Stark Ceramics, Inc.

OCR transcription for search; preserved printed pages are authoritative

The court incorporates by reference in this paragraph and adopts as the findings and orders
of this court the document set forth below. This document was signed electronically at the
time and date indicated, which may be materially different from its entry on the record.

Vee. bez

Russ Kendig
United States Bankruptcy Judge

Dated: 11:10 AM March 29, 2012

UNITED STATES BANKRUPTCY COURT
NORTHERN DISTRICT OF OHIO
EASTERN DIVISION

IN RE: CHAPTER 7

STARK CERAMICS, INC., CASE NO. 06-61101

Debtor. JUDGE RUSS KENDIG

MEMORANDUM OF OPINION
(NOT FOR PUBLICATION)

Se a a a a a aS a

Now before the court is the First and Final Application for Compensation for Attomeys
for Debtor-in- Possession and Request for Authority to Pay Approved Fees from Retainer
(“Application”). The Application was filed on March 20, 2008 and was held in abeyance
pending the filing of the chapter 7 trustee’ s (“Trustee”) final report. Richard G. Zellers and
Melody Dugic Gazda (“Counsel”) were counsel for Debtor during the chapter 11 phase of this
case and seek $88,630 for services rendered. Two objections were filed, one by the unsecured
creditors’ committee on April 8, 2008 and one by Trustee on February 20, 2012. A hearing was
held on May 27, 2008. Further opportunity for hearing was provided but no requests for
additional hearing were filed.

The court has jurisdiction of this case under 28 U.S.C. § 1334 and the general order of
reference entered in this district on July 16, 1984. In accordance with 28 U.S.C. § 1409, venue
in this district and division is proper. This is a core proceeding pursuant to 28 U.S.C.

§ 157(b)(2)(B).

AUTHENTICATED
U.S. GOVERNMENT
INFORMATION

This opinion is not intended for publication or citation. The availability of this opinion,
in electronic or printed form, is not the result of a direct submission by the court.
FACTS
Debtor, founded in 1909, was a manufacturer of ceramic glazed brick and tile products
and was “the world’s largest producer of structural glazing (sic) facing tile for interiors.” (App.
To Employ Buckingham, Doolittle & Burroughs, LLP, doc. 76, ¶ 4). As with any case, multiple
factors influenced Debtor’s chapter 11 filing on June 29, 2006, but one of the key pressures
involved its deteriorating relationship with the largest secured creditor, FirstMerit Bank, N.A.
(“FirstMerit”). Prepetition, Debtor borrowed money from FirstMerit and later defaulted on the
notes. On April 24, 2006, FirstMerit obtained a $2,035,500.36 judgment, plus interest and costs,
in the Stark County Court of Common Pleas. On the same day, FirstMerit filed a judgment lien,
which was assigned to American First Federal, Inc. (“American First Federal”) in March 2007.
Prior to the judgment lien, Debtor’s real estate was unencumbered.
After seeking bankruptcy protection, Debtor operated as a debtor-in-possession and
negotiated use of FirstMerit’s cash collateral to continue operations. As part of the final cash
collateral order, FirstMerit’s judgment lien was deemed perfected. Although a window to
challenge the lien was provided in the final cash collateral order, the only effort to challenge the
lien was rejected by this court. (Simon v. American First Federal, Inc. (In re Stark Ceramics,
Inc.), Case. No. 06-61101, Adv. No. 07-6259 (Bankr. N.D. Ohio November 12, 2010)).
Consequently, unsecured creditors were denied any recovery from a substantial asset, the real
estate.
Debtor’s case was contentious from the outset. Throughout the case, there were
accusations that the reorganization process was used for the benefit Debtor’s insiders via a sale
to an investor group, which purportedly included insiders, at a discounted rate. Less than two
months after the case was filed, FirstMerit filed a motion to dismiss or convert the case. Relying
on Debtor’s turnaround specialist, FirstMerit argued that the only chance for reorganization was
through “the immediate sale of Debtor’s business or Debtor being able to sell its excess kiln
capacity.” (M. to Dism., doc. 96, ¶ 4). Alternatively, Debtor would face liquidation. 	Counsel
for Debtor confirms this in the reply1 filed to the fee application. While Debtor repeatedly
referenced an imminent sale, and a § 363 motion was filed on November 30, 2006, a sale was
never finalized. On December 5, 2006, the court granted an oral motion to appoint a chapter 11
trustee. On March 27, 2007, the case converted to chapter 7.
The chapter 7 trustee’s final report gives a glimpse of the dismal outcome of this case,
which is administratively insolvent. Trustee has a mere $151,800.11 in receipts, which is
sufficient to pay chapter 7 administrative fees and expenses in full. The funds remaining after
1 The pleading is titled Response to Objection of David O. Simon, Chapter 7 Trustee, to
First and Final Application for Compensation for Attorneys for Debtor in Possession.
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the chapter 7 administrative expenses will provide less than eight percent on chapter 11
administrative expenses. The chapter 11 expenses include amounts incurred to produce product
for a contract that Debtor anticipated receiving but was not executed. According to Trustee, the
manufacturing specs of the product made the inventory nearly worthless. The result was
increased chapter 11 administrative expenses with no corresponding benefit to the estate and
minimal recovery to the administrative claimants. There will be no recovery to priority or
unsecured claimants from estate funds.
Throughout the chapter 11 proceedings, Debtor was represented by Richard G. Zellers
and Melody Dugic Gazda who, at the time of filing, were with the firm of Luckhart, Mumaw,
Zellers & Robinson.2 Their employment as counsel for Debtor was approved on July 13, 2006.
The application stated that they had received a $20,000 prepetition retainer, which is supported
by the Rule 2016 statement filed with the petition. Their fee application contradictorily states
that they received a $27,000 prepetition retainer. The Statement of Financial Affairs indicates
Debtor paid Mr. Zellers a total of $32,000 for debt counseling or bankruptcy within a year of the
case filing.
Counsel requests a total of $88,630 in fees as payment of an administrative expense
under 11 U.S.C. § 503(b). This represents 471.5 hours of work by Attorney Zellers at $170.00
per hour ($80,155), and 56.5 hours of work by Attorney Gazda at $150.00 per hour ($8,475).
According to the application, $18,653 of the $27,000 was applied to prepetition fees. An
additional $1,039 was used to pay the chapter 11 filing fee, leaving a balance of $8,347 in
Counsel’s trust account.3
ARGUMENTS
The official committee of unsecured creditors (“Committee”) objected to the fee
application, raising numerous arguments. From a procedural standpoint, the Committee
contends there was a defect in the appointment, there is an improper disclosure regarding the
prepetition retainer, and the application does not conform to the requirements for fee applications
in this district. On a more substantive basis, the Committee claims Counsel’s loyalties were
divided during its representation of Debtor and that the services did not benefit the estate.
The chapter 7 trustee also takes issue with the fee application, pointing to the failed
2 It appears Mr. Zellers and Ms. Gazda are now associated with Richard G. Zellers &
Associates.
3 There is a mathematical inconsistency in the figures provided by Counsel. $27,000 -
$18,653 - $1,039 = $7,308, not $8,347, which is the amount that reportedly remains in Counsel’s
IOLTA trust account. The difference is the amount of the filing fee. On his final report, Trustee
states Counsel’s claim is $80,283, which would be the difference between the amount requested
($88,630) and the amount purportedly remaining in the IOLTA account ($8,347).
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chapter 11 case. Trustee posits that Counsel failed to meet its burden of proof and did not
demonstrate the reasonableness of the fee request, especially considering the results obtained. As
key support, he references the appointment of a chapter 11 trustee approximately five months
after the case was filed and the subsequent cessation of operations and conversion to chapter 7,
as well as incurrence of unnecessary administrative expenses. The thrust of his position is that
the lack of success of the case influences the amount of compensation to which Counsel is
entitled.
In turn, Counsel’s reply places the blame for the dismal outcome on the shoulders of the
unsecured creditors. Counsel claims that a refinancing deal with a group of investors was close
to finalization but failed when the unsecured creditors demanded an ownership interest in the
business. Counsel also contends that the unsecured creditors maintained an unrealistically high
valuation of the business which ultimately doomed the investor plan to fail. Additionally,
Counsel disclaims culpability for the accrual of unnecessary administrative expenses associated
with the anticipated contract, suggesting criticism is more appropriately directed to the
consultants who were operating the business or the untimely conversion to chapter 7.
ANALYSIS
Although post-petition compensation is an administrative expense pursuant to 11 U.S.C.
§ 503(b)(2), the actual award of post-petition compensation is founded in 11 U.S.C. § 330(a). At
its core, § 330 permits a court to award “reasonable compensation for actual, necessary
expenses” to a professional employed under 11 U.S.C. § 327. 11 U.S.C. § 330(a)(1). Section
330 contains very specific guidance in determining what is reasonable. Section 330(a)(3)
outlines several factors applicable to a court’s contemplation of the reasonableness of a
compensation request:
the court shall consider the nature, the extent, and the
value of such services, taking in to account all relevant
factors, including--
(A) 	the time spent on such services;
(B) 	the rates charged for such services;
(C) 	whether the services where necessary to the
administration of, or beneficial at the time at
which the service was rendered toward the
completion of, a case under this title;
(D) 	whether the services were performed within
a reasonable amount of time commensurate
with the complexity, importance and nature of
the problem, issue, or task addressed;
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(E) 	with respect to a professional person, whether
the person is board certified or otherwise has
demonstrated skill and experience in the bank-
ruptcy field; and
(F) 	whether the compensation is reasonable based
on the customary compensation charged by com-
parably skilled practitioners in cases other than
cases under this title.
The first two statutory considerations, the time and rate, are the heart of the lodestar analysis, the
methodology approved by the Sixth Circuit for determining the reasonableness of a fee request.
See Boddy v. U.S. Bankr. Court (In re Boddy), 950 F.2d 334, 337 (6th Cir. 1991). The lodestar is
the product of the reasonable hourly rate for the services and the reasonable time spent on such
services. Id. at 337 (citations omitted). Determining the reasonable rate and hours is influenced
by multiple factors, including those set forth in § 330(a)(3) and others outlined and adopted in
Boddy. Id. at 338 (citing Harman v. Levin (In re Robertson), 772 F.2d 1150, 1152 n.1 (4th Cir.
1985) (other citations omitted)). The requirement that both the hourly rate and time be
reasonable create a lens for the court to use as a filter, providing an opportunity to adjust for
services that do not meet the reasonable criterion.
Adjustments to fee requests are supported in § 330(a)(2), which permits a court to award
less than the requested compensation. Section 330(a)(4)(A), by virtue of its outright
disallowance of compensation, finds the following services to be inherently unreasonable, and
therefore non-compensable:
(1) 	unnecessary duplication of services; or
(2) 	services that were not--
(i) 	reasonably likely to benefit the debtor’s
estate; or
(ii) 	necessary to the administration of the case.
In addition to the above, fee applications are also subject to localized procedural requirements
under Local Bankruptcy Rule 2016-1.4 Under that rule, applications must comply with the
Guidelines for Compensation and Expense Reimbursement of Professionals (“Guidelines”).
The court will review the application, the objections, and Counsel’s response, against this
4 This rule incorporated the requirements previously adopted by this district through
General Order 93-1, which was effective at the time this case was filed.
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back drop.
I. 	General Order 93-1
Initially, the court finds that the application fails to comply with the compensation and
reimbursement guidelines adopted through General Order 93-1.5 The Committee also noted
several deficiencies along the same lines. Many of the time entries are vague and lack definition.
For example, billing for “review of correspondence from Attorney Hannabury” on September
28, 2006 gives the court no intimation of the underlying issue. The court could go to the docket
and learn that Mr. Hannabury represented George C. Miller Brick Company, and could postulate
that the communication may have related to a motion for relief from stay filed on September 12,
2006, but such postulation may misguided.
Similarly, there are multiple entries for generic descriptions including “work on files”
and “review files.” These entries are virtually meaningless and therefore it is impossible to
determine if the time spent is reasonable. Services are lumped together almost incoherently. For
example, the August 1, 2006 reads as follows:
Meeting with Associates regarding schedules and
utilities (.5), conferences with Inglewood (.3, .3.,
.3, .2), receipt of correspondence from client (.3, .3,
.2, .3, .2, .2), review and revise schedules (1.2), receipt
and review of Inglewood presentation (.8), preparation
for 341 examination (.5).
The multiple time entries for the same task, without any distinguishing characterization of the
services, provides no context, making it nearly impossible for the court to understand whether
1.5 hours is reasonable for “receipt of correspondence from client.” These entries are in
derogation of General Order 93-1, which states that “[m]ere notations of telephone calls,
conferences, research, drafting, etc., without appropriately identifying the matter involved, may
result in disallowance of the applicable time.” (General Order 93-1, ¶ 9).
The lumping problem is exacerbated by the poor breakdown in the billing categories.
The services provided are divided into four categories: Business Operations/General
Administration of Case, Disclosure Statement and Plan, FirstMerit Collateral Order, and Fees
and Employment. Eighty percent of the application falls under the first heading. This alone
suggests the application fails to efficiently and usefully separate and categorize the services.
General Order 93-1 required the following:
The professional shall describe each Project, the
5 A copy of General Order No. 93-1, effective July 28, 1993, is attached as Exhibit A.
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purpose and/or need for the services, significant
problems encountered, results achieved, and pro-
vide other relevant information for the Court to
evaluate the services and time expended. If the
narrative is not divided into separate Projects, the
services shall be described generally.
(General Order No. 93-1, ¶ 2). This description is simply absent from the fee application.
A premier example of how the deficiencies impact review of the application can be
understood when considering the potential sale of Debtor’s assets. Anything related to the sale is
lumped in to the Business Operations/General Administration of Case. Counsel, in the response
to the objections, argues that their sale efforts were hampered by the Committee’s demands. The
court is simply unable to evaluate these statements within a clear frame of reference. The
application does not identify when the negotiations started or provide an overview of the amount
of time involved. There are dozens of entries which indicate Counsel had communications with
Committee counsel, Anthony DeGirolamo. However, the focus of those exchanges is a mystery.
The exchanges could have been about operating reports, cash collateral, a potential sale, or other
matters entirely. Specific references to sale negotiations are scarce, at best. The court found an
entry on August 24, 2006 which references an “offer” that was submitted to Attorney
DeGirolamo. It would have been beneficial to know if that was related to potential sale
negotiations or something else entirely. The court cannot say with any certainty when the sale
negotiations began, how long they lasted, or what amount of time was devoted to a potential
sale. The next entry which may be related to the sale is found more than two months later, on
November 10, 2006, in which Attorney Zellers is billing for “receipt and review of binding letter
of intent.” The gaps in the fee application are detrimental to Counsel’s application because the
applicant bears the burden of proving the reasonableness of the fees requested. In re James
Contracting Group, Inc., 120 B.R. 868 (Bankr. N.D. Ohio 1990) (citations omitted); Solomon v.
Wein (In re Huhn), 145 B.R. 872 (W.D. Mich. 1992). Without more definitive information, the
court has been left to speculation and conjecture.
The court notes that services related to the post-petition use of utilities is also included
under this category. Looking at the fee application, it appears that separating out this category
would have been fairly easy. And, with certain work separated in to distinct projects, it may
have made the remaining entries more meaningful. Instead, the court is left with the inability to
decipher the nature of the services provided.
Also particularly troubling is the complete lack of billing for any time other than attorney
time. There are no paraprofessional hours billed. At the hearing, Attorney Zellers confirmed
that the firm does not bill for paraprofessionals. However, the fee application is replete with
entries for the attorneys to prepare correspondence, schedules and pleadings, which are items
that generally would fall to non-attorney staff. For example, on August 1, 2006, Attorney
Zellers itemizes 6.3 hours to “prepare Schedules and Statement of Financial affairs.” This could
have been attorney time appropriately spent on schedule issues or it could have been
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administrative or paralegal time. It is unclear. As General Order 93-1 identifies, “partner rates
are generally not allowable for routine work.” The fee application also fails to comply with
General Order 93-1 in that it does not contain the certification referenced in paragraph six. It
also fails to justify the time spent in intra-office conferences, contrary to paragraph eleven. And
it is unclear whether travel time was appropriately billed at half the billing rate as required by
paragraph fourteen.
More than once during the hearing on the fee application, Attorney Zellers relied on past
practice to defend the fee application, stating that he prepared the application in the same manner
it had always been prepared and which was acceptable to this court’s predecessor. This
argument fails to move the court. There are clear guidelines for fee applications adopted in this
district which Counsel is obligated to follow. Moreover, it is doubtful the previous applications
drew the same degree of objection or were in cases of similar complexity and difficulty. Counsel
assumes the risk for noncompliance.
Counsel’s failures to comply with General Order 93-1 are marked and pronounced.
Large portions of the application are amorphous. The failures to adequately describe the nature
of the services rendered handicaps the court’s ability to determine the reasonableness of the fees.
II. 	The lodestar
Arriving at a lodestar figure in this case is particularly difficult. While no one challenges
the hourly rate of Mr. Zellers and Ms. Gazda, and the court has no issue with the hourly rates
they charge in the fee application when applied to legal services that are properly billable by
attorneys, an hourly rate of $150 - $170 is patently unreasonable for services which could have
been rendered by a paraprofessional. This concern was noted above. Another concern is in a
perceived failure to more fully utilize Ms. Gazda’s services at a slightly lower billing rate.
Almost ninety-six percent of the fee application is comprised of hours billed by Mr. Zellers.
Although his hourly fee is reasonable, the court concludes that Counsel was not engaged in
economical work-sharing between the billing attorneys.
Not only is the court tasked with determining which services warrant the billing at the
attorney rates, it is also forced to divine whether the time expended on services is justified. The
lack of specificity in the fee application outlined above directly hampers the court’s ability to
undertake this consideration. For example, Attorney Zellers billed a total of 2.40 hours on
September 5, 2006 for the following:
Receipt and review of correspondences from client (3)
(.7), conferences with client (.3, .8), receipt and review
of correspondence from Inglewood (.3, .3).
These services were rendered in an apparent vacuum. Without any context as to the nature of the
correspondence, the topic it covered, or other detail, the court is left bewildered as to either
necessity or reasonableness.
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Many of the entries are also suspect. For example, there are several days for which
Attorney Zellers billed in excess of seven hours. On August 24, 2006, he billed 3.00 hours under
the Business Operations heading and billed 8.80 hours under the FirstMerit Collateral Order
category. Both entries reference correspondence to Attorney DeGirolamo and it is unclear
whether there was an overlap in services. Additionally, the court notes that at no point is there a
single entry for the minimum billing increment of one-tenth of an hour, or six minutes, as
provided in General Order 93-1. Instead, the smallest increment is two-tenths of hour. This is
true for even a simple task such as review of a court order scheduling an emergency hearing, as
noted on the December 5, 2006 entry. Additionally, as Attorney DeGirolamo pointed out at the
hearing, if the attorney time is divided over the days between the case filing and the appointment
of the chapter 11 trustee, it amounts to an astounding 4.4 hours per working day (Monday -
Friday) in billed services.
The court accepts that $150 is an acceptable hourly rate for Ms. Gazda and that $170 is a
reasonable rate for Mr. Zellers to charge when applied to legal services properly provided by
attorneys. 	The identified problems with the fee application notably complicate the court’s
ability to accurately calculate the lodestar.
III. 	Case specific factors
Both the Committee and Trustee argue that the lack of success in this case should directly
impact the compensation awarded Counsel. While confirmation is not the only benchmark of
success in a chapter 11 case, the failure to confirm a plan subjects the requested fees to higher
scrutiny. In re McLean Wine Co., Inc., 463 B.R. 838, 848 (Bankr. E.D. Mich. 2011) (citing In re
Cardinal Indus., Inc., 151 B.R. 843, 847 (Bankr. S.D. Ohio 1993) (citations omitted)). And
when reorganization is improbable, attorneys assume the risk that fee applications may be
reduced or denied. In re Berg, 268 B.R. 250 (Bankr. D. Mont. 2001) (citations omitted).
Generally, a court looks at whether services benefitted the estate in determining whether to allow
the fees. 11 U.S.C. § 330(a)(3)(C).
Several factors lead to the court to conclude that this case was unlikely to succeed from
its filing. The swift downfall of the case, from filing to the appointment of a chapter 11 trustee,
in less than seven months, is telling. A plan of reorganization was never filed and it appears
Debtor never had the support of the unsecured creditors for the sale motion filed on November
30, 2006, which was opposed by multiple parties. A week after the filing of the sale motion, the
court appointed a chapter 11 trustee due to troubling concerns and the case converted to chapter
7 in March 2007. The operating report for the period ending November 30, 2006, just prior to
the appointment of the chapter 11 trustee, shows that Debtor lost close to $1,000,000 since filing
a chapter 11 petition.
The court also finds the sheer amount of time devoted to utility issues an omen as to the
case’s likelihood of success. The fee application reveals that substantial time was devoted to
utility issues. Operation of the kilns was a substantial expense for debtor, as evidenced by the
figures agreed to as adequate assurance. In October 2006, two major utilities filed a motion
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seeking additional adequate protection because of Debtor’s failure to comply with the existing
agreement regarding utility payments, including adequate protection. Dominion East Ohio has a
postpetition administrative expense claim for $235,010.26 and is scheduled to receive only
$18,181.37 on that chapter 11 administrative expense claim. Quite simply, the inability to
maintain necessary utility payments was a red flag as to the dire financial condition of Debtor.
Further, over $500,000 in administrative expense claims are itemized in the Trustee’s
final report, and the distribution on those claims is $38,280.49. The prime indicator of lack of
success is the administrative insolvency, resulting in an incomplete recovery to administrative
claimants and no distribution to priority or unsecured creditors. This is a relevant consideration
in determining a fee award. Kemp, Klein, Umphrey, Endelman and May v. Veltri Metal Prod.,
Inc. (In re Veltri Metal Prod., Inc.), 189 Fed.Appx. 385 (6th Cir. 2006) (citing In re Thrifty Oil
Co., 205 B.R. 1009 (Bankr. S.D. Cal. 1997)). However, it is not intended as an exclusive factor.
Veltri Metal, 189 Fed.Appx. 385 (citing 11 U.S.C. § 330(a)(4)(A)(ii)(II)). In this case, the lack
of recovery to the unsecured creditors is of consequential import and is particularly relevant.
Debtor entered this case with its biggest asset, the real estate, encumbered by a recent
judgment lien. The lien had attached less than ninety days before the petition was filed, which
likely was avoidable as a preference under 11 U.S.C. § 547. If the lien had been avoided, the
outcome for the unsecured creditors would be materially different. Instead, in obtaining use of
cash collateral, Debtor essentially put the asset beyond the reach of the unsecured creditors.6
The purpose was to provide an opportunity for Debtor’s reorganization. Debtor traded its sole,
substantial unsecured asset for some time that was used to pursue a transaction opposed by
unsecured creditors as self-serving. The court is now convinced that the chances of
reorganization were so slim it borders on foolhardy. Consequently, the loss to the unsecured
creditors is substantial and directly related to Counsel’s representation of Debtor during the
reorganization phase of the case.
Not only are the unsecured creditors not receiving a distribution, but the distribution to
unsecured claimants is diluted through the increased expenses added to the administrative
expense pool with needless post-petition production of inventory. While Counsel wants to
blame other parties, the fact is that Counsel was representing Debtor and had been instrumental
in retaining multiple professionals to assist in the case. The production of inventory for a
contract that was never formalized is inexplicable. Clearly, no benefit to the estate resulted,
drawing in to question whether the associated fees are reasonable. McLean Wine, 463 B.R. 838
(citations omitted). The court cannot conclude that they were. However, it is impossible to
determine from the fee application what time was expended dealing with this matter.
Finally, there were frequent allegations questioning Counsel’s loyalty. The Committee
repeatedly alleged that Counsel was representing the interests of Debtor’s insiders over Debtor’s
6 The court recognizes the Committee’s acceptance and approval of the cash collateral
order, so Debtor does not solely bear responsibility.
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interests. This type of conflict can result in denial or disgorgement of compensation. See, e.g.,
The Law Offices of Ivan W. Halperin v. Occidental Fin. Group, Inc. (In re Occidental Fin.
Group, Inc.), 40 F.3d 1059 (9th Cir. 1994); In re Angelika Films 57th Inc., 227 B.R. 299 (Bankr.
S.D.N.Y. 1998); Roger J. Au & Son, Inc. v. Aetna Ins. Co. (In re Roger J. Au & Son, Inc.), 64
B.R. 600 (N.D. Ohio 1986). The proposed asset purchase agreement (“APA”) filed with the
court shows that Debtor’s principal, Lorraine G. Stewart, also was the principal who signed the
APA on behalf of Stark Ceramics Acquisition Company, LLC (“Acquisition Company”), the
potential purchaser. It also shows that Acquisition Company intended to assume various
liabilities, including Debtor’s liabilities to its attorneys. While this is concerning, and could
place a shadow on Counsel’s loyalties, the court finds it, standing alone, inconclusive on the
existence of an actual conflict of interest.
IV. 	Objections
The court addresses the Committee’s objection as it relates to Counsel’s employment
under 11 U.S.C. § 327. The Committee suggests that the fee application inappropriately requests
compensation for Attorneys Zellers and Gazda, not the firm of Luckhart, Mumaw, Zellers &
Robinson. The court simply finds this argument specious. Reviewing the employment
application and order, it is clear that both employment of both the individual attorneys and the
firm was authorized. The fact that the application for compensation is for individually named
attorneys is of no consequence.
The Committee makes a valid argument regarding to disclosure of the prepetition
retainer. The record contains conflicting information about the amount of the retainer. It is
unclear whether the prepetition retainer was $20,000 or $27,000 and how the remaining amount
was calculated. Counsel will be instructed to clarify the amount before any fees are awarded.
However, the court does not find the error to be egregious enough to warrant denial of all
compensation. The retainer was disclosed and there is nothing in the record to suggest that it
was anything other than a careless error by Counsel. Cf. Jensen v. U.S. Trustee (In re Smitty’s
Truck Stop, Inc.), 210 B.R. 844 (B.A.P. 10th Cir. 1997).
V. 	Disgorgement
The objectors did not argue for disgorgement.
CONCLUSION
The pervasive problems identified with the fee application are symptomatic of the case.
The application was filed with seemingly little regard for the rules or the outcome. As a result,
the court can unequivocally declare that Counsel failed to carry their burden in proving that the
requested fees are reasonable.
As discussed above, it would be difficult to determine what constitutes reasonable
compensation under these facts. However, at this juncture, it appears unnecessary to go through
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the fee application with a line item veto pen. Because of the administrative insolvency, the
potential recovery to Counsel is so small that reasonableness will be forcefully imposed.
Looking at the final report, Trustee indicates that approximately $14,000.00 is at stake,
representing the sum of the amount remaining in the IOLTA trust account and the amount that
Trustee proposes distributing on the claim ($6,211.03). At Counsel’s blended hourly rate of
$167.86, this represents approximately eighty-three hours of work, which could be supported as
reasonable. However, this would actually result in a windfall to Counsel because it would result
in receipt of approximately sixteen percent, or twice as much, as the payout to other
administrative claimants. That is clearly not reasonable or equitable and undermines the priority
system of distribution set forth in the bankruptcy code. Consequently, the court will not
authorize this amount. To keep payment on Counsel’s administrative claim in line with the
distribution to other unsecured claimants, Counsel’s recovery on its claim will be limited to an
amount that corresponds to the recovery of other similarly situated claimants. Counsel is
authorized to retain the monies in the IOLTA account. No further distribution will be made on
the claim by Trustee.7 The amount to be recovered by Counsel is deemed reasonable.
In the event that estate assets are discovered or further distribution will be made, the
court reserves the right to further review the fee application to determine the reasonableness of
the balance of the compensation requested.
An order will be entered immediately reflecting the decision of the court.
# 	# 	#
Service List:
Richard G. Zellers
Melody Dugic Gazda
Richard G. Zellers & Associates
3810 Starrs Centre Dr.
Canfield, OH 44406
David O. Simon
1370 Ontario Street
Suite 450
Cleveland, OH 44113-1744
Derrick Rippy ust11
7 The $6,211.03 that Counsel is currently scheduled to receive from the estate will be
redistributed among the remaining administrative claimants. As a result, the percentage paid on
their claims will increase to just under nine percent. Counsel’s recovery will be approximately
9.4%. The difference is sufficiently slight to obviate the need for exactness.
12
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Office of the US Trustee
H. M. Metzenbaum U.S. Courthouse
201 Superior Avenue
Suite 441
Cleveland, OH 44114
Anthony J DeGirolamo
116 Cleveland Ave., N.W.
Suite 307
Canton, OH 44702
13
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AO 72A
(Rev. 8/82)

e{LeD

IN THE UNITED STATES BANKRUPTCY COUR \\j| 28 AMAT: GS
FOR THE NORTHERN DISTRICT OF OHIO *

a VANERUR TaN y COURT
uead. OA 18
au HISTRG! OF OF
IN RE: “yo CANTOR

)
GUIDELINES FOR COMPENSATION )
AND EXPENSE REIMBURSEMENT )
OF PROFESSIONALS )
)
)

GENERAL ORDER NO, 93-1

ee ee ee

The Bankruptcy Judges for the Northern District of Ohio, hav-
ing at their meeting on July 9, 1993, approved Guidelines for Com-
pensation and Expense Reimbursement of Professionals and directed
that such Guidelines shall be effective in all cases filed after
August 1, 1993,

IT IS ORDERED that the Guidelines for Compensation and Ex-
pense Reimbursement of Professionals shall be effective as to all
cases filed after August 1, 1993, and

IT IS FURTHER ORDERED that the Clerk of this Court prepare
sufficient copies of the Guidelines for distribution to interested
persons and that such copies be available at the offices of the
Clerk in Akron, Canton, Cleveland, Toledo and Youngstown.

DATED: July 28, 1993

FOR THE COURT

MF Cele CL.

JAMES H. WILLIAMS
CHIEF BANKRUPTCY JUDGE

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UNITED STATES BANKRUPTCY COURT
NORTHERN DISTRICT OF OHIO

GUIDELINES FOR COMPENSATION AND
EXPENSE REIMBURSEMENT CF PROFESSIONALS

The following Guidelines govern applications for
compensation and expense reimbursement. The Guidelines
cover the narrative portions of applications, time records
and expenses. Except as otherwise provided, the Guidelines
apply to professionals generally including lawyers,
accountants, appraisers, auctioneers, financial advisors and
consultants unless, for cause shown, modifications are made

at the time a professional is employed.

The Narrative

1. Employment; Prior Compensation: Holdback

The application shall state the date of the order
approving applicant's employment, amount and
deposit date of any retainer, the date of each
prior request for compensation and the amount re-
quested, approved and paid. Payment of interim
fees allowed depends upon the estate's cash,
status of the case and the interests of the debtor

and creditors generally.

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2. Work Description; Projects

Each application shall categorize the services
rendered into separate projects or tasks
("Projects") unless payment of less than $5,000 is
requested. Projects in an attorney's Chapter 11
application might include the use of cash
collateral, financing, relief from stay matters,
plan and disclosure statement, preferences, etc.
Ordinarily a separate Project category should be
established for any matter which required

significant time.

The professional shall describe each Project, the
purpose and/or need for the services, significant
problems encountered, results achieved, and pro-
vide other relevant information for the Court to
evaluate the services and time expended. If the
narrative is not divided into separate Projects,

the services shall be described generally.

A billing summary for each Project shall follow

each Project description.

3. Summary. of Time Billed

Fach application shall include a billing summary

showing (a) total hours billed to each Project,

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(b) the composite hourly billing rate for the Pro-
ject, and (c) for each professional charging time
to the Project, his or her name, status (e.g.,
partner, associate, paralegal, manager), hourly
rate, and hours billed. In applications not
divided by Projects the billing summary shall
cover all time billed. If initials are used to

identify professionals, a key shall be provided.

4. Preparation of Application

Reasonable fees for preparation of a fee applica-
tion may be requested. Applicant has the burden
to prove the extent to which the preparation fees
requested exceed those for clients who require
detailed fee statements and have adopted fee

review procedures.

5. Staffing; Rates
Rates charged must be commensurate with the skill
required for the task. For example, partner rates
are not generally allowable for routine work.
Rates may be adjusted to conform with these Guide-
lines and applicable law notwithstanding an order

approving rates at the time of employment.

= 3+
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6. Certification

Fach application shall contain a certification by
the responsible professional that (a) the profes-
sional has read the application, (b) to the best
of the professional's knowledge, information, and
belief formed after reasonable inquiry, the com-
pensation and expense reimbursement sought
conforms with these Guidelines, except as other-
wise specifically noted in the application and
(c) the compensation and expense reimbursement re-
quested are billed at rates and in accordance with
practices no less favorable to the debtor/estate
than those customarily employed by applicant
generally, except as otherwise specifically noted

in the application.

Time Records
7. Time Records Required
All professionals shall keep accurate contempora-
neous time records, except auctioneers, real es-
tate brokers, appraisers, and any other profes-
sional whom the Court excuses from this obligation
at the time of appointment. Notwithstanding the
foregoing, the order of appointment may require
auctioneers, appraisers, or real estate brokers to

submit time records.

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8. Increments
Professionals shall keep time records in minimum
increments no greater than 6 minutes. Applica-
tions which contain minimum billing increments

greater than .1 hour may be disallowed.

9. Entries
Time entries shall identify the person who per-
formed the service, the date performed, matter
involved and services rendered. Mere notations of
telephone calls, conferences, research, drafting,
etc., without appropriately identifying the matter
involved, may result in disallowance of the appli-
cable time. Time entries with unexplained abbre-
viations may be disallowed. If computer time
sheets are submitted, an appropriate key shall be

provided to facilitate review.

Applicant has the burden to show that services for
which compensation is sought are for professional
services only and not for services ordinarily

performed by a trustee or debtor in possession.

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10. Lumping
If separate tasks are performed on a single day,
the fee application shall disclose the time
required for each task (i.e., no “grouping" or

"lumping").

11. Conferences
Professionals shall justify time spent in confer-
ences with other professionals or paraprofession-
als in the same firm. Failure to do so may result
in disallowance of fees related to the

conferences.

12. Multiple Professionals

Professionals shall justify the need for more than |
one professional or paraprofessional from the same
firm at the same court hearing, deposition or
meeting. Failure to justify this time may result

in disallowance of fees.

13. Office Tasks

Time spent addressing, stamping and stuffing
envelopes, filing, photocopying or "supervising"
any of the foregoing is generally net compensable
whether performed by a professional, paraprofes-

sional, or secretary.

_=-—-— § =
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14. Travel Time
Travel time is ordinarily compensable at not more
than one-half the professional’s allowed hourly

rate, Travel of one hour or less round-trip is

not compensable.

15. Filing Papers
Time spent filing papers or pleadings is generally

non-compensable.

Expenses
16. Receipts
Receipts should be obtained for all expenditures.
Receipts shall be retaine@ and produced upon
request for reimbursement of expenditures

exceeding $25.00.

17. Office Overhead

Office overhead is generally not reimbursable.
Overhead includes secretarial time or overtime,
word processing time and cost of meals or trans-
portation provided professionals and staff who

work late or on weekends.

18. Computerized Research
Computerized research is reimbursable at actual

cost. "Actual cost," in these Guidelines, means

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the amount actually expended by the professional
or paid to a third party provider without markup
or enhancement for handling or administrative

charges.

19. Professional Services
A professional employed under section 327 of the
Bankruptcy Code may not employ or charge as an
expense services provided by another professional
unless employment of the second professional is
approved by the Court prior to the rendering of

services.

20. Photocopies (Internal)

Charges must be disclosed on an aggregate and per
page basis. Charges allowed are actual cost not

to exceed 20 cents per page.

21. Photocopies (Outside)

Actual cost.

22. Postage

Actual cost.

23. Overnight Delivery

Actual cost where shown to be necessary.

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24. Messenger Service
Actual cost shown to be necessary. In-house
messenger service is not reimbursable for more

than the cost of comparable services outside the

firm.

25. Facsimile Transmission

Actual costs of telephone charges for outgoing
transmissions are reimbursable. Transmissions re-
ceived are reimbursable at actual cost not to

exceed 20 cents per page.

26. Long Distance Telephone

Actual cost.

27. Travel - Automobile Transportation
Travel of one hour or less round-trip is generally
not reimbursable. Travel expense for trips in ex-
cess of one hour round-trip is reimbursable in ac~-
cordance with the allowance by the Internal
Revenue Service - currently 28 cents per mile (IRC

§ 274(a) and the current applicable I.R.B.

Announcement).

28. Travel - Air Transportation

Reimbursement is limited to amount spent or regu-

lar coach fare whichever is lower.

= 9-
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29. Travel Accommodations and Meals

Reimbursement is allowed for reasonable hotel and
meal expense. Luxury dining or accommodations are

not reimbursable.

30. Meals - Working

Working meals at restaurants or private clubs are
generally not reimbursable. Reimbursement may he
requested for working meals only when food is
catered to the professional's office during a
meeting with clients, such as a creditors’
committee, ‘to permit the meeting to continue

through a normal meal period.

31. Amenities
Charges for entertainment, alcoholic beverages,
newspapers, dry cleaning, shoe shines, etc. are

generally not reimbursable.

32. Miscellaneous

Filing fees, court reporter fees, witness fees,
process service and UCC searches are reimbursable

at actual cost.

33. Special Practices

The Court is aware that billing practices of

professionals may differ. The court will consider

- 10 -

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applicant's customary practice in charging or not
charging other clients for particular items. If
other clients are not billed for a particular
item, the estate will not be billed. If an item
is billed to alli other clients, reimbursement
should be sought at the least expensive rate the
professional charges any client for comparable

services or expenses.

Uniess the Court otherwise requires, all objec-
tions to an application must be filed and served

not later than five (5) working days prior to the

scheduled hearing.

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