Billing Increments and Lump-Sum Billings in Applications for Professional Compensation

The Federal District Court of New Jersey recently examined the reasonableness of professional fees to a prevailing party arising from lengthy litigation involving clean-up cost allocations of a New Jersey Superfund site. In reducing the prevailing party’s fee application, the Court, in United States v. NCH Corp., [1] applied bankruptcy-court precedent [2] to establish billing increments of six minutes (e.g., a one-tenth of an hour). The district court found the use of block billing generally acceptable as long as listed activities reasonably corresponded to the number of hours billed. [3] The court, however, saw it appropriate to reduce the requested professional fees of the petitioner in this case because they were hard to “pin down by task” and thus, difficult for the district court to perform a review of their reasonableness. Since the professional’s billing practices were confusing and had caused the need for the hearing, the court also disallowed professional fees incurred in preparation of the application itself. [4] This article surveys bankruptcy-court precedent concerning the reasonableness of fee applications by bankruptcy professionals.

Reasonableness of Professional Fees as Evaluated under the Code and Rules
Sections 330 and 331 of the Bankruptcy Code provide that upon notice to the parties-in-interest and the U.S. Trustee, professional compensation can be awarded by the bankruptcy court when the compensation and related services are reasonable, actual and necessary. [5] The bankruptcy court is given wide discretion in evaluating professional fee applications to protect a bankruptcy estate and its creditors. [6] Professional compensation is evaluated using numerous factors, including time spent, rates charged, the nature of services and the professional’s qualifications performing the services. [7] The Federal Rules of Bankruptcy Procedure also establish and detail the requirements that professionals must follow in order to request reimbursement by bankrupt estates, including the responsibilities of the bankruptcy court and U.S. Trustees to review the respective applications for professional compensation. [8] Many local rules establish further requirements for professional fee compensation, and the U.S. Trustee Guidelines for Reviewing Applications for Compensation and Reimbursement of Expenses [9] set forth principles concerning professional compensation, including billing increments and methods of categorizing and describing the services provided. [10]

Bankruptcy Professional Compensation Billing Increments
The bankruptcy court has found that “minimum charges of one-tenth hour increments more fairly reflect actual time involved than do quarter-hour segments.” [11] The bankruptcy court has also noted that failing to bill in one-tenth hour increments can create the impression of artificially inflated bills. [12] The court has also been bold enough to assert that “professionals who choose not to record their time in such fashion are making business decisions not to accept work for which approval under Code Section 327 and 330 is required.” [13]

Lump-Sum Billing Disallowed in Bankruptcy Applications
Providing unreliable, nonspecific or inadequate details of services and time spent can result in the reduction or disallowance of professional fees. [14] As defined in USA v. NCH Corp., et al., “block billing is a time-keeping method by which each lawyer and legal assistant enters the total time daily spent working on case, rather than itemizing the time expended on specific tasks.” [15] Moreover, a bankruptcy court held that “(lumped) entries, i.e., used a single-entry listing (or more accurately, intending to list) several different and distinct services with an aggregate time. This approach makes determining actual time spent on any individual task impossible.” [16] The bankruptcy court expresses contempt for lump-sum billing practices and expects that each time-entry have separate descriptions and allocations of time. [17] The U.S. Trustee Guidelines state that services greater than 0.5 hours on a daily basis should be detailed individually and not “lumped” together. [18] Bankruptcy Courts have generally denied lump-sum billings, yet differed in the method of reducing professional fee requests, as some courts have disallowed all fees and others have applied a partial fee reduction. [19]

Reimbursement of Professional Time in Preparing Fee Applications
Code Section 330(a)(6) allows for reimbursement of reasonable amounts of professional fees spent in preparing fee applications for bankruptcy court approval. Generally, the reasonableness of time spent in preparing fee applications will be evaluated based on the total fee applications presented to the bankruptcy court for approval. [20]

The bankruptcy court has remained generally consistent with the district court in its application of one-tenth hour billing increments, yet it has remained steadfastly against the use of lump sum billing.  The Code also allows for the reimbursement of reasonable efforts in the preparation of fee applications subject to review by parties-in-interest, the U.S. Trustee and the bankruptcy court.