Restructuring

Contributed by Doron P. Kenter.
We don’t wear the robes, but we’ve been through enough final fee hearings to venture an educated guess that reviewing professional fee applications may be the second least favorite task of the bankruptcy bench, just behind refereeing discovery disputes.  In many large-cap chapter 11 cases, a court-appointed fee auditor or a fee committee scrutinizes the billing records, but courts still have the last word in determining whether the requested fee is “reasonable” and have to adjudicate any objections to fees by parties in interest.  A recent decision from the United States District Court for the Eastern District of Michigan, in an appeal from a chapter 13 case, discusses the standard bankruptcy judges must apply in determining the reasonableness of the fees charged by debtor’s counsel.  Because the standard is the same in chapter 13 as it is in chapter 11, the decision may have implications in commercial cases as well.
In In re Hudock, counsel for the chapter 13 debtors sought approval of fees and expenses in the amount of approximately $7,000, incurred in connection with litigation to avoid a second lien on the debtors’ home.  The chapter 13 trustee objected, arguing that the fees were excessive in light of the debtors’ estimate that the entire plan value was only $5,500.  Ruling from the bench, the bankruptcy court recognized that pursuant to the Sixth Circuit Court of Appeals’ decision in In re Boddy, it must apply a “lodestar analysis” to determine (i) a reasonable hourly rate (based on the prevailing market rate for similar services) and (ii) a reasonable number of hours worked.  The bankruptcy court concluded that the fees were excessive and reduced the fee award by $800, observing that “rather than pick out specific hours [for disallowance],” it would note that the fees were driven up, in part, by the debtors’ attempt to pursue relief that was unlikely to be granted, and that the fee award should therefore be reduced.
On appeal, the chapter 13 trustee argued that the bankruptcy court had failed to actually apply the lodestar analysis referenced in its ruling, and that the fee award should have been reduced by a greater than “nominal” amount.  The district court agreed, holding that bankruptcy courts must “expressly calculate the lodestar amount, rather than relying on other standards to determine the fee award” and should explain with specificity why certain hours should be disallowed.  In other words, the court could not simply apply a “blanket” fee reduction to address its general concerns with the overall amount of fees incurred in connection with the representation.  Accordingly, the district court reversed and remanded to the bankruptcy court to “undertake a proper lodestar analysis” regarding the reasonable number of hours that the debtors’ counsel should have worked in connection with the representation.
Though couched in the requirements of prevailing case law in the Sixth Circuit, the impact of the district court’s decision is far from clear.
Taken at face value, the decision seems to require bankruptcy courts to consider each time entry in connection with its lodestar analysis.  In a complex chapter 11 case, with many professionals recording thousands of hours and time records kept in six minute increments, an across-the-board requirement of lodestar analysis could be very burdensome for bankruptcy courts, and some courts have disagreed with this approach.
Though the amounts at issue were quite small, Hudock raises questions regarding the discretion that may be afforded to bankruptcy courts considering fee applications in all manner of cases.  While blanket fee reductions may be most efficient (and an accurate reflection of the judge’s best understanding of what would be “reasonable” under the circumstances) courts may nonetheless be required to review time entries on a line-by-line basis and that may lead to increased use of third-party fee examiners, especially in large cases.