Restructuring

Contributed by Conray C. Tseng
In a recent decision in the chapter 11 case of In re CCT Communications, Inc., Judge Bernstein of the U.S. Bankruptcy Court for the Southern District of New York ruled on the allowance of certain fees and expenses incurred by retained chapter 11 professionals.  Some of the rules adopted by Judge Bernstein are fairly-well established.  Other rules, however, appear to stake out new territory (some more restrictive, some more flexible) on the allowance of fees and expenses.

1. Lumping – Lumping of time, of course, is prohibited. Applying an apparently new standard, if a time entry contains lumped time, fees for only 30 minutes of such time will be allowed, and the fees for the remaining time will be disallowed. Of the $131,758.51 in fees related to lumped time entries, Judge Bernstein disallowed $92,741.50 or over 70% of the proposed fees.
2. Communications – Entries regarding communications should reference the subject matter and the party. Failure to include such information may result in the fees for such time entry being disallowed in their entirety. Judge Bernstein focused on telephone calls and letters and did not address e-mail communications. In some cases, the U.S. trustee has sought to extend this rule to e-mails, although no formal decision has applied this rule to individual e-mails. Because the time spent itemizing each individual e-mail may exceed the time spent reviewing and responding to an e-mail and given the significant number of e-mails professionals receive on a daily basis, this requirement would seem to be impractical as applied to e-mail.
3. Adequate Descriptions – While professionals should be sensitive about confidential information, failure to specify an activity with sufficient detail may result in the partial disallowance of the fees for the time entry. In particular, Judge Bernstein noted that use of “attention to [topic]” and “work on [topic]” are per se insufficient.
4. Telephonic Appearances – Professionals should use discretion when attending hearings. Where multiple professionals travel to attend a relatively short hearing (e.g., a fee application hearing) and the fee application does not indicate why counsel needed to appear in person (as opposed to telephonically), fees for such time may be partially disallowed. In CCT, Judge Bernstein partially disallowed fees by 50% where two attorneys from the same firm traveled 7 hours each (for a total of 14 hours) to attend a fee application hearing (1.5 hours) where a telephonic appearance would have been sufficient.
5. Preparation of Fee Applications – Professionals may charge for preparation of a fee application.
6. Defense of Fee Applications – Depending upon the circumstances, professionals may charge for defending a fee application. Judge Bernstein noted that litigants, including professionals disputing fees, bear the cost of their own legal expenses, and there is no statutory requirement that the debtor’s estates compensate professionals for the legal fees incurred in defense of the professional’s fee application. In CCT, however, Judge Bernstein allowed approximately $35,000 in fees incurred in the defense of over $1 million in fees because disallowance of such fees would dilute the overall fees awarded to the professional. Notably, the cases cited by Judge Bernstein to support the allowance of fees incurred in the defense of a fee application did so only where the professional was generally successful in the defense of a fee application.
7. Reviewing and Editing Time Records – Professionals may not charge for reviewing and editing time records. Judge Bernstein’s reasoning is that professionals do not get compensated for reviewing and editing time records in non-bankruptcy matters. Such reasoning ignores, and Judge Bernstein did not address, why professionals must review time records in bankruptcy cases. For example, he does not explain how such a rule squares with the requirement that an attorney certify he or she has reviewed the fee application. Moreover, the decision overlooks that, outside of bankruptcy, time records are not publicly disclosed, so they need not be reviewed to protect privileged information. Finally, it does not address the requirement for professionals in bankruptcy cases to make sure that time is billed consistently among professionals to the specific task codes required by the U.S. trustee’s billing guidelines.
8. Conferences – Multiple professionals may confer to discuss matters and doing so is not per se unreasonable.
9. Ministerial or Clerical Tasks – Professionals may charge for addressing certain ministerial or clerical tasks where it is more efficient for the professional to attend to the task rather than explain the task to a secretary or paralegal and check whether it was done correctly afterwards. Such time, however, should be minimal.
10. Nunc Pro Tunc – Unless a professional is retained nunc pro tunc, fees incurred prior to entry of the retention order are per se disallowed. Because local practice in the Southern District of New York is that applications to retain professionals are heard on at least 21 days’ notice, professionals retained from the start of a chapter 11 case should seek retention nunc pro tunc to the commencement date. Notwithstanding the foregoing, where a professional is not responsible for the delay of entry of an order (e.g., the U.S. trustee or court lost the proposed order), the court may award fees to the professional on a “deemed” nunc pro tunc basis.
11. Local Rules Certification – The local rules for the Southern District of New York require that a professional certify that the professional provided the U.S. trustee and the debtor with a statement of fees and disbursements 20 days after each billing month. Failure to provide such certification is harmless error if the U.S. trustee and the debtor have sufficient time to review such fees and disbursements.