Creditors and parties in interest frequently file objections to bankruptcy professionals’ fee requests incurred during the case. According to the U.S. Trustee’s Annual Report of Significant Accomplishments for FY 2009, [1] the U.S. Trustee alone filed 511 objections to the allowance of professional fees in 2009 (the last year reported as of the date of this article), and 91.9 percent of which were successful, lowering the total amount of fees awarded in those cases by $28,524,879. In the heat of battle of a chapter 11 restructuring, bankruptcy estate professionals, especially debtors’ counsel, simply do not have the luxury of constantly analyzing their ongoing work under the rubric of 11 U.S.C. § 330’s standards for allowance of professional fees and the case law interpreting that statute, nor does anyone familiar with the nature of chapter 11 cases expect them to. Rather, it is hoped that § 330 of the Bankruptcy Code, which governs the court’s authority to allow professional fees in chapter 11 cases, is written and designed in such a way as to permit the allowance of fees and expenses of a chapter 11 professional who acts reasonably and with the best interest of the estate in mind.
While attorneys may have very different opinions as to the efficacy of § 330 in that regard, courts make strident efforts to ensure that the application of § 330 to a professional’s fee application produces a fair and justifiable result. That effort is well demonstrated in recent court opinion from Hon. John J. Thomas of the U.S. Bankruptcy Court for the Middle District of Pennsylvania in the In re Wireless Telecommunications Inc. [2] chapter 11 case, where the court thoughtfully addressed a variety of fee objections and ultimately approved a settlement that had already been voluntarily proposed by the fee applicant itself.
In re Wireless Telecommunications Inc. had been pending for approximately 11 years by the time the court issued its opinion denying in part and sustaining in part objections from a creditor and the U.S. Trustee to debtor’s counsel’s $2,164,000 final fee application. According to the opinion, the case evolved through various stages, from an involuntary liquidation to a chapter 11 case to the transfer of equity of the debtor in possession to a sale by the reorganized debtor to a buyer. Those sale proceeds were subsequently depleted because of delays in obtaining regulatory approval such that, at the time of the court’s decision, the case was administratively insolvent.
The objecting parties, taking an overly expansive view of § 330, objected to the debtor’s fee application to the extent that any of the services provided did not actually result in quantifiable benefit to the estate. The opinion first corrected the objecting parties on a fundamental but frequently overlooked tenet of § 330, i.e., that fees should be awarded if they were “reasonably likely to benefit the debtor’s estate.” [3] The court cited to the 1994 Bankruptcy Reform Act and the inclusion of § 330(a)(3)(C) as evidence of Congress’ intent to apply “likely to benefit” standard and to reject the “actually benefitted” standard.
The court then addressed the specific categories of concern raised by the objecting parties applying the correct “likely-to-benefit” standard under § 330(a)(3)(C). First, the court overruled an objection to fees for time spent by debtor’s attorneys responding to objections to a proposed settlement of a proof of claim. The court ruled that the time fell squarely within the language of § 330(a)(3)(C) as “being necessary to the administration of…a case under this title,” especially given the fact that bankruptcy judges are required under Third Circuit law to scrutinize settlements even in the absence of objections. Next, the court overruled an objection raised by a party whose initial settlement agreement with the debtor was reconsidered and investigated by debtor’s counsel, leading to a revised settlement agreement that the objecting party claimed was on virtually the same terms as the reconsidered settlement proposal. The court applied § 330(a)(3)(C) likely-to-benefit test and overruled the objection, noting that debtor’s counsel’s work was preceded by a request to the Court to undertake such investigation.
The primary thrust of the objections were to a large amount of time spent applying for payments and fees for the debtor’s principal and then defending that principal against demands for disgorgement of some of those same fees. The court disallowed all fees of debtor’s lead counsel related to its “effort to enrich [the principal]” related to a sale transaction, as well as time spent defending disgorgement demands, noting the debtor’s attorney’s conflict of interest and the lack of any benefit to the estate.
The court then overruled blanket objections to any time billed by attorneys attending the same meeting at the same law firm, likening the debtor’s firm’s efforts to that of a symphony, requiring the work of many individuals in harmony. However, the court did state that debtor’s counsel had the burden to demonstrate the need for any such meetings, and in the absence of a satisfactory explanation, the court would assume that “concurrent billing hours to attend the same meeting would be duplicitous.”
Then, the court overruled various objections to time billed for paralegal and clerical staff, but denied fees incurred by debtor’s counsel preparing an application to employ another law firm, noting that the “record fails to demonstrate how the performance of work by one professional for another professional should be chargeable to the estate.” Note that this ruling may be inconsistent with other parts of the opinion that recognized that certain administrative functions of debtor’s counsel are required and are in fact beneficial to the estate. Preparation of applications to employ special counsel, for example, are often required to be drafted by debtor’s general bankruptcy counsel when such special counsel law firms do not have the capacity to prepare such specialized applications internally and yet the debtor’s have a specific need for such counsel.
The court spent a considerable amount of time discussing § 330(a)(6), which “articulates that preparation of a fee application is compensable.” The court discussed various cases and articles discussing the argument for and against allowing fees incurred for defending objections to fee applications. It declined to approve the fees incurred by debtor’s counsel in this case, but had “no desire to implement a per se rule of disallowance.” Noting that “there are many reasons favoring and disfavoring the allowance of fees of litigating attorneys compensation,” the court was “troubled by awarding the firm attorney fees for defending their fee application to the detriment of unsecured creditors.”
The Wireless Telecommunications opinion demonstrates that courts will not hesitate to both sustain and overrule objections to fee applications based on the specific facts and what the court considers to be a fair and justifiable result, applying the Code and past precedent as well the courts’ experience in chapter 11 cases. The net result of Wireless Telecommunications was that the court voiced its approval of the debtor’s law firm’s voluntary reduction of 12.38 percent of the total amount of their fee application, stating that it fell within the range that the court estimated was its exposure in light of the objections filed against the fee application.