Restructuring

Contributed by Doron P. Kenter.
We’ve written about the new fee guidelines to take effect in bankruptcy courts this November, and much more will be said in the coming months.  In a recent decision, however, a bankruptcy court addressed the reasonableness of attorneys’ fees outside the ordinary course of bankruptcy representations.  Because the attorneys seeking payment were not seeking payment from a bankruptcy estate, but reimbursement from the non-prevailing party, the court did not look to the patterns and practices inherent in bankruptcy cases, but rather, to the contractually and statutorily permissible “reasonableness” standard for such reimbursement of the prevailing party’s attorneys’ fees.
In Cappello Capital Corp. v. AmericanWest Bank (In re AmericanWest Bancorporation), the United States Bankruptcy Court for the Eastern District of Washington was tasked with issuing a report and recommendation regarding an application for reimbursement of fees and expenses paid to professionals for AmericanWest Bank (AWB), the successful defendant in a breach of contract action.  The plaintiff, Cappello Capital Corporation, vigorously litigated every stage of the process, including a number of disputes regarding venue and discovery.  As the “prevailing party,” AWB then sought to have its fees and expenses reimbursed by Cappello pursuant to the underlying contract between the parties and pursuant to California Civil Code § 1717, which governs awards of fees and expenses in actions based on contract claims.  Because AWB had earned a “simple, unqualified win,” in the litigation, both the contract and the California statute permitted AWB to be awarded “reasonable” attorneys’ fees.  In assessing whether the claimed fees were “reasonable,” the court examined various factors.
Local Rates vs. Large Regional Law Firm Rates
First, the court examined the attorneys’ hourly rates.  Both AWB and Cappello were represented by attorneys with what the court called “large regional law firms.”  Accordingly, their hourly rates were higher than average hourly rates for local litigation counsel in Spokane, Washington.  Recognizing that it is not uncommon for counsel from other large west coast cities to appear in local bankruptcy proceedings, the court observed that AWB and Cappello were financially sophisticated parties and knowingly selected counsel and agreed to pay certain hourly rates for their services – rates that were “comparable” for each party’s attorneys.  Further, the court recognized that Cappello had commenced the action in California state court in Los Angeles, and that the determination of proper venue was “a lengthy and hard fought battle,” in which the parties were (at least initially) uncertain whether the case would proceed in Los Angeles or in Spokane.  For these reasons, the court concluded that there was no reason to require the attorneys to have charged “local rates” for their work.
Consultations with Colleagues (Non-Core Timekeepers)
Second, the court looked to the nature of the services rendered.  Though the fees were slightly reduced for work related to defenses and counterclaims that were untenable or spurious, the court concluded that it had been reasonable for AWB’s attorneys to consult other members of the firm regarding specialized issues or to consult with colleagues regarding their experience with the various courts before which the matter might have been litigated.  The court further concluded that there was no reason to reduce or disallow any of the claimed fees as unreasonable simply due to the number of people working on the project.
Block Billing
Third, the court questioned the propriety of “block billing” (i.e., “a timekeeping method by which legal professionals enter the total time attributable to a client or lawsuit for a particular day and describe all tasks performed, but do not specify the time attributable to each task”).  Though the court questioned the utility of block billing, insofar as such practices make it difficult to assess the reasonableness of fees for any particular task and may increase the total number of hours billed, the court, again, stated that AWB and Cappello were financially sophisticated parties, and that AWB specifically agreed to a block billing timekeeping method.  Moreover, block billing by itself did not necessitate a fee reduction; instead, the court concluded that it should apply a separate analysis to the specific services rendered by AWB’s counsel to determine whether the fees for such services were, in fact, reasonable.
Services Rendered for Third Parties
Fourth, the court concluded that AWB was not entitled to reimbursement of the costs of responding to third party discovery requests made from the stalking horse bidder in AWB’s chapter 11 case and from AWB’s ultimate purchaser and successor in interest.  Because of the attorneys’ block billing practices, it would be difficult to assess what portion of the work related to services for those third parties.  Even though 32.2% of the documents were produced from the third parties, the court noted that this percentage would not account for the work that would have been done for AWB in any event (e.g., attending depositions).  Accordingly, without further explanation, the court reduced AWB’s legal fee award by 15% (even though it had previously noted that across-the-board fee reductions were not warranted).
Similarly, the court considered whether AWB could recover the cost of attorneys for a co-defendant, whom AWB was bound to indemnify for actions by Cappello.  Because the contract only provided for the reimbursement of fees and expenses incurred by AWB – and not by a third party – AWB was not entitled to recoup the cost of hiring counsel to represent its co-defendant and indemnitee, notwithstanding the fact that AWB eventually bore those costs.  The mere fact that the indemnitee was a named co-defendant did not cause that third party’s legal fees to be associated with the contract between Cappello and AWB.  Accordingly, the court declined to award those amounts to AWB and ruled that nearly $1.2 million of the requested fees (more than 25% of the total amount of legal fees incurred by AWB) were not reimbursable.
Software Training and Research Costs
Fifth, the court allowed AWB to recover its professionals’ fees incurred in connection with being trained on document review software because “[w]ithout that training,” the document production and privilege review “could not have occurred.”  On the other hand, the court did not allow AWB to recover the costs associated with online legal research.
Interest on Attorneys’ Fees
Sixth, the court addressed AWB’s argument that it was entitled to interest on its “award” of legal fees and that such interest began to accrue from the date that any amounts became due.  Rejecting that argument, the court held that Cappello had no duty to pay AWB’s legal fees until an award was actually entered in AWB’s favor (i.e., the date that the district court enters a judgment awarding those fees to AWB).
In addressing the various elements of the legal fees and expenses incurred by AWB, the bankruptcy court provided interesting insight regarding the types of fees that may be considered  “reasonable” by a court and the types that might not.  Because the bankruptcy court’s assessments were made in the context of a fee dispute between two litigants, its rationale may not necessarily apply to other types of fee disputes.  For now, it appears that fee issues still remain subject to a case-by-case analysis.