Furr's Supermarkets, Inc.

UNITED STATES BANKRUPTCY COURT
DISTRICT OF NEW MEXICO
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06/14/06
Furr's Supermarkets, Inc.
01-10779
Minutes of Hearing Held On 5/14/02 Re: [1463-1] Application For Compensation (
Fees: $ 48,495,50, Expenses: $ 4425.17) by Stuart E. Hertzberg, I. William
Cohen, P. Casey Coston, [1334-1] Application For Compensation ( Fees: $
1,096,641.92, ) for period of 9/1/01 through 10/31/01 and 2/21/01 through
Received on: 2002-05-14 14:17:25.000
2002-05-14 14:17:25.000
2002-05-15 00:00:00.000
Jill Peterson
Case 01-10779-nlj7 Doc 1662 Filed 05/14/02 Entered 05/15/02 09:31:00 Page 1 of 17

UNITED STATES BANKRUPTCY COURT
DISTRICT OF NEW MEXICO
Clerk’s Minutes
Before the Honorable James Starzynski
James Burke, Law Clerk
Jill Peterson, Courtroom Deputy
Joe Jameson Court Reporters
(505) 242-2809
Sara Edmonds Troske
Date:
TUESDAY, MAY 14, 2002
In Re:
FURRS
No. 7-01-10779 SA
Oral Ruling on Application for Fees by Pepper, Hamilton
Oral Ruling on Application for Fees by Deloitte and Touche
Attorney for Heller: Paul Fish
Attorney for UST: Ron Andazola
Attorney for UCC: William Davis, William Cohen and Casey Coston
Attorney for Trustee: Robert Jacobvitz
Attorney for Deloitte: Michael Li
Attorney for MetLife: Jennie Behles
____________________________________________________________________
Summary of Proceedings: Exhibits ______
Testimony ______
ORAL RULING ATTACHED
JACOBVITZ WILL PREPARE ORDERS
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1 A substantial added benefit for Furrs employees of the
partial turnaround that prevented most of the stores from
“going dark” before a sale was the continued employment of
thousands of the employees.
1334 and 157; core; 7052
Overall standards (§330(a) is the standard):
1. The Court is not bound to accept the agreement of the parties as to
compensation, and may (and indeed may be required to) independently make
a determination of the amount of compensation that should be allowed.
In re Albrecht, 245 B.R. 666, 672 (10th Cir. B.A.P. 2000) (bankruptcy
court has an independent duty to review professional fee applications,
even if no party in interest objects), affirmed In re Albrecht, 233 F.3d
1258 (10th Cir. 2000). And an overarching standard for the award of
fees is what value the services contributed to the estate, regardless of
what the lodestar figure (rates times hours) is. Rubner & Kutner, P.C.
v. U.S. Trustee (In re Lederman), 997 F.2d 1321, 1323 (10th Cir. 1993).
Some overall considerations in this case:
2. The primary events or actions that contributed the substantial value to
this estate were the Fleming sale, the slowing of the massive losses
being suffered by the estate so that the estate’s assets were preserved
long enough to be sold (in this case, to Fleming)1, and the day-to-day
work of administering the estate, including but not limited to
implementing the Fleming sale and ensuring that the W-2's and 1099's
will be issued timely and the employees’ pension and 401(k) funds are
safe and available to the employees. The sale to Fleming was brought
about largely by the efforts of Messrs. Golleher and Mays, Peter J.
Solomon Company and the estate’s counsel (Skadden, Arps, Slate, Meagher
& Flom, and Jacobvitz, Thuma & Walker). The partial turnaround of the
company came around largely as a result of the management skills of
Messrs. Golleher and (especially) Mays. And the day-to-day work of
pushing the estate through the chapter 11 liquidation process (including
preparing the estate for the conversion to chapter 7) was due in large
part to the efforts of Jacobvitz, Thuma & Walker.
3. The Unsecured Creditors’ Committee (“UCC”) and its professionals will
have contributed value to the estate to the extent that their efforts
helped bring about those benefits and to the extent that the UCC
(including its professionals) benefitted its constituency and
contributed to the administration of the estate. From a review of the
file and the applications and objections, it appears that the UCC on the
whole contributed relatively little to the major events that benefitted
the estate. The sale to Fleming was brought about largely by the
efforts of Messrs. Golleher and Mays, Peter J. Solomon Company and the
estate’s counsel (Skadden, Arps, Slate, Meagher & Flom, and Jacobvitz,
Thuma & Walker). The partial turnaround of the company came around
largely as a result of the management skills of Messrs. Golleher and
Mays (“G&M”). And the day-to-day work of pushing the estate through the
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chapter 11 liquidation process (including preparing the estate for the
conversion to chapter 7) was due in large part to the efforts of
Jacobvitz, Thuma & Walker. In none of these three areas did the UCC
play a significant affirmative role. Were those the only matters that
counted, the UCC would not be able to show that their services were
“necessary” for the estate, In re Lederman, 997 F.2d at 1323-24
(inability of debtor in possession to develop and complete a plan should
have been apparent to counsel from commencement of the case, and thus
debtor’s counsel’s work was not necessary and would not be compensated).
The UCC (and its professionals) did monitor the sale, the turnaround and
the administration of the chapter 11 case, and did look out for the
interests of its constituency, and for that reimbursement is due, since
that function is necessary for the estate.
4. On the other hand, this is an estate that may be threatened with
administrative insolvency, and even if not, there is a question about
whether the priority claims will be paid in full, and even if the
priority claims are paid in full, there will be little if any
distribution on non-administrative and non-priority claims, such as the
prepetition severance pay claims of the laid-off employees. Thus this
case was less than completely successful.
5. But the fact that the case may be administratively insolvent is not a
reason for reducing fees as a way of distributing the (perhaps) limited
funds for professional fees. In other words, I should determine what
the services for all the professionals were worth as if there were
enough money to pay all the fees in full, and then the reduction due to
admin insolvency (if that turns out to be the case) can take place on a
purely mathematical or automatic basis.
6. Issue of rates is not before the Court, because of language of §328(a)
which limits changing the compensation rate to changes in circumstances
that could not be reasonably anticipated at the time the rates were
ordered.
7. Also, the statute provides that the Court must take into consideration
“whether the services were necessary to the administration of, or
beneficial at the time at which the service was rendered toward the
completion of, [the case];...” § 330(a)(3)(C). In other words, as
Deloitte’s counsel accurately argued, if a professional took an action
which at the time would have appeared to a reasonable person as
necessary, hindsight and changing circumstances should not intervene to
decrease the compensation allowed for that work.
8. This is not applying the old “economy” rule that the Code has forbidden;
rather, it is applying a standard that a hypothetical informed and
reasonable client would impose upon reviewing the bills.
9. In that connection, I think that a client would question the total UCC
professional compensation and committee reimbursement of $2.35mm. Given
the role of the committee in a chapter 11 case and given the fact that
this case may have started out as a “national” (big) case but relatively
quickly began to look like a lot of “sound and fury signifying nothing”
(so to speak), $2.35mm is too much for the committee to have spent on
its professionals.
10. Also, fairly soon it should have been clear that a sale of the business
was a good possibility (despite all the talk of the “stand-alone” plan),
that the sale would have to be substantially in excess of the secured
debt in order to generate anything for the unsecured creditors (given
among other things the rate at which the professional fees were being
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accumulated), or at least that the committee would have to find
significant unsecured assets, and that such a sale would be unlikely to
happen.
11. Would be helpful if applications were done sort of like Skadden’s:
description of what the category covers and then (1) a fee app total for
that category (2) inserted at that point (in the front of the
application).
==========
COMMITTEE EXPENSES
I have reviewed the committee’s application for reimbursement of
expenses and also the UST response and the Heller Objection.
First, for simplicity’s sake, I need to address the expenses incurred by
Sandra Shirmang (the Kraft representative) for the trip to ABQ two days before
the UCC was constituted. The trip began on February 12, and the Committee
members were appointed by the UST on February 14. That figure is $786.31, and
it may not be reimbursed. I am not even sure why the figure was included in
the list of expenses to be reimbursed. At a minimum, and even assuming that
part of the expenses for this trip were incurred on or after February 14, the
amount should have at least been prorated. I have to wonder therefore what
was going through the mind of Ms. Shirmang and of Committee counsel when that
got put into the reimbursement request.
As I said at the beginning of the evidentiary hearing, in the larger
picture, in terms of money, this application is small potatoes. And these
folks did put in the travel, etc., and presumably did the work, and their
companies are getting paid little if anything out of this, and I don’t want to
discourage future creditor participation on committees by denying or
substantially trimming reimbursement of these expenses.
However, in this case (after I had pretty much made the foregoing
remarks to everyone and suggested that there was not much point in challenging
the committee expenses), what was disclosed during the final hearing was what
I consider to be unusual circumstances that warrant reducing the reimbursement
of committee expenses.
The witness speaking for the committee was Mr. Salvadori. He was the
one selected by the committee counsel to speak for the committee, and I think
that he testified candidly. As is apparent from the remarks that follow, I
have taken Mr. Salvadori as a representative of the Committee not only
officially but as representative of the committee members’ attitudes and
decision-making.
VP of credit services for Con-Agra. 2nd largest food processor in US;
$27mmm sales. Chair of the UCC. He also served on the Bruno’s, White’s Farm
Fresh, Revco and both Grand Union cases, among others. Other committee
members included giants such as Kraft, Pepsi and Nestle. And there were
others in this diverse group – Rick Johnson, a union representative, Bueno
Foods, and Earthgrain Foods – that were not and should not be considered naive
and inexperienced.
What clearly came across to me, from Mr. Salvadori, were two things in
particular:
a. It was quite clear to me that the committee’s attitude was that the
debtor should be heeding the committee’s advice to the debtor on how to run
its business, and that the committee should act almost as a board of directors
or oversight management team for the chapter 11 proceedings, and that if the
debtor did not heed the committee’s instructions then the committee would not
relent in attempting to force the debtor to do things the “committee way”. An
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example of that was the continued insistence that a trade lien be set up as a
method of financing inventory purchases. Even if this were to have been shown
during the trial to have been a viable mechanism (and it was not), the DIP had
the business discretion not to pursue that avenue, and it almost seems as if
when the DIP did not heed the committee’s advice, the committee looked on the
DIP as being defiant or recalcitrant.
Concerning the trade lien, which was a recurring theme of why the
committee and its professionals took various positions and action, there was
no proof that the trade lien was a viable idea in this case. For one thing,
there was no proof that they (DIP and/or committee) would be able to get
vendors who were getting cash up front to instead take an admin lien and
undergo risk of nonpayment. And Mr. Forcum was unable to say how or whether
it would have worked. Salvadori testified that Mays admitted in June that he
(Mays) should have pushed for trade lien. But this single allegation,
unsupported by any detail, any documentary evidence, and especially by any
testimony from Mays himself, who presumably was available to at least give a
deposition, is not sufficient evidence to establish anything. And in any
event by April 18 the committee knew that Debtor was not getting enough trade
credit, so the issue of a trade lien should have become a more minor issue in
the relations between the debtor and the committee.
In fact, I must say that my sense of the trade lien issue is that it
became a bigger issue in retrospect; that is, as a way to argue for the
justification of actions taken and of fees, rather than only an issue at the
times that it was raised with the debtor.
And similarly, there was discussion about the committee’s continuing
hopes for a “stand alone plan” – that is, a plan that would allow the business
to continue in some form, so as to provide a return to unsecured creditors,
instead of a sale. Throughout the case there really was little prospect of a
sale for such a large price that would result in anything for the unsecured
creditors, especially after not only the secured creditors were paid, but
after the administrative and priority claimants were also paid. From the
outset the committee knew that the secured creditors were seeking a sale of
the business, and that the DIP was pursuing a sale as at least one very
serious option, and the reports from DT/DC should not have provided a
committee of objective experienced business people with much hope of a sale
that would be so successful. Yet the committee and its counsel have taken the
position that such a sale was one of the reasons that they pursued the case
the way they did. Again, it appears to me that this is a position taken by
the committee and its counsel more in retrospect than in reality at the time.
b. Mr. Salvadori admitted that the committee considered that the money
to pay the committee professionals was coming from the secured creditors and
not from the pockets of the committee members. It is true that Salvadori said
in response to the Court’s question that the committee thought all the
expenses would be covered by funds generated from the DIP’s operations or
assets. However, in subsequent questioning by Heller’s counsel, Mr. Salvadori
said that committee counsel said that secured lender would pay this, although
that would reduce the dividend to unsecured creditors. He thought there was a
carve out: it was funded, and a certain amount would go to pay DIP and UCC
professionals, and that was the secured lenders’ money. And in connection
with the Motion to Appoint a Trustee, Mr. Cohen conceded (to his credit) that
the committee did not care about the cost at that time when it instructed its
counsel to file the motion for the appointment of a trustee. In consequence
of those facts or understandings, the committee did not monitor or attempt to
hold in check the fees being incurred by the committee professionals.
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I also think that, given this committee’s experience and sophistication,
the committee should be charged with monitoring their counsel. Were the
committee less sophisticated, as is frequently the case in the few New Mexico
chapter 11 cases that have committees, I would certainly not expect the
committee to do that monitoring. But here, the committee members were from
companies that routinely hire and pay significant attorney fees each year;
many of them are truly what law firms covet as “blue chip” clients. And as
such, the Court is convinced that each (or almost each) member of the
committee inspects its own counsel bills closely, to ensure that it is getting
full value for the dollar, if not more. No such monitoring or inspection took
place in this case, and that is a second reason for reducing the committee
members’ reimbursement.
This would be a good time to talk for a moment about a related issue,
and that is where the DIP was going financially early on in the case, and what
the committee knew about that and what it did about that. The introduction of
DT Ex. M (the DT presentation to the committee at its April 18 meeting), and
the cross examination of Salvadori about that presentation, make it fairly
clear that by the April 18 meeting, the committee knew or should have known
that DIP was doing even worse than its (DIP’s) downgraded projections. Pp. 5-
6. The DIP was getting virtually no trade credit (e.g., p. 26). The DIP was
replenishing inventory with DIP facility. The DIP was in violation of a
number of its borrowing covenants under the DIP Financing order (p. 28). And
at this time Golleher was talking to them of a sale, and he was an experienced
person to be talking about that sort of thing.
Further bad news in the April 18 presentation was the 25% lower attendance as
of April 7, and the average transaction amount being down from CY 2000 by 24%.
P. 18. D&T predicted that DIP would be out of cash by the week of June 2
(page 27), and would be unlikely to be able to increase weekly sales enough to
break even (page 37).
In summary as of April 18: sales projections were off, there were no lenders
willing to step in, and the debtor soon would be out of money. And page 69 of
DT M showed more bad news: a deficit of $3mm/week, the trade lien idea was not
going anywhere, and there was heavy use of DIP facility.
Pp. 78-93 of DT M was the valuation of sales of stores: market and income
approach. That valuation analysis shows $140-180mm as the possible sale price
range, but with warning that if the revenue targets were not met (and they
were not being met), the income valuation could be “significantly worse”.
Then on page 99, is the Preliminary High Level Liquidation analysis, showing a
recovery range of a high of $127mm down to $61mm, and page 106 shows $160mm in
secured debt. Mr. Salvadori testified that those numbers did not include the
Fleming “give-back” (22 stores that Fleming would not take – although as of
April 18 he would not have known of the Fleming sale) plus unsecured leases.
But even taking into account the Fleming give-back, is it credible to think
that the 22 stores that Fleming did not want even for resale to someone else
represented the possibility of significant net income to the estate? Later
testimony not related to DT M also made clear that the committee never really
considered as a source of income for the estate any potential preferences that
committee members may have received. So only the unsecured leases represented
much real value for claimants other than the secured creditors in April 2001.
Bottom line, there was a lot of bad news in DT M that should have put
the committee on notice that this case was not turning out to be a big or even
small successful reorganization that would support a lot of work and a lot of
fees for that work. And I think the committee could and should have concluded
this. And without going into the details, the news that came from the debtor
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in the following weeks and months did not provide any grounds for an
appreciably more optimistic outlook. It was clear from the outset of the case
that a sale of the entire business was a strong possibility, and that the
secured creditors, who had insisted that the DIP Financing Order include a
provision for an investment banker to investigate sales, were in favor of such
an outcome. And it was just not credible to believe that these secured
lenders would be likely to give up or concede any significant amount of the
assets that they had a lien on in order to pay for professional fees or, for
that matter, to pay for anything else that the lenders did not think was going
to directly and substantially benefit them. For the most part, that “giving”
was done (that is, any concessions were made) either in the DIP Financing
Order or in the hiring of Golleher and Mays.
This analysis of the status of the debtor by mid-April 2001 is
applicable to all the compensation applications being addressed today.
In consequence of these findings, but also taking into consideration the
competing policy of not discouraging creditor participation in future chapter
11 cases and recognizing that the committee members did expend their
companies’ time and money in rendering service to the estate, I will order
that the expenses of the committee be reduced 20%. That may in effect be
little more than a slap on the wrist, especially for companies such as Kraft,
Nestle, Con-Agra and Pepsi, but for companies of that size, even denying all
reimbursement would be little more than a slap on the wrist. Still, it is
important to recognize the problems with the services rendered by the
Committee members. Thus, the arithmetic of the allowance of the reimbursement
is as follows: the committee application seeks $35,648.09, from which Ms.
Shirmang’s expenses of $786.31 are subtracted, leaving a remainder of
$34,861.78. 80% of that figure is $27,889.42, and that is what is allowed for
reimbursement of the Committee expenses.
==============
PEPPER, HAMILTON
I had thought that the First Fee app (#897) was for $617m, but the numbers do
not add up to that, so I don’t know where that information came from. Not
before the Court was Pepper Hamilton 3 (#1463): $48m fees and $4m costs
Mr. Cohen argued in his opening statement that behind the scenes the
committee professionals of Pepper were able to accomplish significant savings
for the estate. I did not see much evidence of that in the record.
On a similar note, I agree with that part of the opening statement of
Mr. Keleher in which he said that the professionals (at least ones paid at as
a high rate as these ones) are paid to make quick accurate decisions (and
recognize reality). I don’t see that that happened in this case as much as it
should have.
Mr. Cohen’s testimony was that at the outset the debtor was overly
focused on the KERP (Key Employee Retention Plan) and compensation of its
managers and not on the critical issues of keeping the business running,
getting inventory on to the shelves in an economical way and reducing expenses
and unprofitable operations (the 4-wall EBITDA issue, among others). In
addition, Dahlen did not even show up to meet with the committee (although
whether Dahlen’s departure was a disadvantage is certainly debatable), and the
committee did not have confidence in Mortensen, who was saying among other
things that the company had adequate financing and would soon emerge from this
chapter 11. Mr. Forcum largely echoed this view during his testimony. And
somewhat later, although Mr. Cohen had a good relationship with G&M, they
seemed to be jumping back and forth between reorganizing the company and
selling its assets, and the company itself was in turmoil. Based on his
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considerable experience, these should have all been warning signs to Mr. Cohen
that this might not be a well run chapter 11, leading to concomitant concerns
about minimizing expenses.
Part of the testimony focused on the billing produced by attorney Casey
Coston. Heller and UST argued that Mr. Coston overbilled on some matters.
For example, on two days (February 21 and 22), Mr. Coston billed a total of
two hours and 1.8 hours respectively – 2/10 of an hour per entry for ten
entries on the first day and 2/10 of an hour per entry for nine entries on the
second day – in reviewing entries of appearance and apparently dictating
something such that a secretary or legal assistant entered the party
represented in a party database as part of the Pepper firm’s tracking of the
case and making information available to the committee and its professionals.
(There is some considerable question in the mind of the Court whether this
sort of work could not and should not have been done by a paralegal, but the
Court does not need to consider that in light of its disposition of the
applications.)
In this case, despite the explanations by Mr. Cohen, the Court finds
that Mr. Coston overbilled the review of the entries of appearance. The Court
accepts billing in minimum increments of one tenth of an hour, subject of
course to overriding considerations of whether a matter should be billed at
all, or written down in a subsequent review of the bill, etc. In this case
there was simply no reason to bill a review of an entry of appearance at, say,
6 ½ or 7 minutes (the minimum that it would take to get over the .1
incremental minimum). Pepper simply did not provide sufficient proof (and the
applicant is the one that has the burden of persuasion for its compensation
applications) that whatever Mr. Coston was doing, or whatever the Pepper
system was for keeping track of parties in a case, was worth that time.
But the Court’s concern in this instance goes further. Mr. Coston
should not have billed the review of ten entries of appearance for a total of
1 hour or nine entries for .9 hour.. The Court is comfortable that the
entries of appearance for those days could have been “batched” and dealt with
in their entirety in one-tenth or maybe two-tenths of an hour each day.
Permitting minimum billings of one tenth of an hour, as is the norm outside
the bankruptcy world as well as inside it, is not a license to manipulate the
work to achieve the maximum billing for that work that should fairly be billed
at a much lower total. The test is not merely a mathematical one of how many
increments of time the work can be stretched to cover, but rather how much
time it reasonably takes to get the work done, albeit with a recognition that
the transaction costs of recording time, etc. ought also to be taken into
account and compensated (resulting in the widespread acceptance of a minimum
billable unit of one-tenth of an hour).
Further examples of Mr. Coston’s overbilling are that he appears to have
spent an hour on Feb 23 comparing compensation procedures in other cases and
this one. The explanation from Mr. Cohen was that they were concerned that
the proposed interim comp provisions would not work in this case. But this is
not billable. And in the First Fee App: Tab 4, page 76 – .5 for Mr. Coston to
review UST objection to the Solomon employment app (doc 565) on June 21. But
the minutes (doc 599) show that the UST objection was denied at a hearing on
June 13. And Tab 4, page 15 (first entry on June 15, 2001) shows that Mr.
Coston reviewed copy of those minutes of June 13. And at Tab 4, page 76:
second entry – Coston recorded 1.3 hours on issue of indemnity. But next day
was the hearing on employment of Chanin on Wed, June 27 (minutes). Chanin was
the only UCC pro seeking indemnification. This research was directed at
Solomon. If court had already approved indemnity for Solomon, then this work
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would not be needed. Again, this work has the appearance of billing simply
for the sake of billing and little more.
No doubt Mr. Coston did in fact do work, and probably a substantial
amount of work, for which he billed the appropriate amount of time. But
practically speaking the lodestar approach to billing and to allowing
compensation is necessarily based on an accurate and reasonable statement of
the time spent in doing the work, and everyone’s assumption that the statement
of time will be accurate and reasonable. (And the reality is that, with rare
exceptions, when we – judges, professionals, and everyone else in a case –
review fee applications, we all start with the assumption that the time sheets
submitted with fee applications are accurate. That is consistent with our
further assumption that lawyers and other professionals are basically honest
people until shown to be otherwise. And to assume otherwise at the outset in
every case would increase the transaction time for every application immensely
and for no good purpose.) Mr. Coston burst that assumption in the case of his
time entries.
The problem that this overbilling causes for Pepper is that it seriously
affects the credibility of Mr. Coston; the Court has serious questions about
how many other time entries he recorded that are inflated. And in turn, the
Court wonders why there was no review of his time entries by one of the two
Pepper attorneys who had the primary responsibility for this engagement. (It
seems that it is already clear to the Court why the committee did not review
or object to the billing, or at least one reason is clear; as recited above,
the committee felt that it was not paying the bills and therefore it did not
care what was billed to the estate.) In any significant engagement, whether
in or out of bankruptcy (and this was certainly a significant engagement), a
firm is expected to have someone in charge of the engagement review the bills
for accuracy and reasonableness, both as to the individual entries and the
overall billing. That was not done in this case. Thus the firm itself fell
down on the job, as did its client the committee.
Mr. Cohen did testify that the individual timekeepers at the firm have a
system for inputting time, and that they are, in his experience, honest and
forthright people who would not pad their time. For the most part, the Court
finds from the time sheets that it has examined that Mr. Cohen’s assessment is
probably correct. But Mr. Cohen said that of Mr. Coston also. And while Mr.
Coston may be honest and forthright, his understanding of what is acceptable
for billing is not. A review of the time entries seems to focus the problem
of overbilling for individual entries on him. In consequence, we really don’t
know, with respect to Mr. Coston, what billing is accurate and what is not.
The Court assumes but (as in most cases) will never know for sure exactly how
much time each task actually took the biller to accomplish; since the Court
was not there to observe the process, the Court must necessarily rely on an
examination of the bills themselves, the surrounding data and the honesty or
integrity of the persons doing the billing. For most of the employees of the
Pepper firm, that examination sufficiently evidences honesty and
reasonableness. The same cannot be said for Mr. Coston’s billing.
In Gray v. English, 30 F.3d 1319 (10th Cir. 1994), the court provided
guidelines for reducing compensation in light of misconduct. In that case the
bankruptcy court had denied fees to a law firm in the amount that was earned
by an attorney of the firm that had lost his disinterested status (by
surreptitiously purchasing a claim against the estate), but had not denied the
fees earned by the other members of the firm who had performed services for
the estate and who were unaware of the wrongdoing of the attorney in question.
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On review, the Tenth Circuit panel did not overrule the decision, since it was
within the discretion of the trial court. But the panel did say as follows:
In exercising the discretion granted by the statute we think the
court should lean strongly toward denial of fees, and if the past
benefit to the wrongdoer fiduciary can be quantified, to require
disgorgement of compensation previously paid that fiduciary even
before the conflict arose. This approach is most in keeping with
common law fiduciary principles and best serves the deterrent
purpose of the rule. See Continental Ill. Nat’l. Bank & Trust v.
Charles N. Wooten, Ltd. (Matter of Evangeline Ref. Co.), 890 F.2d
1312, 1322-24 (5th Cir. 1989) (fraudulent fee application deserves
denial of all compensation). (Other cite omitted.) 30 F.3d 1324
I realize that this is not a case of lack of disinterestedness or
conflict of interest. But the Tenth Circuit did cite to such a case, which
was the Evangeline Refining case. In that case, the Fifth Circuit did deal
with time records that appeared to be falsely submitted, and ended up
remanding the case with directions that the bankruptcy court state the basis
for the amounts that it subtracted, and did not subtract, from the amount of
compensation sought by the applicant. At page 1325 of the case (not the
portion of the case cited by the Tenth Circuit), the 5th Circuit panel stated
as follows:
When a trustee or attorney for the trustee intentionally
misrepresents facts to the court in a fee application or in
related proceedings, a mere reduction in fees would clearly be an
inadequate deterrent. At least where such misrepresentations are
serious or substantial, all compensation should be denied. 890
F.2d at 1325.
I take Gray v. English, and I took it this way when it first came out,
as a caution by the Tenth Circuit to deal firmly, if not even expansively,
with situations in which the applicant has violated the Code or otherwise
misbehaved.
In this instance, the Court finds it appropriate to disallow any fees
for any of the work done by Mr. Coston that appears in any of the fee
applications. This addresses not only the evident overbilling for which he
was responsible; it also addresses the failure of the firm to monitor his
billing. Disallowing all of Mr. Coston’s billings may seem harsh, but it puts
Mr. Coston in the position of dealing with his firm about this problem, it
takes into account the fact that the Court cannot tell which of his billings
are accurate (thus demonstrating the effect of the firm’s failure to meet the
burden of persuasion concerning his billings), and it sends a message to the
Pepper firm that someone needs to ensure the accuracy of the bills.
Disallowing all of Mr. Coston’s time precludes the necessity for me to
spend additional time pointing out various entries in Mr. Coston’s time sheets
that would be disallowed anyway. For example, the entries early in the case
reflecting Mr. Coston’s learning the billing practices approved by the
bankruptcy judges in this district, and the additional time spent preparing
the form of order allowing the firm to be paid 75% of fees and GRT and 100% of
costs on a monthly basis, is something that a firm that wishes to practice in
various jurisdictions around the country needs to learn as part of that
national practice, and not bill the estate for.
In addition, there are three areas of work for which the Court has major
reservations about full compensation for all that the firm has billed for: the
challenge to the employment of the estate professionals Skadden and Solomon,
the challenge to the employment (in reality, the rates of compensation) of
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G&M, and the M/Appoint Trustee. These are things the committee wanted pursued
but turned out not to benefit the estate much if at all. And this is in
addition to the time spent on the executive search for new management for the
DIP, which this Court considers to have been an overreaching by the committee
of its role and largely a waste of time.
(Mr. Cohen testified that Pepper’s position was that, even when it
disagreed with the committee – the client – it would nevertheless do as
instructed, and if a court later ruled that the action taken for the committee
should not be compensated, that was a burden or loss that the firm would
shoulder. Given the longstanding relationship between Pepper and some of the
larger committee members, as illustrated by the Jitney Jungle and Bruno’s
cases, for example, Pepper’s policy probably makes good business sense. But
the Court also accepts the reasoning given by Mr. Cohen, that Pepper wanted
its client to be able to make its decisions unhindered by a consideration of
how the work would be paid for. (Outside of BR, this is less of an issue: if
the client wants it done and it is ethical, can do it if client is willing to
pay for it. Inside BR, when the issue is whether a judge will allow it to be
paid for and there is no back up source of payment, the issue is more complex,
at least for some firms.) In this case, Mr. Cohen testified that he discussed
with the committee the possibility that the challenges (Skadden and G&M) might
be seen as a fruitless gesture, but did not mention not getting paid because
he did not want that to seem to be a motivating factor. And at Pepper, they
do what the clients want (but not of course anything illegal or unethical),
regardless of these issues of payment.)
So a further discussion of these three factors and the reductions
attributable to them, are as follows:
The challenge to the employment of estate professionals Skadden
and Solomon:
The committee challenged Skadden’s employment for conflicts of interest,
including particularly Skadden’s relationship with a number of creditors in
the case such as Metropolitan Life. PH’s advice to the committee, that such a
challenge was likely to fail, and that indeed PH itself had relationships with
some of the creditors, appears to have fallen on deaf ears. PH is to be
credited with providing this advice that turned out to be so accurate. Why
the committee ignored the advice is not clear; it may have been perhaps merely
the intent to deprive the estate of nationally recognized competent counsel.
Nevertheless, the objection was joined in by the UST, and usefully aired
factual and legal issues that were resolved with a court decision that, one
hopes, contributed to more confidence in the administration of this case and
the bankruptcy system in general. Thus, even though the committee could
usefully have taken its counsel’s advice on this subject, or should have, I am
hesitant to in effect punish the firm for the committee’s decision on this
particular issue, despite the Firm’s position on what happens when the
committee tells it to do something that the Firm advises against.
I do have some question about why the committee challenged the indemnity
provisions of Solomon and then did not at least promptly withdraw the
challenge when its own investment banker, Chanin, demanded the same treatment.
But at least the committee’s counsel argued for the same treatment at the end
of the day.
The category that these objections came under is B171 – Employment of
Professionals/Objections, and includes as well objections to the hiring of the
investment bankers, who ultimately were hired on much the same basis as the
Committee’s investment bankers Chanin. The First App lists total fees for
this work of $33,919 (from pp. 8-9 and page 2 of each of the attached four
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invoices); the Second App is for a negligible amount. The Court will not
deduct anything from this category.
The challenge to the employment terms of Golleher and Mays, and
the M/Appoint Trustee.
At the end of the day (literally, in this instance), the fight over the
employment of Golleher and Mays came down to a comparatively minor adjustment
in the compensation of those two for what they were being hired to do. Mostly
that fight was a waste of time and money. Similarly, the motion to appoint a
trustee, which was filed and never litigated (indeed, the Court questions
whether it was ever genuine), was a waste of time and money. These actions by
the committee, in the face of contrary advice from its counsel, appear to be
part of that almost-hubris that seems to have characterized much of what the
committee did during this case.
The category for this work was B190 – Contested Matters/Motions (page 9
of the First App), and the total in the First App was $32,041 (second page of
the second, third and fourth invoices). Although some of the time in that
category was usefully spent, such as analyzing the terms of the G&M agreement,
that review and advice to the committee should have cost no more than about
$2,000. This portion of the application will be reduced by $30,000, leaving
an allowed balance of $2,041.
Two other factors lead the Court to further reduce the Pepper bill:
evidence of overworking some matters (with the concomitant failure to review),
and the financial precariousness of this reorganization which began to become
evident at the April 18 meeting, if not before. Mr. Cohen admitted that
following the May meetings, the committee met by telephone, which this Court
takes as one example of a recognition that at least by after the May meetings,
the committee and its professionals realized that this case might face serious
financial problems. In fact, according to Mr. Cohen’s testimony, he admitted
that by April he knew the company was having significant cash problems, and
indeed, at the first meeting with the DIP’s representatives right after the
case began, the DIP made a poor showing, focusing not on financing but on the
Key Employee Retention Plan (KERP), and this in a business where the profit
margins are quite thin to begin with.
An example of overworking the case is the time spent on the preparation
of the minutes of the March 23 committee conference call reflected in PH-K.
And all this was going on in view of the financial precariousness of the
debtor.
Finally, I am left with an impression of carelessness on the part of the
applicant’s senior counsel. For example, the committee’s application for
reimbursement was signed by Mr. Hertzberg, and it asked for reimbursement for
committee expenses of $630,278.26. That figure, wildly inaccurate on its
face, appears about two inches from Mr. Hertzberg’s signature. It is not like
the number is buried in the text of the document and not especially
noticeable. Did Mr. Hertzberg even look at the figure before he signed the
application? And Mr. Cohen testified that no one reviewed the first PH
application before it was signed and filed. Would they have forgotten to do
such a thing before sending out a bill to a client, including one the size or
stature of a Con-Agra, Kraft, Nestle or Pepsi? I don’t think so.
At the same time, there clearly was good work that PH did, and some work
that was of particular benefit to the estate. For example, the B112 category
– General Creditor Inquiries – consisted of “time spent by Applicant’s
professionals responding to telephone calls and correspondence received from
creditors and other interested parties inquiring about the status of the case
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and other matters of a general nature.” One of the serious problems in this
case was the difficulty of informing the general creditor body who could not
afford counsel – primarily employees and small (and some not so small) vendors
– about how the BR process is supposed to work, what are the priorities for
payment, what payment they could expect, why some people were getting paid
literally millions of dollars when others were not getting paid anything, etc.
That job did not get done well by the Debtor in this case (although maybe the
Debtor could not do it), and the press did not do it (although accurate and
comprehensive reporting from the press would be nice, that is not necessarily
something that ought to be expected), so the firm should be compensated fully
for that work. The firm should also get credit for having local counsel cover
many hearings, as set out in B155 – Court Hearings, for reducing the non-
working travel time by 50%, as set out in B195 – Non-Working Travel, etc. And
Mr. Cohen testified that he did not bill for his time spent at the auction of
the stores.
In summary, taking into consideration the additional concerns expressed
above, I think it is appropriate to further reduce the bill by 20%, to reflect
the value to the estate as accurately as I can.
In this connection, Heller has argued that Mr. Coston’s overbilling,
other instances of overbilling, and the failure to review the first fee
application before filing, mean in effect that the entire billing was
fraudulent and ought to be disallowed in its entirety. I have considered that
option, especially in light of the guidance proffered by the Tenth Circuit in
Gray v. English, but rejected it as too harsh in these circumstances, given
that Gray v. English involved a specific fraudulent scheme worked on that
court and the bankruptcy system that constituted significantly more culpable
behavior than here, given that there was value contributed to the estate and
given that I believe that the majority of the work done was probably
accurately recorded by the other members and employees of the firm.
So the arithmetic on these two applications goes as follows:
The four invoices attached to the First App total $596,288 in fees and
$46,475.51 in costs, for a total of $642,763.51.
The Second App totals are $98,506.00 for fees and 11,778.77 for costs,
totaling $110,284.77. Those two totals together equal $753,048.28.
The costs of $58,254.28, which is the total in both apps, are allowed in
full. That leaves total fees from both apps in an amount of $694,794, from
which I subtract (a) the $30,000 referred to above for the B190 work, and (b)
the total billings for Mr. Coston in the sum of $109,364, leaving a remainder
of $555,430. This figure I further reduce by 20% for reasons specified above,
leaving a total of $444,344 that is allowed for fees, in addition to the
$58,254.28 of costs.
==========
DELOITTE & TOUCHE, DELOITTE CONSULTING (together, “Deloitte” or “DT/DC”):
Total requested: $1,096,641.92, which includes a write down of $42, which “in
essence creates a fee reduction for the Debtor.” Project Summary from First
Interim Fee Application, at 1 n.1.
This next paragraph addresses the issue of when in the case DT/DC should
be allowed to start billing; DT/DC is allowed to further argue that issue, by
filing a motion on the issue, if it wants. -----The application begins with
work done as of February 21; however, given that the employment application
was filed on March 14, 2001, that is the date from which billing can be
approved for payment. I have considered again the issue of what happens when
a very large global organization is asked to serve as a professional on very
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short notice, and whether that ought to justify the post facto or nunc pro
tunc employment of the firm, effective for some period of time after the
filing of the petition but before the date of the filing of the employment
application. It seems to me there are two unsatisfactory solutions to the
problem, and I do not have sufficient Solomonic wisdom to figure out a useful
third alternative. One would be to enforce the fairly strict (albeit not
completely inflexible) rule that is in effect here in the district of New
Mexico and which has been reinforced by the Albrecht decision: that is, absent
very unusual circumstances, a professional simply may not claim reimbursement
for a period prior to the filing of an employment application. The other
would be to make an exception to that rule in circumstances such as these. I
am still opting for the former. It seems to me that on balance, the bright-
line test of when employment and compensation begin has such a value that it
ought to be maintained except in very unusual circumstances. And a very large
firm has to make a decision, and can make that decision, about how to keep
growing and yet be flexible or agile enough to respond to employment
opportunities that arise in the space of a day or two – and if it cannot, then
it needs to consider whether that cost of growth is worth paying. So any time
that was billed, and any costs incurred, prior to March 14, 2002, will not be
allowed. That means as well that, when I say that “all” or the “entire” the
compensation sought for any given category is allowable, I mean that all the
time starting on March 14 but not any time billed for before that.------------
-----------------
In a related vein, I have a question about how appropriate it is to bill
the estate for preparing to represent a committee or party by doing a
conflicts check, when, it seems to me, a conflicts check is something that
must necessarily be done before any representation, whether in or out of
bankruptcy. On the other hand, some allowance should be made for this
category since the tests for disinterestedness and particularly conflicts of
interest are in fact more rigorous inside bankruptcy rather than outside
bankruptcy. Concerning fee applications by contrast, outside of bankruptcy it
is probably rather seldom that the firm needs to prepare and defend a fee
application, although that could happen in certain contexts, such as civil
rights or perhaps probate litigation. Comparing the entries for category 107
in the first interim and the final (second) applications seems to show
respectively that D&T/DC incurred $63,041.50 “on conflict clearing, retention,
and billing issues throughout the case” and as much as $19,596.50 in preparing
the two fee applications. I find that those numbers themselves are sort of
amazing; out of a bill of a little over $1mm, a little over 6% – over $60m –
is spent just to make sure that the firm can participate in the case. Clearly
a large part of that has to do with the size of the firms themselves. That
DT/DC are so large that it takes tens of thousands of dollars to confirm that
there are no conflict of interest, is simply a cost that the estate should not
have to bear. I will allow 10% for the conflict clearing, which is $6,304.15,
which added to the $19,596.50 for preparing the fee applications, comes to
$25,900.65 for category 107 fees, plus applicable GRT.
On other issues, there will be no deduction for any overlap between
Chanin’s work and DT’s work, since there is little evidence of such an
overlap. I also note that except for Mr. Forcum, no one billed at $600/hour,
and almost everyone was substantially lower than the $600/hour.
Also, I recognize the committee’s desire to match nationally recognized
and experienced firms in its employ with those of the DIP; e.g., Skadden with
Pepper, PwC with D&T, etc. I have no argument with that as such. But even
then, the professionals’ compensation will be judged on what value is
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contributed.
First, concerning the leasehold work which Mr. Cohen said was absolutely
essential because was it was the basis for going forward on hoped-for value
for creditors, the lease valuations still did not require on-site visits,
especially at the stage that the DIP was not meeting its (lowered-
expectations) projections and everyone recognized (or should have recognized
by the summer of 2001 – Mr. Barnett testified that they first started talking
about this in March, sent staff to collect data toward end of May, and started
project in June) that a sale for less than the secured claims against the
estate was becoming more likely. Here Mr. Barnett chose to expand the work to
get a higher quality answer. I don’t question Mr. Barnett’s sincerity and
certainly not his commitment to quality; however, there are times when one
simply cannot afford the higher priced product and needs to settle for the
minimum needed to get the job done. Assuming a cost of roughly $4m per lease
that could have been done for $1m (and they evaluated 3 office buildings, 3
warehouses, and 74 stores), but taking into account that there are necessarily
some additional transaction costs and time incurred, the Court will allow 1/3
of the fees ($416,409.25 ÷ 3 = $138,803.08) and any GRT, plus all the
applicable costs. (My recollection is that none of this work began until
sometime after March 14 – Mr. Barnett testified it was in early June that Mr.
Davis asked for the information -- so the issue of when the DT/DC employment
began is not relevant for this category of work.)
Concerning the FMV of the business, the work done was useful and
appropriate for the beginning of the case, especially when there was some
issue of documents being supplied in a timely fashion and the debtor’s general
state of disorganization. (I am not blaming anyone about the dispute over
document production, just pointing out that the lack of documentation made the
work more difficult.)
The economic reporting on the debtor’s situation was valuable for the
estate in general and the committee in particular; if there is bad news, as
there surely was here, it is better to know it sooner rather than later. I
will allow the entire amount requested for both data analysis and business
analysis.
Once the bad news began to become clear, it became incumbent on all the
professionals, including D&T/DC, to start billing in a reduced manner. This
is particularly the case when the professionals are billing at a blended rate
of almost $300 per hour. (I recognize that the blended rate for the last two
months of the billings considered - from September 1 through October 31 – the
blended billing rate went from about $295/hour to $233/hour.) One of the
reasons for paying relatively high rates to professionals is for their
presumed ability to quickly recognize and react to the symptoms of a rapidly
depleting estate. One example of how that could have been applied is to the
preparation for and staffing of the committee meetings, called Meeting of
Creditors (111). As pointed out above, the April 18 report showed just how
badly the DIP’s business was going, and DT/DC was in a better position than
anyone else connected with the UCC to know that. And things did not get
better after that, and again DT/DC knew about that as well. It is true that
Mr. Forcum testified that based on his experience, a debtor in possession will
drop in business the first few months before recovering. But given the losses
that became acute in April and May, given what the DIP had started with
prepetition (losing customers and foot traffic for lack of product on the
shelves), and given the other circumstances of the case at that time, it
behooved DT/DC to begin at least then to reduce spending. And nothing ever
made that advice no longer relevant to this case. In consequence, the time
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spent preparing for creditor meetings will be reduced by 20%, with the number
being reduced being ($125,188.00 less the pre-March 14 amounts if I ultimately
disallow the pre-March 14 amounts).
The Court also has a question about the numbers for the categories of
financing (109), case administration (104), and employee benefits/pensions
(106). The ultimate question is what benefit that work provided to the
estate, a calculation that is, given the limitations of human nature,
something of a rough cut in most instances, including in this case. I just
cannot shake the concern that, taking into account the case overall, the
charges in these categories were significantly beyond the value to the estate.
Concerning category 109, once the DIP Financing Order was entered, on March 14
as it turns out, much of the financing issue was resolved, for good or bad,
especially when the DIP refused to try to implement the trade lien. The
entire amount for that category should be reduced by 20%. The case
administration fee will be reduced by 20%, and the employee benefits/pensions
work will be reduced by 25%, to reflect in part what a rabbit hole in effect
the whole KERP project turned out to be.
With respect to the remainder of the categories, I will allow the entire
amount requested.
-----Since I have not calculated with respect to each category what the March
14 and afterward sums are, I will leave that to the parties to calculate in
the course of agreeing upon an order, and if they cannot reach an agreement, I
will deal with it. In any event, once the total figures are figured for
period from March 14 onward, and then from that number are subtracted the
additional sums described above, the order should reflect what the amount is
that is allowed to DT/DC.----------------------
======
Trustee’s counsel should prepare the form of orders for all three applicants’
various applications ruled on today.
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