Steven Len Howard and Judy Ann Pimentel

UNITED STATES BANKRUPTCY COURT
DISTRICT OF NEW MEXICO
In re:
STEVEN LEN HOWARD and No. 14-11297 ta7
JUDY ANN PIMENTEL,
Debtors.
MEMORANDUM OPINION
Before the Court is the final fee application of debtor’s Chapter 11 counsel. The United
States Trustee’s office objected to the application, arguing that counsel should not be paid for,
inter alia, proposing two unconfirmable Chapter 11 plans. After a trial on the objection, the Court
concludes the fees charged for the second plan and disclosure statement were not necessary and
should be disallowed.
I. Findings of Fact1
Steven Len Howard is a dentist; his wife Judy Ann Pimentel is a flight attendant who also
helps out in his dental office. For many years, Dr. Howard operated a profitable periodontal
practice, earning between $30,000-$50,000 per month. When she took all available flights, Mrs.
Pimentel earned about $3,500-$4,000 a month.
Dr. Howard also generated income by buying, selling, and developing real estate. He is a
licensed Realtor and Certified Commercial Investment Member, and considers himself an expert
in commercial real estate. Prepetition, Dr. Howard formed the following single-member limited
1 To the extent any finding of fact is construed as a conclusion of law, it is adopted as such, and
vice versa. The Court may make additional findings of fact and conclusions of law as it deems
appropriate or as may be requested by any of the parties.
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liability companies (“LLCs”) to buy, develop, and resell real property:
LLC Property owned Lender: Mortgage:2
La Cueva
Properties
8300 Carmel NE, Alb.
(the “Carmel Building”)
Wells Fargo $980,000
IF Group 179 Howard Place, Las Cruces
(the “Howard Building”)
None None
Progressive Dental Lots 1, 2, & 3, Camino Coyote,
Las Cruces (the “Lots”)
Pioneer Bank
(“Pioneer”)
$302,000
Templar Properties 4151 Camino Coyote, Las
Cruces
Pioneer Not listed
Simon Properties 190 Howard Place
Las Cruces
First Financial Credit
Union (“FFCU”)
$1,212,351
Simon Properties 271 Paseo de Dia, Las Cruces FFCU $2,747,413
The properties were all purchased before the real estate downturn in late 2007.
Dr. Howard serviced the mortgage debt until 2013, when he began having financial trouble.
To work out his difficulties, Dr. Howard proposed that FFCU accept interest-only payments until
he completed a business transaction that would allow him to pay the FFCU debt. FFCU initially
accepted the payments without reporting negative information to the credit bureaus. About four
months later, however, FFCU appointed a new CEO who declined to honor the arrangement. In
2014, FFCU reported the late payments and filed a foreclosure action against Simon Properties
and Dr. Howard as guarantor. One result was that Dr. Howard asserted he could not complete the
transaction and pay FFCU. FFCU’s change of position, inter alia, caused animosity between
FFCU and Dr. Howard, which increased over time.
Debtors retained William F. Davis & Associates, P.C. (the “Firm”) and filed this Chapter
11 case on April 29, 2014. They filed their bankruptcy schedules shortly thereafter. In Schedule
2 These amounts reflect Debtors’ representations in Exhibit J to the amended disclosure statement,
p. 15 of 18. The lenders’ claim amounts are now different, as several properties have been sold.
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B, Debtors valued their interest in La Cueva Properties at $1,3 IF Group at $90,000,4 and
Progressive Dental at $20,000.5 The estimated property values upon which the LLCs were valued
differed dramatically from previous estimates. In an April 2012 financial statement, for example,
Dr. Howard valued the Carmel Building at $3,340,000 (not $980,000) and the Lots at $1,975,328
(not $330,000). Similarly, Debtors had listed the Howard Building for sale at $642,458 (not
$90,000) within a year or so before the petition date.
FFCU held an unsecured claim of at least $1,166,276, which is about 59% of the unsecured
claims pool.6 Pioneer filed an unsecured claim in the amount of $96,000 (about 5% of the pool).
Debtors and the Firm’s lead attorney, William F. Davis (“Attorney”) knew that unless FFCU’s
claim was substantially reduced for voting purposes, FFCU could control the unsecured creditor
class and block confirmation.7 There is nothing to indicate that a challenge to FFCU’s claim would
have been successful, so FFCU’s acceptance was needed to confirm any Chapter 11 plan that paid
less than 100% to unsecured creditors.
The first meeting of creditors was held on May 29, 2014. At the meeting, the United States
Trustee (“UST”) asked Debtors how they intended to confirm a plan over FFCU’s opposition.
Attorney indicated that he hoped the plan payments would be high enough to convince unsecured
creditors to accept the plan. At the meeting, FFCU’s counsel expressed concern about the
scheduled values of the LLCs. Dr. Howard responded that the values were based on his estimates
3 Based on an estimated value of the Carmel Building of about $980,000.
4 Based on an estimated the value of the Howard Building of $90,000.
5 Based on an estimated the value of the Lots of around $330,000.
6 The claims register reflects $1,980,624 in unsecured claims.
7 The absolute priority rule applies in individual Chapter 11 cases. In re Stephens, 704 F.3d 1279
(10th Cir. 2013); 11 U.S.C. § 1129(b)(2)(B)(ii).
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and/or recent interest in the properties owned by the LLCs.
On June 17, 2014, FFCU’s lawyer sent Attorney an e-mail reiterating his belief that
Debtors materially undervalued the LLCs:
Unless the Howards agree to properly value all properties and LLC interests to
thereby reflect fair values for the LLC entities by amending their schedules, FFCU
will seek appropriate relief through the U.S. Trustee and the bankruptcy court and
will further contest any proposed Plan based on lack of fair market valuations.
Debtors filed a plan and disclosure statement on October 10, 2014, proposing to make 60
monthly plan payments of $3,000 each. After the payment of administrative claims, unsecured
creditors were to receive about $156,000, or a 10% dividend. Debtors intended to fund the plan
from future income and, if necessary, exempt retirement funds. The disclosure statement had the
same LLC values as Schedule B. The plan allowed Debtors to retain the Carmel Building, the
Howard Building, and the Lots.
A number of parties objected to the disclosure statement, including FFCU, Pioneer, and
the UST. Most parties, particularly FFCU, complained that Debtors failed to properly value their
LLCs. Pioneer asserted the plan violated the absolute priority rule, presumably because it did not
require the liquidation of all non-exempt property. Debtors could not have confirmed their plan
without the support of the unsecured creditors, and it was apparent that no such support would be
forthcoming. Debtors decided not to pursue confirmation of the first plan.
Debtors filed an amended plan and disclosure statement on January 2, 2015. The amended
plan was similar to the first plan, with two exceptions. First, the dividend to unsecured creditors
was increased slightly, to about 14%. The monthly plan payments were still 60 payments of
$3,000, but Debtors also promised to pay unsecured creditors at least $90,000 from the sale of real
estate.
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Second, Debtors proposed to list the Carmel Building, Howard Building, and Lots for sale
and pay all net proceeds to unsecured creditors, under the following conditions:
 The Carmel Building would be listed for $1,175,000 or more; the Howard
Building for $119,500 or more; and the Lots for at least $365,000;8
 Dr. Howard was to be the listing agent and would earn a commission on any
sale;
 Debtors would only consider cash offers accompanied by a 20% earnest
deposit;
 If the buyer failed to close within 15 days of court approval of the sale, they
would forfeit their earnest money;
 Debtors shall have six months to vacate any sold property;
 Debtors have a right to match any offer, plus 5%; and
 If any property was not sold within 90 days, Debtors could remove the
property from the market and keep it.
The amended disclosure statement reflected the same property values as before. Debtors
hoped the amended plan would prompt serious negotiations with FFCU and other creditors,
resulting in an agreed plan. Debtors were prepared to offer monthly plan payments of about
$10,000 to obtain FFCU’s vote. Attorney has a deserved reputation of being able to negotiate and
settle with creditors in Chapter 11 cases.
FFCU objected, this time more vehemently, to the amended disclosure statement. FFCU
reiterated its position the property values were too low, and asserted that the proposed sales
arrangement was a sub rosa attempt to retain non-exempt equity in violation of the absolute
priority rule. At trial, FFCU’s counsel characterized the sales proposal as bankruptcy fraud.
Pioneer joined in FFCU’s objection. The New Mexico Taxation and Revenue Department also
objected on, inter alia, absolute priority rule grounds.
8 The proposed listing prices were low. For example, six months earlier Debtors rejected an offer
to purchase the Howard Building for $500,000. Dr. Howard viewed the offer as more of an option
contract because it contained some contingencies.
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Because of the obvious problems with the property sales proposal and FFCU’s aggressive
stance throughout the case, the Court finds there was no chance unsecured creditors would have
accepted the amended plan, nor that the amended plan could be crammed down.
About the time Debtors filed their amended plan, Dr. Howard began radiation treatment.
By March of 2015, he had difficulty working full time. In light of Dr. Howard’s health issues,
Debtors no longer believed they could complete a Chapter 11 plan. On April 7, 2015, Debtors
voluntarily converted the case to Chapter 7.
Debtors amended their Schedule B on June 19, 2015 to increase the value of La Cueva
Properties from $1 to $50,000. The values of IF Group and Progressive Dental were unchanged.
The Chapter 7 trustee sold the Carmel Building for $1,500,000 ($425,000 net to creditors),
the Howard Building for $370,000 ($328,000 net to creditors), and the Lots for $572,000
($241,000 net to creditors). The sale prices were on the low end, but were reasonable. The estate
now has about $994,000 to distribute to unsecured creditors, before the payment of administrative
expenses. This compares very favorably to the amended plan’s proposal to pay unsecured creditors
$246,000—or even to $600,000, if the monthly payment had been negotiated up to $10,000—over
five years.
The Firm filed its first and final fee application on May 12, 2015, seeking fees and costs of
$61,678. The fees and expenses are broken down as follows:9
Service Hours Fees Expenses Total, with taxes
9 The amounts were calculated from the Firm’s billing statements. Work performed before
December 15, 2014 was credited to the original plan and disclosure statement. Worked performed
on or after that date was credited to the amended plan and disclosure Statement. The Court finds
that December 15, 2014 is the appropriate cutoff for work done on the plans.
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Chapter 11
Administration
44.3 $10,411 $584 $11,723
First Plan and
Disclosure Statement
22.4 $20,642 None $22,087
Second Plan and
Disclosure Statement
19.8 $10,957 None $11,723
Claims Administration 39.7 $8,489 $0.30 $9,083
Operating Reports 27.5 $3,269 None $3,497
Stay Proceedings 1.6 $460 None $492
341 Meeting 5.5 $1,230 None $1,316
Fee Application 10.8 $1,569 None $1,757
Total 259 $57,025 $662 $61,678
The UST objected to the application in its entirety, arguing that the services were not necessary or
beneficial to the estate. The UST asserted Debtors did not have a legitimate Chapter 11 purpose
from the start, and that both plans were patently unconfirmable.
II. DISCUSSION
A. Section 330(a).
Attorney compensation in Chapter 11 cases is governed by 11 U.S.C. § 330(a). To be
compensable, the fees must be for services that were “actual” and “necessary.” § 330(a)(1)(A). If
the services pass that test, then the fees for those services must be “reasonable.” Id. See also In
re Lederman Enterprises, Inc., 997 F.2d 1321, 1323 (10th Cir. 1993). Section 330(a) is unclear in
some respects; courts have struggled, for example, to determine what “necessary” services are. As
the case law has developed in the Tenth Circuit, the following rules have emerged:
 “[A]n element of whether the services were “necessary” is whether they
benefited the bankruptcy estate.” Lederman, 997 F.2d at 1323.
 “‘Benefit’ to the estate is measured by considering whether the services
were necessary to the administration of, or beneficial toward the completion of, a
case under [title 11].” In re Schupback Investments, LLC, 2014 WL 6680122, at *8
(10th Cir. BAP 2014).
 The appropriate time for measuring benefit to the estate is when the services
are provided, not when the fee application is heard. Id.; In re Kitts Development,
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474 B.R. 712, 720 (Bankr. D.N.M. 2012); In re Macco Properties, Inc., 540 B.R.
793, 868 (Bankr. W.D. Okla. 2015).
 Benefit is not measured solely by success; work done that had a reasonable
chance of succeeding is “necessary” even if it is not successful ultimately.
Schupback Investments, 2014 WL 6680122, at *8; Kitts Development, 474 B.R. at
721.
 A proposed plan does not have to be facially confirmable to benefit the
estate. In re Berg, 268 B.R. 250, 260 (Bankr. D. Mont. 2001). Instead, there must
be some “realistic hope of confirmation” after negotiating with creditors. In re
Universal Factoring, Co., Inc., 329 B.R. 62, 79 (Bankr. N.D. Okla. 2005).
 Even though Lederman states that “benefit” is only an element of
“necessary,” it is by and large the only element courts discuss. If a service
benefitted the estate, courts conclude that the service was necessary, and the inquiry
ends there.
 The applicant has the burden of proving its services were actual and
necessary, and its fees reasonable in amount. In re Commercial Financial Services,
Inc., 427 F.3d 804, 811 (10th Cir. 2005); Kitts Development, 474 B.R. at 720.
B. Were the Firm’s Services Necessary?
The only significant dispute at trial was whether the Firm’s services benefited the estate
and therefore were necessary.10 The UST asserts the services provided no benefit because the Firm
knew as early as the first meeting of creditors that Debtors could never confirm a Chapter 11 plan,
and that both proposed plans were patently unconfirmable.
1. Services Leading Up to the Original Plan. This case presented a challenge
to Debtors’ counsel: an aggressive creditor controlled the unsecured class, and Debtors wanted to
keep non-exempt property while paying the creditor substantially less than 100%. In the Tenth
Circuit, the absolute priority rule means that individual Chapter 11 debtors cannot keep non-
exempt property unless creditors accept the plan or the plan provides for payment in full. In re
Stephens, 704 F.3d 1279 (10th Cir. 2013).
10 The UST also argued that a portion of the fees were not reasonable. That objection is discussed
below.
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Notwithstanding the challenge, the Court finds that the Debtors had a chance to reorganize.
Dr. Howard was in good health on the petition date, able to earn between $30,000-$50,000 per
month. Debtors had at least $500,000 in exempt retirement funds that could be used to buy back
non-exempt assets and/or fund a plan. Debtors had a reasonable chance of negotiating an
agreement with their unsecured creditors to pay a substantial dividend and keep some or all of their
LLCs.
FFCU’s e-mail stating it would vote against any plan if Debtors did not obtain independent
appraisals of their properties does not, as the UST asserts, indicate a hopeless cause. Finding that
reorganization efforts are hopeless because a creditor threatens to oppose confirmation could
discourage attorneys from representing debtors in many cases. See Kitts Development, 474 B.R.
at 723 (discussing the chilling effect an overly strict standard would have). The Court concludes
that the Firm’s services leading up to the first plan and disclosure statement were necessary.
2. The Original Plan and Disclosure Statement. It was clear that unless the
unsecured creditors accepted Debtors’ original plan, it could not be confirmed. That is not fatal to
a fee application. Many plans contain terms favorable to the debtors and involve negotiation.
Many cannot be “crammed down” without amendment. Based on Debtors’ income and assets, it
was not clear that negotiation was going to fail when the original plan and disclosure statement
were filed. The fees charged for the plan and disclosure statement therefore were necessary.
3. The Amended Plan and Disclosure Statement. By the time the amended
plan and disclosure statement were filed, however, it should have been obvious that Debtors
needed to make meaningful concessions to get FFCU’s vote or “cram” the plan down. Debtors
did not do so. Instead, they proposed a plan that was substantially similar to the original plan, but
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with sale terms that were patently unacceptable. The sale terms appear to be an attempt to retain
non-exempt property without paying creditors for it, since all of the property could simply be taken
off the market after 90 days and retained.
Based on the amended plan terms and their dealings with FFCU, there was no chance
Debtors could have settled with FFCU based on the amended plan. Because of that, the Court
concludes that the amended plan and disclosure statement were not necessary.
The Court is not entirely unsympathetic to the Firm in this situation. It is natural for
lawyers to want to achieve the best result for their clients, and often it is difficult to balance the
client’s interests with those of the estate in an individual Chapter 11 case. Similarly, the Court is
not suggesting that attorneys risk their fees any time they refuse to accommodate an obstreperous
creditor. Nevertheless, under the circumstances of this particular case, and in light of the interests
and positions of these particular parties, the amended plan and disclosure statement were
unnecessary. The related fees ($11,723) therefore are not compensable under § 330(a).
4. Other Services. Although the plan and amended plan were the main focus
at trial, the UST objected to the Firm’s fee application in its entirety. After reviewing Attorney’s
billing statements and hearing the evidence, the Court finds that the remaining services not
addressed above (such as Chapter 11 administration, claims administration, operating reports, etc.)
were necessary.
C. Were the Fees for Necessary Services Reasonable?
The UST also argues that the Firm’s fees were unreasonable. “[B]ankruptcy court[s] must
consider the § 330(a)(3) and Johnson factors in evaluating whether a proposed fee amount is
reasonable…” In re Market Center East Retail Property, Inc., 730 F.3d 1239, 1249 (10th Cir.
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2013). This is true for contingent and fixed fee arrangements. Id. In applying the factors, the
Court may draw on its own experience about the case and customary rates. In re Weaver, 2011
WL 867136, *3 (Bankr. D.N.M. 2011).11
Having disallowed fees for the amended plan and disclosure statement, the Court must
assess the reasonableness of the fees charged for the remaining services ($49,955), which have
been found to be necessary. The Court weighs each Johnson/§ 330(a)(3) factor as follows:
§ 330(a)(3) Factor Discussion
(a)(3)(A)
Time spent
Attorneys spent 239.2 hours on the necessary services.
This amount of time spent is reasonable for the case.
(a)(3)(B)
Rates charged
The rates charged - $300 for Attorney and $200 for his
associates – are reasonable and customary for attorneys in
New Mexico with their level of experience.
(a)(3)(C)
Necessary/beneficial
As discussed in detail above, the services were beneficial
at the time they were rendered.
(a)(3)(D)
Timeliness
The record indicates that the services were performed
timely.
(a)(3)(E)
Skill/experience
Attorney is New Mexico certified bankruptcy specialist.
The Firm is well known in the field. Attorney is very
skilled and experienced in representing debtors in
possession.
(a)(3)(F)
Customary compensation in non-
bankruptcy cases
Based on the Court’s experience, the fees are consistent
with the customary compensation charged by practitioners
in non-bankruptcy cases.
Johnson Factors Discussion
11 See also Smith v. Freeman, 921 F.2d 1120, 1122 (10th Cir. 1990) (in assessing fees, “[a] district
judge … may …turn to her own knowledge to supplement the evidence”) (quotations omitted);
Case v. Unified School Dist. No. 233, Johnson County, Kan., 157 F.3d 1243, 1257 (10th Cir. 1998)
(“Only if the district court does not have before it adequate evidence of prevailing market rates
may the court, in its discretion, use other relevant factors, including its own knowledge, to establish
the rate.”); In re Recycling Industries, Inc., 243 B.R. 396, 404 n. 6 (Bankr. D. Colo. 2000) (When
there is no evidence of prevailing market rates, the court “may use other relevant factors, including
its own knowledge, to establish the rate.”) (citation omitted); In re Lady Baltimore Foods, Inc.,
2004 WL 2192365 (Bankr. D. Kan. 2004) (A court “may also use its own knowledge and
experience in determining reasonableness.”).
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Time and labor required? This factor is more applicable to contingent fee cases. The
time spent was reasonable, all things considered.
Novelty and difficulty of the
questions?
The case did not present novel or difficult legal questions.
The difficultly was in trying to negotiate a deal with FFCU
and its counsel.
Skill requisite to perform the
legal service properly?
The case required an attorney skilled in Chapter 11 cases,
and with the ability to negotiate effectively. Attorney has
those skills.
Preclusion of other employment
due to acceptance of the case?
It is unclear whether this case precluded other
employment. Since Attorney was billing hourly, this
factor is not particularly applicable.
Customary fee? The fee is customary for a case of this size and
complexity.
Whether the fee is fixed or
contingent?
The hourly rates charged by Attorney and his associates
were fixed.
Time limitations imposed by the
client or circumstances?
There is no evidence of time limitations. The Firm
provided services in a timely fashion.
Amount involved and results
obtained?
Debtors had to deal with about $5 million of debt, which is
fairly large for a New Mexico individual Chapter 11 case.
Debtors did not reorganize under Chapter 11.
Experience, reputation, and
ability of the attorneys?
Attorney and the Firm are very experienced and have good
reputations as debtor in possession counsel.
Undesirability of the case? This factor is more applicable to contingent fee cases. The
case was challenging. There was substantial animosity
between Dr. Howard and FFCU.
Nature and length of professional
relationship with the client?
This factor does not apply to Chapter 11 DIP counsel.
Awards in similar cases? A fee award of $50,000 is consistent with awards in cases
involving a high amount of debt, active creditors, and
various non-debtor entities.
Most factors weigh in the Firm’s favor or do not apply. After weighing all the factors, the
Court concludes the fees for the remaining services are reasonable.
D. Paralegal Fees.
Finally, the Firm asks the Court to rule on whether it can charge paralegal time for filing
documents using the Court’s electronic filing system, CM/ECF. The question is a fair one, but the
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UST did not object to the fee application on these grounds and takes no position on the matter.
The Court therefore declines to rule on the matter.
IV. CONCLUSION
Debtors and their counsel took aggressive positions in this case. That is fine. At some
point, however, they should have realized that no plan could ever be confirmed unless they made
meaningful concessions to the controlling unsecured creditor. The amended plan and disclosure
statement were drafted and pursued after this point, and therefore were not necessary. The
remaining fees ($49,955) were charged for necessary services and are reasonable in amount. A
separate order will be entered.
_______________________________________
Hon. David T. Thuma
United States Bankruptcy Judge
Entered: March 3, 2016
Copies to:
William F. Davis
6709 Academy NE, Suite A
Albuquerque, NM 87109
Leonard K. Martinez-Metzgar
P.O. Box 608
Albuquerque, NM 87103-0608
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