What Is Reasonable under Lodestar

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Dec/Jan 2004

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This month's
Straight & Narrow explores the basic but critical question of what
factors must be considered in determining reasonable hours and reasonable
professional rates under the Lodestar Standard.<a href="#2" name="2a">2</a> While the
reasonable-hours-times-reasonable-rates formula under Lodestar is
well-known and has been extensively analyzed, the more difficult questions
of what constitutes reasonable rates and hours has not received extensive
judicial review.<a href="#3" name="3a">3</a> As a determination of reasonableness in a given case is a
factual, rather than legal, inquiry,<a href="#4" name="4a">4</a> I will not attempt to provide an
exact answer to this great philosophical question but instead will describe
certain factors that generally should be considered in
"reasoning" what are appropriate professional fees.

<h4>Let's Go to the Statute</h4>

11 U.S.C. §330(3)(A) provides that:

<blockquote>
In determining the amount of reasonable compensation
to be awarded, the court shall consider the nature, the extent and the
value of such services, taking into account all relevant factors, including
(a) the time spent on such services; (b) the rates charged for such
services; (c) 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 under this title; (d) 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;
and (e) whether the compensation is reasonable based on the customary
compensation charged by comparably skilled practitioners in cases other
than cases under this title.
</blockquote>

While this provision of the Bankruptcy Code sets forth
a few key factors for courts to consider, the factors set forth in
§330(3) are by no means exhaustive. See,
generally, Johnson v. Georgia Highway Express Inc., 488 F.2d 714 (5th Cir.1974) (setting forth 12 factors to be
considered in determining reasonable hourly rates and reasonable hours for
an award of professional fees). However, the U.S. Bankruptcy Court for the
Western District of Kentucky in In re Atwell<a href="#5" name="5a">5</a> attempted to devise a framework for resolving these
questions by formulating a set of factors to be used in determining (1)
reasonable hourly rates, (2) reasonable hours expended on the tasks in
question and (3) whether there should be global modifications to the
requested professional fees.

<h4>Let's See, the Moon Is in the Seventh House, so This Year's Hourly Rate Is...</h4>

Atwell lists six factors
to be considered in determining what constitutes a reasonable rate of
compensation. The first and most important of these factors is the customary hourly rate charged by the
professional in question.<a href="#6" name="6a">6</a> In litigating any objection to fees, this
is the starting point of determining reasonable hourly rates. Professionals
seeking to defend their fee requests should consider providing general
billing records for the professionals or fee applications in other
bankruptcy cases to establish their hourly rates.

The second factor that should be established in
litigation involving the reasonableness of a professional's rates is
whether the rate charged by the professional is commensurate with rates
charged by other similar professionals. The principal issues that will
arise under this factor are: (1) do you compare the professional's
rates to other bankruptcy professionals only or to all similar
professionals regardless of their specialty?<a href="#7" name="7a">7</a> and (2) do you compare the
professional's rates to the rates charged where the bankruptcy is
pending or where the professionals generally practice?<a href="#8" name="8a">8</a> In situations such
as this, parties should consider using expert witnesses or fee studies to
support their positions.<a href="#9" name="9a">9</a>

A third factor to be used in determining the
reasonableness of fees is the skill of the attorney and quality of legal
services provided. This is one of the most subjective elements of the
consideration concerning the reasonableness of rates, as it goes not to an
attorney's general billing rate or a comparable rate of compensation
in an appropriate market, but to how well the attorney performed his tasks
in the case. This issue will generally be resolved by a review by the court
of the professional's performance in the case.

The fourth factor in determining the reasonableness
of hourly rates is the difficulty and novelty of the issues present in a
case. More complex issues will probably require more senior levels of
attorneys to work on those issues. This consideration primarily addresses
the issue of the level of staffing of specific issues in a case. Counsel
should work to ensure that the staffing levels used and the rates charged
for a particular matter addressed in a case are appropriate for the
importance and complexity of that matter.<a href="#10" name="10a">10</a>

A fifth issue controlling reasonable hourly rates
concerns whether the tasks performed by a professional would be considered
"clerical" duties that would either be considered part of a
professional's overhead (and not compensated) or compensated at much
lower rates. While there has been a recent trend both in bankruptcy and
non-bankruptcy settings to compensate paraprofessional work as professional
fees rather than a form of expense, there is still a great deal of
discussion as to the appropriate rate for such billings.<a href="#11" name="11a">11</a>

The sixth and final factor that should be reviewed by
courts in determining the reasonableness of hourly rates is the billing
agreement between the debtor or committee and the professional and the use
of reasonable billing judgment by the professional in charging its clients
under that contract. A billing agreement, approved by the court as part of
the professional's retention, will govern how the debtor should be
billed, unless the court agrees to this modification of the billing
agreement. Further, as noted by the Supreme Court,<a href="#12" name="12a">12</a> attorneys should
exercise billing judgment in reducing the hourly rates charged on a matter
where appropriate. However, at all times professionals should disclose in
their fee applications how they exercised their billing judgment and should
be able to provide evidence of the care with which they reviewed their
bills in any disputed hearings over fees.

<blockquote><blockquote>
<hr>
<big><center>
[I]n this era of increasingly complex fee litigation it is sometimes important to take time to view the forest instead of carefully examining the specific branches of the various trees.
</center></big>
<hr>
</blockquote></blockquote>

<h4>It's About Time...Uh, Yeah It Is</h4>

The second component of the Lodestar calculation of
an appropriate professional fee is the determination of the reasonable
hours expended in a bankruptcy case. This portion of the Lodestar analysis
is generally given stricter scrutiny than the reasonable-rate component as
courts seek to ensure that professionals are not compensated for
inefficiency or for spending time on projects that are not beneficial to
the estate.<a href="#13" name="13a">13</a>

The initial factor in determining what constitutes
reasonable hours expended in a case concerns the nature of the issues
involved in the proceeding. The more difficult, unusual or complicated
issues present in a case, the more time that will be spent by the
professional. Further, the size and magnitude of a particular issue will
also be important in determining the reasonableness of the hours expended
in a matter. Unfortunately, as noted by the Atwell court, the size, importance and difficulty of the issues in
dispute in a bankruptcy case is a purely factual question that must be made
on a case-by-case determination.<a href="#14" name="14a">14</a>

The second factor important to determining what
constitutes a reasonable amount of time spent on matters in a case is the
amount of time spent on comparable matters in similar cases by comparable
counsel. This factor is more often applied in an analysis of chapter 13
fees, where numerous routine pleadings often make up the bulk of a
professional's fees. However, such a review can also be applied in
chapter 11 cases.<a href="#15" name="15a">15</a>

The third element to be used in evaluating the
reasonable hours expended by a professional in a bankruptcy case is the
nature and characteristics of the debtor in a particular case. A debtor
with a simple debt structure that is in the process of selling its assets
or has terminated its operations will generally have fewer legal and
factual issues in dispute than an operating chapter 11 debtor with several
viable but different potential business models, a complex debt structure
and significant pending litigation.

The fourth factor that must be considered in
determining whether the hours claimed by the professional are reasonable is
the amount and degree to which matters are litigated. While professionals
should not be compensated for causing needless litigation,<a href="#16" name="16a">16</a> professionals
should not be penalized by having the actual time spent on a matter reduced
solely because they were faced with zealous or perhaps overly zealous
opposition that led to what would otherwise be an excessive amount of time
spent on a matter. See Stalnaker v. DLC Ltd., 376 F.3d 819 (8th Cir. 2004) (court awarded
trustee's counsel its requested fees even though defendant settled
case and paid all creditors in full after four years of litigation on a
fraudulent-conveyance suit that became moot upon the defendant's
payment to creditors).

A fifth factor to be considered in determining
reasonable time expended in a case is the amount of time spent in preparing
attorney fees applications. While most courts<a href="#17" name="17a">17</a> permit reimbursement
of at least same professional fees for fee application in Lodestar cases,
the amount of time is generally limited. Further, it is an open question as
to whether any professional fees will be awarded for the defense of, as
opposed to the preparation of, a fee application.

The final factor generally used in determining the
amount of reasonable hours in a case is an analysis of the billing judgment
used by the professional requesting its fees. In order to prove that a bill
has been properly reviewed by a professional, "counsel in their fee
request should set forth what time has been written off" in order to
demonstrate the proper use of billing judgment. In re Automobile Warranty Corp., 138
B.R. 72 (Bankr. D. Colo. 1991).

<h4>Judicial Eye for the Fee...Persons: Global Modifications of Professional Fees under Lodestar</h4>

Finally, the Atwell court lists five additional factors that should be
considered in whether a fee should be modified either up or down, taking
the fee request as a whole rather than by adjusting specific rates or hours
charged. These factors are: (1) compliance with employment and fee
application requirements, (2) opportunity costs in the time the engagement
has taken away from other potential matter, (3) the undesirability of the
case, (4) the potential contingent nature of the compensation and (5)
the results obtained by the professionals. In
re Atwell, 148 B.R. at 492-493.

In briefly discussing these factors, the Atwell court stressed that
factors 2, 3 and 4 of the global modifications would only be used to modify
fees in the rarest and most unusual cases. The Atwell court also noted that factor 1
would generally be used to globally reduce fees<a href="#18" name="18a">18</a> while factor 5 would
generally be considered in cases where a fee enhancement was requested,<a href="#19" name="19a">19</a>
although in extreme cases it could also be used to reduce fees.<a href="#20" name="20a">20</a>

<h4>Conclusion</h4>

While the thrust of this column has been primarily
to restate the obvious in the area of fee litigation, in this era of
increasingly complex fee litigation it is sometimes important to take time
to view the forest instead of carefully examining the specific branches of
the various trees.

<hr>
<h3>Footnotes</h3>

<a name="1">1</a> Board Certified in Business Bankruptcy Law by the American
Board of Certification. <a href="#1a">Return to article</a>

<a name="2">2</a> "The
Lodestar method calculated as the number of hours reasonable expended
multiplied by a reasonable hourly rate is the appropriate calculation of
fees [under 11 U.S.C. §330]." Stalnaker
v. DLC Ltd., 376 F.3d 819, 825 (8th Cir.
2004). <a href="#2a">Return to article</a>

<a name="3">3</a> See In re Atwell, 148
B.R. 483, 488 (Bankr. W.D. Ky. 1993) ("While the Lodestar Standard is
easy to articulate, defining its two key terms is not so simple."). <a href="#3a">Return to article</a>

<a name="4">4</a> See, generally, Stalnaker v. DLC Ltd, 376 F.3d at 825; Matter of Taxman, 49 F.3d 310 (7th Cir. 1995). <a href="#4a">Return to article</a>

<a name="5">5</a> 148 BR at
483. In support of full disclosure, the author had the honor of serving as
the law clerk for Hon. Henry H. Dickinson when he authored the Atwell opinion. <a href="#5a">Return to article</a>

<a name="6">6</a> For a
discussion of customary hourly rates, see Bowles, C.R., "Are All Attorneys Created
Equal?" 23 Am Bankr L.J. 32 (Mar. 2004); see, also, In re Busy Beaver Building Centers, 19 F.3d 833 (3rd Cir. 1994) (professional fees should be awarded
in bankruptcy cases on the same economic basis as fees are paid by
non-bankruptcy clients); Matter of Taxman
Clothing Co., 49 F.3d 310, 315-316 (7th Cir.
1995); In re Atwell, 148 B.R. 483, 488-89 (Bankr. W.D. Ky. 1993). <a href="#6a">Return to article</a>

<a name="7">7</a> See In re Fleming Cos. Inc., 304
B.R. 85 (Bankr. D. Del. 2003). <a href="#7a">Return to article</a>

<a name="8">8</a> See, generally, In re Farly Inc., 156 B.R. 203 (Bankr. N.D. Ill. 1993) (counsel location of
general practice governs fees); In re Grimes, 115 B.R. 639 (Bankr. D. S.D. 1990) (local rates may
prevail if matter could be handled by local counsel). <a href="#8a">Return to article</a>

<a name="9">9</a> See Matter of River Landings Inc., 180 B.R. 701 (Bankr. S.D. Ga. 1995) (discussing use of
expert testimony on fees). <a href="#9a">Return to article</a>

<a name="10">10</a> See In re McClanahan, 137
B.R. 73, 75 (Bankr. M.D. Fla. 1992) (hourly rates requested by counsel in a
routine consumer chapter 13 case exceeded rates charged at that time by
attorneys in complex chapter 11 cases). <a href="#10a">Return to article</a>

<a name="11">11</a> See, generally, In re Busy Beaver Bldg. Centers Inc., 19 F.3d at 833. <a href="#11a">Return to article</a>

<a name="12">12</a> In Hensley v. Eckerhort, 461
U.S. 424, 103 S.Ct. 1933, 76 L.Ed.2d 40 (1983), the Supreme Court noted:
"[attorneys] should make a good-faith effort to exclude from a fee
request hours that are excessive, redundant or otherwise unnecessary; just
as a lawyer in private practice ethically is obligated to exclude such
hours from his fee submission. In the private sector, 'billing
judgment' is an important component in fee setting. It is no less
important here." <a href="#12a">Return to article</a>

<a name="13">13</a> See Matter of Taxman Clothing Co., 49 F.3d 310, 313 (7th Cir. 1995); In
re Atwell, 148 B.R. at 491. <a href="#13a">Return to article</a>

<a name="14">14</a> 148 B.R.
at 491. <a href="#14a">Return to article</a>

<a name="15">15</a> See Matter of Taxman Clothing Co., 49 F.3d 310, 314-315 (discussing comparison of typical
preference litigation with similar litigation). <a href="#15a">Return to article</a>

<a name="16">16</a> Id. at 316 (denying
$78,000 of an $85,000 fee awarded for engaging in a preference lawsuit that
could only have resulted in a $33,000 judgment for the bankruptcy estate). <a href="#16a">Return to article</a>

<a name="17">17</a> See, generally, Coulter v. Tennessee, 805 F.2d 146 (6th Cir. 1986). <a href="#17a">Return to article</a>

<a name="18">18</a> See, generally, Freeman,
"Current Issues in Bankruptcy Ethics," 091803 ABI-CLE 265
(Sept. 18-21, 2003), for a discussion of the problems in failing to comply
with the provisions of the Bankruptcy Code, Bankruptcy Rules and applicable
local rules in seeking employment or requesting awards of fees. <a href="#18a">Return to article</a>

<a name="19">19</a> See Protapopas, Lydia T.,
"Fee Enhancements: How Do You Get One, Parts I and II," 20 Am.
Bankr. Inst. J. 1 and 20 Am. Bank. Inst. J. 12 (2001). <a href="#219a">Return to article</a>

<a name="20">20</a> See, generally, Matter of Taxman Clothing Co., 49 F.3d at 310. <a href="#20a">Return to article</a>

Journal Authors

C. R. Bowles

Journal Date

Wednesday, December 1, 2004 - 12:00

Bankruptcy Rule

2004