Lopez v. Portfolio Recovery Associates, LLC (In re Lopez)

Citation: 576 B.R. 84Docket: CASE NO: 09-70659; ADVERSARY NO. 13-7019

Court: United States Bankruptcy Court, S.D. Texas; September 28, 2017; Us Bankruptcy; United States Bankruptcy Court

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Plaintiff's Application for Compensation and Reimbursement of Expenses related to a Motion for Sanctions has been partially granted and partially denied by the Court. The Application follows a November 24, 2015 Order that granted in part and denied in part Plaintiff Marcos F. Lopez's Motion for Sanctions against Portfolio Recovery Associates, LLC (PRA). The Court ordered PRA to pay reasonable attorney's fees and costs incurred by Plaintiff's Counsel, Kellett, Bartholow PLLC, in preparing the Motion for Sanctions. The Applicant seeks $176,967.50 in fees and $2,023.41 in expenses, totaling $178,990.91, while PRA contests this amount, proposing $15,498.80 instead. 

The Court reviewed the pleadings, evidence, the Bankruptcy Code, and relevant case law to assess the entitlement of the Applicant to the requested fees and expenses. Findings of Fact and Conclusions of Law were made under Federal Rules of Bankruptcy Procedure and Civil Procedure, with the Memorandum Opinion supplementing prior findings. The Court incorporates findings from three earlier Memorandum Opinions regarding the case. The Plaintiff initially filed the Motion for Sanctions on September 24, 2014, with subsequent proceedings addressing admissibility of evidence and proposed findings. Ultimately, the Court granted six of the Plaintiff's requests for sanctions while denying four.

On December 8, 2015, PRA filed a notice of appeal regarding the Third Memorandum Opinion and Sanctions Order, along with a Motion for Leave to Appeal. Subsequently, on January 6, 2016, the Plaintiff designated the record for the appeal, and on January 13, 2016, filed an Agreed Motion to Abate. The United States District Court denied PRA’s Motion for Leave on September 1, 2016, ruling that the Sanctions Order was interlocutory and not appealable. 

On February 15, 2017, the Plaintiff submitted an Application requesting $144,753.91 in fees and expenses related to the Motion for Sanctions. PRA responded on March 8, 2017, challenging the fee request by alleging inadequate billing judgment, inefficiencies, excessive rates, improper block billing, and the ineligibility of fees related to PRA's appeal. PRA recommended a downward adjustment to the lodestar calculation and requested $15,498.80 in attorney’s fees while denying all costs and remaining fees.

In reply, the Plaintiff argued against PRA’s proposed reductions, labeling them unreasonable and legally unjustified, and asserted that the Court should uphold the Applicant's rates and allow recovery of fees related to PRA's unsuccessful appeal. The Plaintiff also contended that PRA waived its right to challenge the hours billed and claimed PRA’s adjustments were without merit. On April 14, 2017, PRA filed a sur-reply, rejecting the Plaintiff’s claims and asserting no misrepresentations were made.

A hearing on the Application was conducted on April 18, 2017, with representatives from both the Plaintiff and PRA present. Due to time limitations, the hearing was continued to April 28, 2017, during which both parties presented evidence and arguments regarding the Fee Application.

Plaintiff and PRA agreed to admit PRA’s exhibits A, D, F, H, I, J, K, L, N, and P, while PRA's exhibits B, C, E, and G were admitted only for demonstrative purposes despite Plaintiff's objection. Exhibit O was not admitted. PRA accepted the hours related to its appeal of the Third Memorandum Opinion and Sanctions Order, contingent on the Court ruling in favor of Applicant regarding entitlement to fees for opposing PRA’s Motion for Leave. Plaintiff and PRA also stipulated to the admission of Plaintiffs exhibits 2-9, 27, 38, 48, and 99, while the Court admitted additional Plaintiff exhibits (1, 10, 13, 24, 26, 32, 35, 40-42, 47, 49-60, and 65-98) over PRA’s objection. Judicial notice was taken of exhibits 12, 14-23, 25, 28-31, 33-34, 36-37, 39, 43-46, and 61.

During two hearings, extensive testimony was presented from several individuals. Ms. Ellen Stone, a consumer bankruptcy attorney with 30 years of experience, testified about her work, stating her hourly rate for the case was $500, compared to her usual rate of $350, but she was not qualified as an expert on attorney’s fees; the Court found her testimony credible. Bartholow, a consumer bankruptcy litigator with over 10 years of experience, noted that Applicant regularly files adversary proceedings in the RGV and calculated his rates accordingly. He also discussed the review process for time records and past fee applications, without being qualified as an expert; the Court deemed his testimony credible. Wells reported that Applicant is the only firm in the RGV handling cases with non-bankruptcy consumer law claims and confirmed the approval of Applicant’s rates in the Southern District of Texas, with her testimony also found credible by the Court.

Kellett provided expert testimony on attorney's fees despite PRA's objections, highlighting her extensive experience in consumer financial litigation and bankruptcy since 1994. She established her hourly rate in 2000 and deemed the rates charged by the Applicant as reasonable based on her practice in Dallas and the RGV. The Court found her testimony credible. Additionally, Martin and Akerly offered credible testimony on PRA's exhibits and the Applicant's fee applications, with Akerly's expertise being contested but accepted by the Court.

The legal standards for awarding attorney's fees are discussed, emphasizing that courts can sanction parties for abuses of process outside the courtroom, as established in Chambers v. NASCO, INC. The Fifth Circuit clarified that attorney's fees cannot be awarded for collateral state court proceedings based on sanctionable conduct in bankruptcy and that sanctions for frivolous appeals are typically the purview of appellate courts. Section 105 of the U.S. Code allows for awarding attorney's fees for defending non-frivolous appeals but does not cover fee application defense costs, as ruled in Baker Botts L.L.P. v. ASARCO LLC. The Supreme Court determined that litigation to defend a fee application is not a compensable service under 11 U.S.C. § 330(a)(1)(A) unless there is explicit statutory authority, reinforcing the American Rule that litigation costs should not be shifted between parties.

A debtor's attorney must file a statement detailing the compensation agreed upon for services rendered, as stipulated by 11 U.S.C. § 329(a). If compensation exceeds the reasonable value of services, the court may cancel the agreement under § 329(b). Under § 330(a)(1)(A), a person employed under this section is entitled to reasonable compensation for actual, necessary services and reimbursement for necessary expenses. Additionally, the court has the authority to award less compensation than requested, as noted in § 330(a)(2) and supported by the case In re Cahill, 428 F.3d 536, 539 (5th Cir. 2005), which emphasizes the court's discretion to adjust attorney’s fees. The evaluation of attorney’s fees involves two key inquiries: whether the attorney was properly employed and, if so, whether the fees are reasonable, as established in In re Palacios, 2016 WL 361569 (Bankr. S.D. Tex. Jan. 27, 2017). In the current case, the proper employment of the attorney is not in dispute, leading the court to focus on assessing the reasonableness of the fees.

The Fifth Circuit employs the "lodestar method" to determine reasonable attorney’s fees under § 330, which involves multiplying the number of hours reasonably spent on similar work by the prevailing hourly rate in the community. The burden falls on the applicant to demonstrate that the rates sought align with prevailing community rates for comparable attorneys. Out-of-town counsel may be awarded out-of-town rates under specific conditions, necessitating a two-prong test: the reasonableness of hiring out-of-town counsel and the reasonableness of the rates based on the attorney's skill and reputation. Courts assess the reasonableness of hours requested, requiring the party seeking fees to provide sufficient documentation, such as contemporaneous billing records. Hours may be deemed unreasonable due to several factors, including non-prevailing issues, vague entries, and excessive travel time. If billing judgment is lacking, courts may reduce the fee award accordingly.

Bankruptcy courts possess inherent equitable powers to issue necessary orders under Title 11 and can impose sanctions for discovery abuse as per Fed. R. Civ. P. 37. Sanctions for bad faith are limited to fees incurred solely due to misconduct, requiring a causal link between the conduct and the fees claimed. The court must apply a "but-for test" to determine recoverable fees, ensuring that only those fees incurred because of the misconduct are compensated. However, courts are advised against overly meticulous accounting, focusing instead on achieving a fair outcome rather than perfect precision.

To assess the reasonableness of attorney's fees, courts evaluate various factors outlined in Section 330(a)(3), including the nature, extent, and value of services provided. Key considerations include: A) time spent on the services; B) rates charged; C) necessity and benefit of the services to the case; D) timeliness relative to the complexity of the task; E) the professional qualifications of the attorney, such as board certification; and F) customary compensation for similar practitioners. Compensation for unnecessary duplication of services or those not likely to benefit the debtor’s estate is prohibited under Section 330(a)(4).

The Fifth Circuit’s decision in Johnson v. Georgia Highway Express, Inc. established twelve guidelines for evaluating attorney’s fees, which encompass labor required, case novelty, requisite skill, impact on other employment, customary fees, fee structure, time constraints, amount at stake, attorney experience, case undesirability, client relationship, and similar case awards. 

After calculating the lodestar amount, courts may adjust it based on the Johnson factors, provided that adjustments are made only for factors not already reflected in the lodestar. The lodestar method typically incorporates four Johnson factors: issue complexity, attorney skill, quality of representation, and litigation results, with preclusion from other employment also commonly included. Courts possess discretion in applying these factors but must clearly articulate the weight assigned to each in their fee award decisions.

Jurisdiction is established under 28 U.S.C. § 1334, granting district courts original and exclusive authority over bankruptcy cases. Section 157 allows for referral of these cases to bankruptcy courts, which will preside appropriately. This case involves both core and non-core claims, with the current issue focused on the determination of attorney's fees owed to the Applicant due to prior sanctions imposed on PRA for discovery violations. The Court's sanctioning authority is derived from 11 U.S.C. § 105(a), Federal Rule of Civil Procedure 37, and Federal Rule of Bankruptcy Procedure 37. The Court confirms its jurisdiction to impose sanctions and to determine the corresponding attorney's fees, as supported by case law.

Venue is deemed proper based on the Plaintiffs' home address, aligning with 28 U.S.C. § 1408. Additionally, the Court must assess its constitutional authority to issue a final order, as discussed in Stern v. Marshall and Wellness Int’l Network v. Sharif. The Application does not solely involve state law, distinguishing it from Stern's context. Furthermore, the Court maintains its constitutional authority to enforce prior orders, including awarding reasonable attorney's fees related to the Sanctions Motion. Thus, the Court is empowered to issue a final order regarding the fee application.

Applicant is entitled to recover $17,522.00 in fees incurred while defending against PRA’s Motion for Leave to Appeal, which amounts to 42.16 hours of legal work. PRA contends that Applicant should not receive any fees related to this defense, arguing that the Court lacks authority to sanction actions from another court and noting that Plaintiff did not request sanctions from the District Court. Conversely, Plaintiff asserts that defending against the Motion for Leave is necessary for a complete remedy regarding PRA’s discovery violations. The Court agrees with Plaintiff, emphasizing that failing to award these fees would leave plaintiffs without adequate remedies in cases of misconduct that necessitate a defense against non-frivolous appeals.

The District Court had dismissed PRA’s Motion for Leave as interlocutory, but this does not affect the Court's decision to award fees. The Court cited a precedent where fees were granted because the applicant did not exacerbate the dispute; similarly, PRA's actions compelled Plaintiff to seek sanctions and defend against the Motion for Leave. The Court reinforces that it is not sanctioning PRA for a frivolous appeal but is allowing fees as part of the Sanctions Order previously issued against PRA. Thus, the fees incurred in defending the Motion for Leave are permissible and should not be deducted, aligning with the Court’s ruling in the Sanctions Order.

Applicant is not entitled to reimbursement for fees incurred while defending the Application, which totaled $34,237.00, as these fees were not included in the Fee Application. According to Section 330(a)(1)(A), attorneys can receive reasonable compensation for actual, necessary services rendered; however, the Supreme Court has ruled that litigation costs associated with defending a fee application do not qualify as such services. Consequently, all time and expense entries related to the defense of the Application are ineligible for compensation. The Court concludes that Applicant cannot recover the $84,237.00 incurred in this defense.

The lodestar amount in this case is established at $117,760.60. The court must evaluate the reasonableness of the hourly rates requested by the Applicant, which are as follows: Kellett at $500/hour, Bartholow at $400/hour, Wells at $250-$300/hour, and Khan at $100/hour. The Plaintiff argues that PRA has waived its right to contest these rates since they have previously paid them without objection. In response, PRA asserts there is no legal basis for this claim and maintains that their payment should not be construed as a waiver. 

Furthermore, the Plaintiff argues that the Applicant’s rates align with prevailing rates in the Rio Grande Valley (RGV) or are reasonable out-of-town rates, supported by prior court approvals. They emphasize that no local attorneys have taken on similar consumer litigation cases since 2014, highlighting the affidavits of local bankruptcy attorneys to demonstrate a lack of local representation capabilities. 

The court ultimately concludes that PRA has not waived its objections to the Applicant's rates, which it contests on two grounds: that the rates are not representative of prevailing RGV rates, and that out-of-town rates are unwarranted. PRA relies on an affidavit from Mark Twenhafel, an experienced RGV bankruptcy attorney, who argues that hiring out-of-town counsel is unreasonable and provides a breakdown of appropriate local rates based on attorney experience. PRA proposes lower rates for the Applicant's attorneys: Kellett at $300/hour, Bartholow at $250/hour, Wells at $200/hour, and Khan at $75/hour.

The relevant community for this case is the Rio Grande Valley (RGV), but the Applicant, a Dallas-based law firm, charges rates nearly double those typically charged by local bankruptcy attorneys in the RGV. No affidavits from the Plaintiff address RGV rates, with only Twenhafel’s affidavit providing evidence of local rates. The Plaintiff claimed that the Applicant's rates were the “prevailing rates” in the RGV due to the firm's unique position in prosecuting such adversarial cases. However, the Court determined that the Applicant's rates should be considered out-of-town rates from Dallas and not representative of prevailing RGV rates.

The Court further evaluated whether it was reasonable for the Plaintiff to hire the Applicant. The case is characterized as an adversary proceeding combining elements of bankruptcy and consumer law. Affidavits from Solana and Limón indicated that no local attorneys would undertake the case without the assistance of an out-of-town firm. Additionally, Whitworth noted that even the largest bankruptcy firm in the RGV lacked the resources to adequately represent clients without external support.

The Court reviewed docket sheets from adversary proceedings in the RGV and found that local counsel typically handle only bankruptcy cases, while the Applicant's cases involve both bankruptcy and consumer claims. The Court is entitled to rely on its understanding of customary billing practices in the RGV and determined that, given the unique nature of such adversary proceedings, it was reasonable for the Plaintiff to hire the Applicant. The argument that the Plaintiff should be restricted in choosing counsel due to the actions of PRA was rejected, affirming the Plaintiff's right to engage the Applicant despite its out-of-town status.

Limón, Solana, Stone, and Whitworth, while skilled bankruptcy attorneys in the RGV, lack the resources to handle the complexities of Plaintiffs' case. Twenhafel's firm, although capable, does not represent consumer debtors, making it an unsuitable option. Stone, the Debtor's counsel, has a working relationship with Applicant, which was a reasonable factor for Plaintiff in selecting counsel. Kellett testified that Applicant specializes in consumer financial litigation related to bankruptcy, a niche area with few attorneys nationwide. The evidence supports the necessity of hiring Applicant. 

The Court found it reasonable for Plaintiff to engage out-of-town counsel, referencing case law that supports this choice when local options are limited. Regarding the reasonableness of Applicant's rates, Kellett, an expert with extensive experience, provided testimony on her evaluation process for setting rates, which considers peer rates, case complexity, and overhead. Kellett highlighted Applicant's strong reputation, including a recent Attorney of the Year award, and noted that they do not engage in high-volume practices, justifying their rates. 

Despite PRA's challenges to Kellett's qualifications, the Fifth Circuit allows for consideration of out-of-town counsel's home rates when necessity is established. The Court concluded that Applicant's rates are reasonable and aligned with those of qualified Dallas litigators. The analysis will continue to assess the reasonable number of hours spent on the Sanctions Motion, as part of the lodestar calculation.

Plaintiff seeks compensation for 495.7 attorney hours and 12.5 paralegal hours, amounting to $142,730.50, plus $2,023.41 in expenses. PRA contends that the billing reflects "extreme inefficiencies," citing excessive attorney involvement and hours spent on tasks. In response, Plaintiff argues that a 25% reduction of total fees demonstrates appropriate billing judgment and attributes the requested hours to PRA's conduct. Plaintiff asserts that the Sanctions Motion was essential for obtaining critical discovery and notes that PRA did not object to 97.61 hours of billed time, urging the Court to dismiss any challenges to those entries. PRA counters that it did not waive objections to these hours, highlighting issues of inefficiency. The Court agrees PRA maintained its objections.

The Court also evaluates the reasonableness of the hours claimed, noting that Plaintiff was only partially successful with the Sanctions Motion, winning six out of ten requests. The Court finds that Applicant did not specify time spent on successful versus unsuccessful issues in their entries, leading to a decision to reduce the time claimed by 15% to account for hours related to issues on which Plaintiff did not prevail. Additionally, the Court addressed PRA's Motion to Supplement, denying it, while also rendering Plaintiff's Motion to Strike moot.

Hours spent on the Motion to Strike are entirely disallowed due to the Plaintiff's lack of success, totaling $13,866.10. Regarding travel, while there's no consensus on billing for travel time, bankruptcy courts possess broad discretion in awarding such fees. The Applicant billed 9 hours of travel at half the hourly rate, amounting to $1,530.00. PRA argues against reimbursement, claiming it was unnecessary for the Plaintiff to hire out-of-town counsel, but the Court finds the retention reasonable and approves the travel fees. 

PRA also contends that the Applicant improperly "block-billed" 162.98 hours for $59,950.00, complicating the Court's ability to assess the reasonableness of the claimed hours. PRA suggests a 20% reduction for block-billing and an additional 10% for alleged clerical work. The Plaintiff counters that a 30% reduction has already been applied to the block-billed hours and that further reductions are inappropriate. The Plaintiff supports their argument with an exhibit detailing cut block-billed entries and asserts that no clerical work was improperly billed.

The Court acknowledges that vague entries, which do not provide adequate detail on compensable services, may be disallowed. Block-billing is defined as recording total daily time without itemizing specific tasks. There is no evidence of improper billing for clerical work, and hours will not be deducted based on hypothetical clerical tasks. However, several time entries lump together multiple services without specifying time spent on each, leading the Court to classify these as vague and subject to disallowance.

A 20% deduction is deemed appropriate for time entries that lump multiple services together due to vagueness, as supported by case law. The Court finds that time entries exceeding four hours are vague and excessive, warranting an additional 20% reduction beyond an initial 25% reduction already applied by the Applicant. For instance, Kellett's request for 30.45 hours for preparing for a hearing, against 40.6 hours worked, is highlighted as excessive and vague. Consequently, $10,753.80 in fees is disallowed for these reasons.

Regarding interoffice communications, the Applicant initially sought 11.6 hours totaling $4,720.00, which the opposing party contested as unnecessary. The Applicant clarified that only 9.7 hours were sought, amounting to $3,680.00. The Court permits fees for interoffice communications provided they are not excessive or involve multiple attorneys billing for the same conference. The evidence needs to show that these communications were reasonable and necessary without requiring exhaustive detail. Given the lengthy discovery dispute, the 9.7 hours are found acceptable; however, specific entries are still subject to deductions. Notably, a 1.5-hour entry for communications regarding deadlines lacked sufficient justification and is reduced by 20%. Additionally, both Kellett and Bartholow billed for the same interoffice conference, which raises concerns about duplication.

Kellett billed 0.4 hours for a conference with Bartholow and Wells concerning appeal issues, while Bartholow billed 0.5 hours for a conference regarding the appellee's record designation. The Court found the entries ambiguous, suggesting both billed for the same conference on January 6, 2016. Consequently, one entry is disallowed, resulting in allowed fees of $3,330.00 for interoffice communications, with $350.00 disallowed. The lodestar figure is determined to be $117,760.60, reflecting reasonable out-of-town rates and hours billed. 

PRA requested a downward adjustment to the lodestar due to alleged excessive billing practices, which Plaintiff countered by stating that many suggested reductions were already considered in the notions of reasonableness and billing judgment. The Court, after reviewing relevant factors, concluded that no adjustments to the lodestar amount were warranted. 

Regarding time and labor, PRA criticized nearly 500 hours billed as excessive for a discovery dispute lacking novel issues. The Court, however, noted that the severity of PRA's discovery misconduct warranted the hours worked on behalf of Plaintiff, asserting that further reductions would unjustly penalize them for PRA's violations. PRA also argued that no significant time pressure was demonstrated beyond normal litigation pressures.

Plaintiff contends that the delay between the filing and hearing of the Sanctions Motion necessitated extensive preparation, particularly due to the case's transfer to a new judge and the engagement of new counsel by PRA, which changed their strategy. However, the Court determines that this time pressure does not justify an upward adjustment to the lodestar calculation, referencing the case In re Pilgrim’s Pride Corp., which allows such adjustments only in rare and exceptional cases supported by specific evidence. 

Regarding the Plaintiff's request for fee enhancement based on the Supreme Court's ruling in Perdue v. Kenny A., the Court finds this argument unsubstantiated as the circumstances do not qualify as extraordinary. The Plaintiff's claims of significant delays in compensation are noted, but the ongoing nature of the case and the Plaintiff's failure to file a Fee Application within the Court's specified timeframe further undermine the request for enhancement.

The Court awards Applicant $2,194.64 in expenses. While PRA challenges reimbursement for travel and meal expenses, arguing for reductions, the Court concludes that the decision to hire out-of-town counsel was reasonable. The Court allows $2,020.71 for travel-related expenses but disallows $2.70 for office supplies, categorizing them as overhead costs. Additionally, the Court reviews $312.90 in meal expenses, which are classified by the Applicant into different categories related to the Sanctions Hearing.

Applicant requested $112.39 for meals related to “Sanctions Hearing Prep” on August 1 and 2, 2015, which the Court determined were not travel-related and should be considered overhead, thus non-reimbursable. For meals incurred during travel from August 3 to 6, 2015, totaling $171.83, the Court deemed these expenses reasonable and reimbursable. A meal expense of $26.68 from August 24, 2015, was also rejected as there was no hearing on that date and no evidence it was travel-related, classifying it as overhead. Overall, the Court allowed $2,194.64 in expenses and disallowed $141.67. 

In total, Plaintiff sought $142,730.50 in fees and $2,336.31 in expenses, plus $34,237.00 for defending the Application. The Court denied $59,206.90 of the fees for reasons including lack of success on certain issues, vague entries, and duplicative communications. The final decision awarded Applicant $117,760.60 in fees and $2,194.64 in expenses, totaling $119,962.24. A check for this amount is to be provided to Kellett Bartholow PLLC within thirty days. Additionally, the document references the Bankruptcy Code and the nature of core proceedings relevant to the case.