1998 to file the amended documents due to the relocation of the debtor’s business. At the conclusion of the November 17, 1997 hearing, the Court took Phillips’ application for an extension under submission. The Court continued the hearing on the UST’s motion to convert or dismiss to December 15, 1997 with the proviso that, if the Court granted the motion for an extension, it would continue the hearing to a later date.
The UST appeared at the continued heraing on December 15, 1997 although the debtor did not. At the hearing, the Court noted that the motion for an extension had been granted. As a consequence, the Court continued the hearing on the UST’s motion to convert or dismiss to March 16, 1998. On March 2, 1998, Tipkins Hood filed a declaration on behalf of the debtor professional corporation, withdrawing its objection to conversion of the case to chapter 7. On March 16, 1998, the Court issued an order converting the case.
On October 14, 1998, the UST filed a motion for review of Phillips’ fees. The motion stated that Phillips had received a $5,000 retainer pre-petition, had failed to obtain a retention order, and had failed to file a fee application justifying his retention of the pre-petition retainer. The UST noted that, although the case had now been determined to be a “no asset” case, so that Phillips would not be entitled to any further fees, if the retainer were determined to be excessive in light of the services provided, the fees Phillips would be required to repay the estate would constitute an asset.
The UST’s motion was set for hearing on November 19, 1998. Phillips appeared at the hearing and requested some time to prepare the application. The Court granted the request and set a hearing on the fee application for February 4, 1999. The fee application was required to be filed by January 14, 1999. An order issued on January 5, 1999 stated that Phillips was ordered to disgorge $5,000 to the chapter 7 trustee unless the fee application was filed and a hearing on the application noticed by January 14, 1999.
The fee application (the “Fee Application”) was filed on a timely basis. The Fee Application sought approval of fees totalling $19,140, leaving a balance due after crediting the retainer of $14,140. The Fee Application indicated that, although costs had been incurred and paid by Phillips, no request was being made for reimbursement of those costs. The UST objected to the Fee Application on the grounds that: (1) Phillips had never obtained a retention order and (2) that he did not provide services of any value to the estate. The UST asked that the Court not only deny approval of Phillips’ fees but also that the Court order Phillips to disgorge his $5,000 pre-petition retainer.
At the hearing, Phillips proffered to the Court a copy of a transmittal memorandum dated April 8, 1997, purporting to send a proposed form of retention order to the Court. A copy of the proposed form of order is attached to the memorandum. Phillips represented at the hearing that it was his practice to simply pick up a conformed copy of the order in the Court’s will call box and apparently did not note the absence of such an order in this case.
DISCUSSION A. APPLICABLE LAW
Section 330 of the Bankruptcy Code requires an attorney representing a debtor-in-possession to obtain court approval for any fees to be paid or costs to be reimbursed from the bankruptcy estate post-petition. Section 330 also sets forth the standards to be applied in determining whether and to what extent the services provided justify the award of the fees requested. Controlling law in this Circuit requires that an order approving the employment of counsel be obtained in order for such fees to be awarded. In reWeibel, 176 B.R. 209 (Bankr. 9th Cir. 1994).
Section 329(a) of the Bankruptcy Code requires any attorney representing the debtor, whether or not the attorney files a request for compensation, to file a statement disclosing any payments made within one year of the filing of the bankruptcy case. Section 329(b) provides that the Court may order the return of any such sums to the estate if it finds that the funds received exceeded the value of the services provided. Rule 2017(a) implements this provision.
The Court is not aware of any controlling authority on whether the lack of a retention order (where one is required) compels the disgorgement of any fees received pre-petition. (Section 329 applies to attorneys representing all debtors. When a debtor is not a debtor-in-possession, no retention order is necessary.) However, the Court concludes that no other approach would make sense. Otherwise, professionals could circumvent the rules requiring employment of only disinterested professionals and requiring the submission of fee applications by obtaining a sufficiently large retainer to carry them through the case. The Court also concludes that the standards set forth in Section 330 should be applied to evaluate the reasonableness of fees received pre-petition.
When an attorney representing a trustee, debtor-in-possession, or court appointed committee does not obtain a retention order before rendering services, the attorney may obtain an order approving his employment on a nunc pro tunc basis only under extraordinary circumstances. There are two required showings: (1) a satisfactory explanation for the failure to obtain a retention order before rendering the service and (2) that the services benefitted the estate. The Court may but need not consider other factors. In addition, the attorney must qualify for employment: i.e., be disinterested. In re Atkins, 69 F.3d at 975-76.
There is no contention in this case that Phillips did not qualify for employment by the debtor at the time the application was filed. (Since then, for reasons unrelated to this case, he has been disqualified for serving as counsel for any bankruptcy fiduciary by the judges of this division.) The value of his services will be considered below. The only remaining question is whether there is a satisfactory explanation for Phillips’ failure to obtain prompt approval of his employment.
In considering this question, the Court observes that Phillips is not requesting approval of his employment nunc pro tunc to the commencement of this case. No explanation has been offered for his failure to file an employment application until approximately two months after the petition was filed. The only question is whether his employment should be approved nunc pro tunc to the date of the application. Therefore, the relevant explanation is why Phillips did not obtain a retention order promptly after filing his application and negotiating a form of the order with the UST, rather than, as in most cases of this sort, why he failed to file an application at all. As noted above, at the hearing on the Fee Application, Phillips submitted some evidence to establish that he sent a proposed form of order to the Court on April 8, 1997. It is possible that, despite the preparation of the transmittal memorandum, the memo and order were never sent or were improperly addressed so that they never arrived at the court. It is also possible that the memo and order were received by the Court and were inadvertently discarded or misfiled. It would be impossible to determine which at this point in time.
At a minimum, Phillips was negligent in failing to note the nonreceipt of a conformed copy of the retention order and in failing to take steps to remedy that defect. However, requiring Phillips to disgorge his $5,000 retainer for that sole reason seems unduly harsh.
Since Phillips is no longer qualified to be employed by an estate fiduciary, such an order could not be justified as a deterrent for future cases. Therefore, the Court will overlook the absence of a retention order and will view the case as if a retention order had been signed on or about April 8, 1997. Moreover, the Court will relate the order back to the date of the application — i.e., March 12, 1997.
The remaining question that the Court must address is whether the $5,000 retainer received by Phillips pre-petition is excessive in view of the services provided. The Court concludes that it is not.
The Fee Application breaks down the time spent into seven categories and summarizes the time spent and fees requested for each category as follows:
(1) Preparation of Chapter 11 Schedules and 341 Meeting 15.7 $2,747.50
(2) Preparation Approval of Application To Employ Counsel 3.0 545.00
(2) Preparation Approval of Application To Employ Counsel 3.0 545.00
(3) Preparation Approval of Application 4.1 717.50 To Employ Accountant
(4) Preparation of Disclosure Statement and Plan 34.6 6,055.00
(5) Preparation of First Amended Disclosure Statement Plan 11.6 2,030.00
(6) Responses to U.S. Trustee’s Motions 12.0 2,100.00
(7) Case Administration 23,8 4,165.00
Preliminarily, the Court notes that Phillips’ requested hourly rate is $175. Given Phillips’ experience in chapter 11 cases, the Court finds this rate reasonable. The rate is modest when compared to the rate charged by other chapter 11 practitioners, even those with little experience or skill.
(1) Preparation of Chapter 11 Schedules and 341 Meeting Phillips represented that he spent 15.7 hours, representing $2,747.50 in fees, preparing the chapter 11 schedules and attending the 341 meeting. The Court has reviewed the description of the services provided in this category. The Court observes that 3.5 hours of these services, for $612.50 in fees, were performed after the bankruptcy case was filed and before the employment application was filed — that is, after January 15, 1997 and before March 12, 1997. The Court will disallow those fees. The remainder of the time entries appear necessary in nature and reasonable in amount. Therefore, the balance of the fees, in the amount of $2,135, will be allowed.
(2) Preparation Approval of Application To Employ Counsel
Phillips represented that he spent 3 hours, for $545 in fees, preparing and obtaining approval of his employment application. The Court has reviewed the description of the services provided in this category. One time entry for .6 hour relates to the prohibited time period. The Court will disallow the fees requested for this entry. Even so, the remaining time spent on this task — 2.4 hours — is excessive. Additional work was required as a result of Phillips’ failure to obtain a retention order promptly and to follow the correct procedures in submitting the application. The Court will allow Phillips 1.5 hours for this task representing $262.50 in fees and will disallow the rest.
(3) Preparation Approval of Application To Employ Accountant
Phillips represented that he spent 4.1 hours, for $717.50 in fees, preparing and obtaining approval of an application to employ an accountant. The Court has reviewed the description of the services provided in this category. None of the time spent in this category occurred during the prohibited period. However, the Court also finds the time spent on this task excessive. It is reasonable that a little more time might need to be spent on an application to employ a third party (someone other than the professional preparing the application). However, 2 hours should be adequate for the task. The Court will allow 2 hours for $350 in fees in this category and will disallow the rest.
(4) Preparation of Disclosure Statement and Plan
Phillips represented that he spent 34.6 hours, for $6,055 in fees, preparing the initial version of the plan and disclosure statement. The Court has reviewed the description of the services provided in this category. One time entry in this category — 1.5 hours for $262.50 — occurred during the prohibited period. The Court will disallow this amount. Of the remaining 33.1 hours, only 14 hours for $2,450 in fees appears to have been spent preparing the plan and the disclosure statement. The remainder of the time — 19.1 hours, for $3,342.50 in fees, appears to have been spent gathering financial information relating to the plan, discussing it with the debtor and with the debtor’s accountant, and applying for a brief extension of time to file the plan and disclosure statement. Given the relative simplicity of the debtor’s finances, the time spent in this category, all told, seems excessive. The Court believes that a total of 20 hours, for $3,500 in fees, is reasonable compensation for this task.
The UST asks the Court to disallow all fees for preparation of the plan and disclosure statement because of the deficiencies noted in them by the Court. The Court is unwilling to do so. The preparation of a proper plan and disclosure statement is not a simple task. Only the best attorneys are successful in preparing a plan and disclosure statement without any defects the first time round. If Phillips were capable of doing, he would be entitled to an hourly rate significantly higher than $175.
CONCLUSION
To recap, the Court finds that the fees requested for the first four categories noted above should be allowed in part as follows: $2,135 for category (1), $262.50 for category (2), $350 for category (3), and $3,500 for category (4) for a total of $6,247.50 for the first four categories. Since the only question before the Court is whether the $5,000 pre-petition retainer received by Phillips is excessive given the services provided, the Court’s review of the services provided need go no further. Even if the Court were to find that none of the services in categories (5) through (7) were compensable, Phillips would still be entitled to retain the full amount of the retainer. Therefore, the Court will not make a precise determination of the amount of Phillips’ reasonable fees and will hold only that those fees exceed $5,000. As a consequence, Phillips will not be ordered to disgorge his retainer as requested by the UST. If the UST wishes an order to memorialize this ruling, it may submit a proposed form of order. Alternatively, Phillips may submit a proposed form of order.