Matter of UDC Homes, Inc.

Citations: 203 B.R. 218; 1996 Bankr. LEXIS 1583; 1996 WL 714520Docket: 17-12808

Court: United States Bankruptcy Court, D. Delaware; December 6, 1996; Us Bankruptcy; United States Bankruptcy Court

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In the bankruptcy case of UDC Homes, Inc., various financial advisors, including Donaldson, Lufkin, Jenrette Securities Corporation and Houlihan Lokey Howard Zukin, submitted applications for compensation and expense reimbursement, following a hearing on October 2, 1996. The case, presided over by Chief Judge Helen S. Balick, involved UDC Homes, a builder experiencing liquidity issues from late 1994 to May 1995. To address its financial difficulties, UDC sought a business combination and initially engaged in exclusive negotiations with AEW Partners, L.P. However, these discussions expanded to other investors, notably DMB Property Ventures Limited Partnership, which ultimately made a more favorable proposal. UDC entered into a definitive agreement with DMB on May 16, 1995, the day before filing for Chapter 11. A reorganization plan was presented shortly after, acknowledging that unsecured claimants would receive approximately nine cents on the dollar, while equity interests would receive nothing. The court later approved UDC's employment of Donaldson, Lufkin as its exclusive financial advisor, with a fee structure that included a $3.75 million restructuring fee and monthly payments of $100,000.

Monthly fees paid by UDC were credited against a total of $3.75 million, with pre-petition payments totaling $900,000 and post-petition payments of $600,000 to DLJ. Dissatisfied preferred shareholders requested an official committee, which was appointed on July 5, 1995, by the United States Trustee. This committee sought to hire financial advisor Houlihan Lokey Howard Zukin (HLHZ) at a rate of $75,000 per month, and the court approved this application while referencing local bankruptcy rules. The equity committee also secured legal counsel.

On August 3, 1995, UDC filed a second amended plan that made concessions to subordinated convertible noteholders but still did not provide for any distribution to preferred or common stock interests. The plan hinged on a stock purchase agreement with DMB, who would invest $108 million in exchange for new common stock and subordinated unsecured notes worth about $30 million. The equity committee asserted that equity interests deserved distribution, contrary to UDC’s stance based on DLJ's valuation, which adhered to the absolute priority rule.

By mid-August, the equity committee was actively opposing UDC's positions, including challenging UDC's exclusivity rights. UDC sought to limit the committee's authority, citing urgent reorganization needs. However, before the motion could be heard, UDC and the equity committee reached a settlement, resulting in an addendum to the second amended plan. This addendum established a $3 million trust in subordinated notes for prime preferred stock interests, estimating a recovery of approximately 2.67. Other classes of old equity were not allocated distributions, and the addendum included concessions regarding the fee applications of equity committee professionals, with UDC agreeing not to object to HLHZ's fees.

The second amended plan was confirmed on October 3, 1995, and executed in November 1995, providing 100% recovery for secured and trade creditors. Unsecured creditors and prime preferred shareholders were impaired, receiving consensual distributions. After confirmation, DLJ, HLHZ, and other professionals submitted compensation applications, initially reviewed by a fee auditor. Following court-ordered procedures, applications were reduced and scheduled for an omnibus fee hearing. The Court approved fees for all professionals except DLJ and HLHZ, deferring their applications.

DLJ filed for $2,125,000 in compensation and $42,993.11 in expenses, claiming a $3.75 million restructuring fee, from which prior payments were deducted, leaving an unpaid fee of $2.25 million. DLJ later agreed to cap its request at $2,125,000. After negotiations with the fee auditor, DLJ reduced its request further to $2,110,000 and $4,924 in expenses. The Court found the reduced expense amount reasonable and approved it. However, the Court clarified that the total amount subject to review was actually $2,710,000, considering the monthly payments made during the Chapter 11 case were subject to review, contrary to DLJ's assertion. The Court's next step is to evaluate whether this amount reflects reasonable compensation for necessary services as dictated by 11 U.S.C. 330(a)(1)(A).

In 1994, the Third Circuit Court of Appeals articulated that professionals must provide comprehensive and clear fee applications to establish the reasonableness of requested compensation, based on market rates typical in non-bankruptcy scenarios. Section 330(a) of Title 11 outlines key factors in assessing compensation, including the time and rates charged, necessity and benefit of services provided, reasonableness of the time spent relative to the complexity of tasks, and customary compensation rates for similarly skilled practitioners.

DLJ detailed its significant contributions to the UDC case, which included evaluating strategic options, preparing financing materials, soliciting buyers, leading the auction process, executing the acquisition strategy, and drafting transaction terms. DLJ's fee structure is a restructuring fee, not a monthly or bonus fee, typically used in merger and acquisition contexts. DLJ compared its requested fee against industry benchmarks, noting that fees for similar transactions ranged from 0.5% to 1.5%, averaging 0.9%. DLJ's fee of $3.75 million, representing approximately 1% of a $345 million transaction, and 0.72% of a $500 million restructuring, aligns with industry standards. Consequently, DLJ's compensation request of $2,710,000 is deemed reasonable and compliant with relevant legal standards.

Houlihan, Lokey Howard & Zukin (HLHZ) submitted two applications for compensation totaling $350,000, which included requests for $125,000 and $225,000 for services rendered between May 17, 1995, to June 30, 1995, and July 5, 1995, to September 30, 1995, respectively, along with expense reimbursements. The Court noted that HLHZ did not provide a mathematical basis for these amounts, but inferred a likely breakdown of $50,000 for May and $75,000 for each subsequent month. After a fee auditor's recommendation for approximately $18,000 in reductions, HLHZ agreed to lower its requests to $119,500 and $212,999.31, while expenses of $10,555.88 were approved.

HLHZ documented a total of 704.7 hours of work, resulting in a blended hourly rate of $471.83 based on the total compensation request. The Court assessed the reasonableness of the request based on whether the services were necessary and beneficial. HLHZ's activities included forming an equity committee, conducting financial analyses, and evaluating investment proposals, but the Court found insufficient justification for how these services specifically benefited the UDC case, especially considering the predominant role of another firm, DLJ.

Additionally, HLHZ did not provide comparative compensation data for similar services outside bankruptcy contexts, raising questions about the reasonableness of its requested monthly rate of $75,000, particularly for months with limited work, which led to exorbitant hourly rates. The Court concluded that the compensation request was not reasonable given these considerations.

HLHZ indicated in its applications that it occasionally bills hourly and provided specific rates for its professionals involved in the UDC case: $500 for Managing Directors David A. Preiser and Cary J. Stanford, $275 for Senior Associate Michael D. Stewart, and $200 for Financial Analyst Brett Fliegler. Assuming these rates are reasonable and all time entries are valid, the blended hourly rate would be $324.50, resulting in total compensation of approximately $235,000, which is about $97,000 less than requested. 

The application did not adequately address subsections (A) and (D) of section 330(a)(1)(A). Qualitatively, much of the work typical for a Chapter 11 case was completed pre-petition, including the negotiation of the DMB transaction and the plan of reorganization. Quantitatively, even if the $3 million trust is viewed as a benefit to the estate, the fees for professionals other than HLHZ already exceed 12% of that benefit, which would rise to 24.3% if HLHZ's fees were approved, deemed excessive.

The Court found HLHZ's applications insufficient to justify the requested $332,499.31 under section 330(a). Although an applicant may generally have the opportunity to supplement an inadequate application, HLHZ was not granted this chance as it did not file the application in good faith. The Court decided reasonable compensation based on existing records, rejecting the monthly billing rate of $75,000 and instead applying hourly rates, which could total $235,535 if all time entries were considered. However, the Court noted those rates were meant to cover overhead expenses and concluded they were inappropriate for the case at hand.

HLHZ did not demonstrate that its fixed and routine overhead expenses should be included as part of its compensation under section 330(a). The application submitted by HLHZ contained numerous time entries lacking sufficient detail, prompting the fee auditor to note inadequacies. Although HLHZ provided revised entries in response, many remained insufficient. The Court's role is to determine reasonable compensation, not to establish an exact fee. Consequently, a reduction in HLHZ's hourly rates and billable time was deemed appropriate, resulting in a total compensation of $230,000. 

Additionally, HLHZ failed to comply with the requirements outlined in the Bankruptcy Code and the Local Rules of the United States Bankruptcy Court for the District of Delaware, as the application did not adequately address necessary factors or provide the required compliance statement. Despite being aware of the rules, HLHZ's submission was deficient compared to a more thorough application from another advisor. The final order approved compensation of $2,710,000 for Donaldson, Lufkin, Jenrette Securities Corporation and $230,000 for Houlihan Lokey Howard, Zukin during the Chapter 11 case of UDC Homes, Inc.

Requests for compensation from Donaldson, Lufkin, Jenrette Securities Corporation (DLJ) and Houlihan Lokey Howard Zukin (HLHZ) are largely denied, with specific approvals for expense reimbursements: DLJ is approved for $4,924.00, and HLHZ for $10,555.88. No enforcement actions will occur for 10 days post-order entry. The total unpaid amount recognized is $2,710,000, accounting for both the unpaid sum of $2,110,000 and prior payments of $600,000, with an additional $900,000 noted as relevant to DLJ's compensation request. HLHZ did not contest the application or assertions made during the October 2 hearing but suggested that actual time spent on the case might be higher due to "administrative limitations," which were not clarified. The court found it challenging to understand these limitations, especially since other financial advisors in similar cases have provided detailed time records. Fee rates for May and September were calculated based on total itemized hours, with concerns raised about the reasonableness of HLHZ’s fees and the adequacy of their time entries, which often lacked necessary subject details for evaluation.