Court: United States Bankruptcy Court, M.D. Florida; October 26, 2016; Us Bankruptcy; United States Bankruptcy Court
In Baker Botts v. ASABCO, the U.S. Supreme Court ruled that Bankruptcy Code § 330(a) does not permit attorney’s fees for defending a fee application, as this work is not performed for the estate. The U.S. Trustee contended that this ruling prevents a professional employed under § 327 from recovering fees related to supplementing a fee application after objection. However, the Court determined that the fees in question were for preparation, not defense, of the fee application, thus qualifying as recoverable under § 330(a).
The Chapter 7 Trustee employed Herb Donica and Ed Rice, who pursued fraudulent transfer claims against the Debtor’s ex-wife, resulting in a settlement that recovered $3.5 million and nearly $3 million in real property. Donica filed an initial fee application seeking $748,875 for nearly 2,000 hours of work, categorized into time spent on the main bankruptcy case and the fraudulent transfer proceeding. The application complied with Local Rule 2016-1, detailing the work performed, time spent, hourly rates, and assertions of reasonableness.
The U.S. Trustee objected to the application on three grounds: lack of detail on the 900 hours in the main case, insufficient explanation of labor division with Glenn Rasmussen in the fraudulent transfer proceeding, and inadequate narrative on results achieved. The U.S. Trustee sought a level of detail typical in chapter 11 applications. In response, Donica supplemented his application with an 18-page document that addressed these objections, breaking down hours spent on eight matters, narrating results, and clarifying the division of labor with Glenn Rasmussen.
At a hearing regarding Donica’s fee application, the U.S. Trustee acknowledged that subsequent fee supplements addressed most informational objections but maintained concerns about potential service duplication. The Court approved an interim distribution of funds but withheld $75,000 for further consideration of this duplication issue. Following an additional hearing, the Court fully approved Donica’s fee application and released the withheld amount. Donica then submitted a second interim fee application for $33,840, which included fees related to his initial application. The U.S. Trustee objected to $27,520 of these fees, arguing they were unrecoverable based on the Supreme Court’s Baker Botts ruling, which established that fees incurred defending a fee application are not compensable under § 330(a) if they arise after an objection has been lodged. The U.S. Trustee proposed a strict rule that any post-objection fees are inherently for defending the application and thus not recoverable. However, the Court emphasized that Baker Botts should not be interpreted too broadly. In Baker Botts, the Supreme Court clarified that § 330(a) allows for the award of reasonable compensation for actual, necessary services rendered, and that the term "services" refers to work done for the estate. Justice Thomas noted that while preparing a fee application benefits the estate by providing transparency, defending it does not offer similar advantages. The key criterion for recoverability is whether the fees were incurred for services benefiting the estate, not merely the timing of their incurrence. In this case, the $27,520 in fees incurred by Donica after the U.S. Trustee's objection were related to supplementing his initial application.
Donica submitted an 18-page supplement to his fee application and a 21-page response to the U.S. Trustee’s objection, detailing his fees, labor division with Glenn Rasmussen, and results achieved. The U.S. Trustee argued that such detailed information should have been included in the initial fee applications. The Court compared Donica’s supplementary work to a mechanic’s itemized bill, emphasizing that the dispute was not about the fee amount but the adequacy of the detail provided.
Although Donica’s fees were incurred after the case was converted to chapter 7, the U.S. Trustee sought the level of detail required for chapter 11 cases. Local Rule 2016-1 outlines that chapter 7 fee applications need only include basic information, while the U.S. Trustee required more extensive descriptions and narratives typically associated with chapter 11. Given the complexity of the case and the substantial fees requested ($1.7 million), the Court acknowledged the U.S. Trustee's insistence on additional disclosure.
However, the Court noted that the U.S. Trustee should have formally requested the higher level of detail or moved to compel compliance with chapter 11 requirements, which would have been granted. If this had occurred, Donica would have been compensated for the detailed work he later provided in his supplement. The U.S. Trustee did not contest the reasonableness of the time spent on the supplement.
The Court ruled that the nature of the work performed by Donica is what determines its compensability under § 330(a), not the timing of its performance. Since Donica’s fees were for services rendered in the interest of the estate, they are deemed recoverable as reasonable compensation. The U.S. Trustee expressed concern that this ruling might result in a practice where professionals submit minimal fee applications and only provide detailed explanations when challenged.
The U.S. Trustee's concerns regarding the potential for professionals to submit bare-bones fee applications are unfounded. The Court's ruling is unlikely to promote such practices, as the detail required for chapter 7 fee applications is not burdensome and typically involves modest sums. While the ruling pertains to chapter 11 applications, where Local Rule 2016-1 imposes stricter requirements, professionals are compensated for the time spent preparing fee applications. Therefore, there is no incentive for them to submit incomplete applications routinely. Even in cases where a two-step application process occurs, the total compensation remains the same as if the application had been properly prepared initially. Furthermore, the U.S. Trustee's suggestion of a bright-line rule disallowing recovery of fees incurred after an objection would lead to greater issues, including excessive over-disclosure and increased costs for estate administration. This over-disclosure could burden the Court and parties with additional litigation over fee reasonableness, creating more problems than the proposed rule would resolve.
The Supreme Court's decision in Baker Botts establishes that the compensability of legal work is determined by its nature, not the timing of its performance. Only work that serves the estate administrator is compensable. Donica is entitled to recover $27,520 for expenses related to supplementing his initial fee application, as this work benefited the estate and was necessary for case administration. The Court will approve Donica’s second interim fee application in full. Additionally, Glenn Rasmussen submitted a separate fee application, which will be addressed in another order. Compliance with Local Rule 2016-1 requires detailed itemization and a narrative explaining the services performed, their necessity, results, and benefits to the estate. The IRS raised concerns about separating time spent on defending versus supplementing fee applications. Ultimately, compensable services must be likely to benefit the debtor's estate or necessary for case administration, per 11 U.S.C. § 330(a).
