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#2235 signed 6-11-96

Affirmed 5-6-97 (Rogers, J.)

IN THE UNITED STATES BANKRUPTCY COURT

FOR THE DISTRICT OF KANSAS



In Re:

AMERICAN FREIGHT SYSTEM, INC., DEBTOR(S).

CASE NO. 88-41050-11

CHAPTER 11



ORDER ON SECURED BANKS' FINAL FEE APPLICATION

This matter is before the Court on the second and final §506(b) fee application of the Bank of New York, f/k/a/ Irving Trust Company, for itself and as agent for itself, Security Pacific National Bank, and NCNB National Bank of North Carolina (the Banks), and the debtor's objection. The application seeks reimbursement of fees and expenses the Banks as oversecured creditors incurred from December 1, 1988, to July 31, 1991, with their law firms Winthrop, Stimson, Putnam & Roberts (Winthrop) and Morrison & Hecker (Morrison), and their accounting firm Ernst & Whinney, now Ernst & Young (Ernst). The Court has reviewed the application, objection, and response, and is now ready to rule.

The fees sought for Winthrop are $275,097.55 and the expenses sought are $38,358.91. The fees sought for Morrison are $47,867.50 and the expenses are $4,715.16. The fees sought for Ernst are $24,183.75 and the expenses are $2,798.45. The debtor(1) objects on a number of grounds: (1) the hourly rates charged for many of the professionals exceed those prevailing within this Court's locale; (2) many of the charges involved monitoring the bankruptcy case after the Banks had been paid on part of their claims and money had been placed in escrow to pay the rest of them; (3) the professionals charged for excessive time spent preparing and defending their fee applications or perhaps should not have charged at all for that time; (4) some of the charges are improperly billed in quarter-hour increments; (5) some of the charges are unreasonably duplicative; (6) some of the time entries are inadequate because they list more than one activity for a single block of time and others because they do not sufficiently describe the matter worked on or tasks accomplished; (7) some of the charges are for preparing to defend against possible fraudulent conveyance or lender liability claims the debtor reserved the right to but never did pursue against the Banks; and (8) some of the expenses are insufficiently documented.

The Banks recognize that the Court intends to reduce their professionals' hourly rates to the level of local rates, but submitted the application based on their usual rates because they did not know what rates the Court would apply. The Court largely agrees with the debtor that few of the fees should be allowed for services provided after January 10, 1989, when the Banks' claims were all paid or secured by money held in escrow. The Banks can properly be reimbursed for charges after that date relating to the letter of credit and a few minor matters concerning clearing up title to their former collateral, and reasonable charges for preparing and defending their fee applications. However, the fact the debtor reserved the right to attack the validity, priority, extent, and value of the Banks' liens or to pursue fraudulent conveyance or lender liability claims against them does not make it reasonable for the Banks to incur fees monitoring the possibility the debtor might sue them. The facts underlying such attacks or claims would already have occurred, and the Court cannot see how subsequent events could alter them. It is simply unreasonable to charge a debtor's estate for fees incurred in preparing for lawsuits that are never filed. In addition, the Banks note in response to the debtor's objection that some of the later fees arose from filing proofs of claim and responding to discovery requests made in a lawsuit the debtor's parent corporation had filed against Westinghouse Credit Corporation. Such fees are not properly recoverable under §506(b) in any event. The Court does not allow secured creditors to recover from the bankruptcy estate fees for work that is made necessary by the mere filing of bankruptcy, such as filing proofs of claim. Any fees incurred in responding to a discovery request in a lawsuit in which a secured creditor is not a party but a source of evidence cannot be related to protecting the creditor's security interest in a bankruptcy case, even though the debtor may be a party to the lawsuit. The Court does believe the professionals have charged excessive amounts for preparing and defending their applications, and will reduce those charges to a reasonable amount. In light of the substantial reductions that will otherwise be made, the Court is not inclined to reduce the fees further due to the use of quarter-hour minimum billing periods. The practice is still disapproved, however, and will ordinarily lead the Court to reduce the fees allowed. Since the fees after January 10 are already being largely disallowed, the Court will not review them to see if they are unreasonably duplicative. The Court has reviewed the entries on or before that date which AFS contends describe more than one activity performed in a single block of time (compound entries) or do not adequately describe the work performed. Many of the compound entries include activities which are sufficiently related to one another to be allowable, but others do not and will be disallowed. The Court will also disallow entries which describe work as involving review or revision of unidentified motions or pleadings, except when the matters are easily identified by reference to other entries at about the same time.

Turning first to Winthrop's portion of the application, the Court finds as follows. Winthrop charged about $65,000 for services provided on or before January 10, 1989. The Court believes the reduced hourly rates suggested by the debtor reasonably reflect the local rates applicable before that date, and so will reduce the request to $44,543 to bring it in line with those rates. Of this amount, the Court will disallow $495 for compound entries and $1,845 for review or revision of unidentified documents. Using a rather generous interpretation of Winthrop's time entries, the Court has been able to identify allowable amounts after January 10, 1989, (at local rates, which increased during 1989 and again during 1990) totalling $7,734.50. This leads to a preliminary total of $49,937.50 in allowable fees, before calculating an allowable amount for preparing and defending the fee applications.

Winthrop is the main culprit charging what appears to the Court to be excessive time for preparing and defending the Banks' fee applications. Initially, Winthrop claimed $608,517.05 in fees in the interim and final applications. The debtor contends, and the Banks have not disputed, that $152,064.25 of the fees sought in the final application involved preparing and defending the applications. This amounts to 24.99% of all Winthrop's fees, and does not even include any charges included in the interim application for preparing the firm's bill. The Banks respond that a "substantial portion" of these fees were incurred in defending the interim application against six objections and a cross-reply, and participating in "a full day of testimony and argument before the Court." Relying on debtor's exhibit D-1, the Court found $46,125.75 in these fees were charged from the first entry mentioning any objections to the interim application (dated 3/13/89) until the last entry involving the defense of the application (dated 5/05/89). Even if this portion of the fees is not considered as part of preparing the firm's bills, Winthrop still charged $105,938.50, or 17.4% of its total fees, for that purpose. While the Court realizes that bankruptcy courts may demand more explanation and justification for a law firm's fees than its clients do, the Court believes it is incredibly inefficient and blatantly unreasonable for attorneys--especially those asking for as much as $365 per hour for their time--to charge over 17 of every 100 dollars billed or, to put it another way, to spend over ten minutes of every hour billed, simply explaining and justifying their work. By comparison, 9.04% of Morrison's bill and 9.47% of Ernst's bill is for time spent preparing and defending their parts of the applications. The Court considers these percentages to be quite high as well. The question is what to do about these charges. The debtor asks the Court to deny all fees for preparing, clarifying, editing, and defending the applications. However, in a statutory fee-shifting case, the Tenth Circuit has said, "An award of reasonable attorneys' fees may include compensation for work performed in preparing and presenting the fee application," and, "[T]he general rule is that at least some compensation is generally allowable for work reasonably expended on the fee application." Mares v. Credit Bureau, 801 F.2d 1197, 1205 and 1206 (1986). Thus, the Court feels compelled to award a reasonable amount for time spent preparing the applications. No evidence has been presented, though, to indicate what would be a reasonable amount. Certainly, Morrison's and Ernst's applications indicate that Winthrop could reasonably have been expected to spend no more than ten percent of its total time on the case preparing and defending its portions of the applications. Winthrop's fees will be reduced accordingly. This should not be interpreted as the Court's approval of that percentage as an allowable amount in every case, but simply the Court's best estimate, based on the evidence available, of the amount that should be allowed in this case.

The Court allowed $228,499.30 as Winthrop's fees on the first application. The $49,937.50 found allowable on this application already includes $16,055.50 for time spent preparing and defending the applications. The Court will allow another $13,000 for doing so, bringing the total allowed on both applications to $291,436.80, with $29,055.50 of that total being for this purpose. The total fees allowed for Winthrop on this application, then, are $62,937.50.

Turning next to Morrison's portion of the application, the Court finds as follows. Morrison should have charged $6,729.50 for services provided on or before January 10, 1989.(2) As indicated in the order on the Banks' interim fee application, the hourly rate for Morrison's partner somewhat exceeded the local rates allowed at the time. Accordingly, the Court will reduce this part of Morrison's fees to $6,414. No improper compound entries or insufficient descriptions appear in this part of the application. The Court has been able to identify allowable amounts after January 10, 1989, (at local rates which increased as noted above) totalling $2,351. This leads to a preliminary total of $8,765 in allowable fees, before calculating an allowable amount for preparing and defending the fee applications.

The Court allowed $31,503.10 as Morrison's fees on the first application. The $8,765 found allowable on this application does not include any time spent preparing and defending the fee applications; all Morrison's time in this regard was spent after January 10, 1989. The Court will allow Morrison $4,400 for this purpose, bringing the total allowed on both applications to $44,668.10. The total fees allowed for Morrison on this application, then, are $13,165.

Turning finally to Ernst's portion of the application, the Court finds as follows. Ernst charged $7,550 for services provided on or before January 10, 1989. Another $3,100 is allowable (at one-half the normal hourly rate) for travel time spent before that date but mistakenly omitted from the first application. No reduction is required to reflect local hourly rates for accountants. No improper compound entries or insufficient descriptions appear in this part of the application. The Court has been able to identify allowable amounts after January 10, 1989, totalling $630. This leads to a preliminary total of $11,280 in allowable fees, before calculating an allowable amount for preparing and defending the fee applications.

The Court allowed $118,603.20 as Ernst's fees on the first application. The $11,280 found allowable on this application already includes $1,777.50 for time spent preparing and defending the applications. The Court will allow another $12,450 for doing so, bringing the total allowed on both applications to $142,333.20, with $14,227.50 of that total being for this purpose. The total fees allowed for Ernst on this application, then, are $23,730.

As indicated, the Banks have also requested reimbursement of expenses in the following amounts: $38,358.91 for Winthrop, $4,715.16 for Morrison, and $2,798.45 for Ernst. The debtor's main objection to expenses is to those incurred after January 10, 1989. It also complains none of Ernst's expenses are adequately documented. Thus, the debtor effectively concedes the following amounts should be allowed: $18,230.97 for Winthrop, and $1,165.22 for Morrison. From the documentation provided, the Court has been able to determine that Winthrop incurred travel expenses totalling $5,213.53 and computer-assisted research expenses totalling $482.76 on or before January 10, 1989, although they were listed after it; these amounts are also allowable. A total of $23,927.26 is therefore allowed for Winthrop's expenses. Neither Morrison nor Ernst has provided documentation from which the Court could make a similar determination regarding any of their expenses after January 10, 1989. None of the firms have provided documentation that would enable the Court to correlate expenses incurred after that date with the allowable fees incurred after it. The Court agrees that Ernst has not adequately documented many of its claimed expenses before that date, but will allow the $59 for telephone expenses. The total reimbursable expenses are therefore $23,927.26 for Winthrop, $1,165.22 for Morrison, and $59 for Ernst.

The total awarded to the Banks on their second and final application is therefore $124,983.98. Pursuant to 11 U.S.C.A. §506(b), these fees and expenses are payable only out of the Banks' collateral and the proceeds of their collateral. The Court does not mean to imply that the professionals have charged their clients unnecessary fees or expenses, but rules only that those disallowed here are not properly charged to the debtor's bankruptcy estate.

IT IS SO ORDERED.

Dated at Topeka, Kansas, this _____ day of June, 1996.













__________________________________

JAMES A. PUSATERI

CHIEF BANKRUPTCY JUDGE

1. 1The objection was actually filed by American Freight System, Inc., USA Western, Inc., Smith's Transfer Corporation, and Sioux Falls Service Center, Inc. Some time ago, however, the Court substantively consolidated these debtors' bankruptcy cases, and will now refer to them as a single debtor.

2. Morrison actually charged $6,824.50, but made a mistake in deducting one-half of the travel time it had charged for 12/23/88. On that date, Mr. Mordy documented 7.00 hours of work which included 2.6 hours of travel time and 1.0 hour that was not charged to Morrison's client. To determine how much time to deduct under this Court's rule allowing only one-half of travel time to be charged, Morrison divided the 2.6 in half and then subtracted 1.0. To attribute all the uncharged hour to the travel time, the 1.0 must be subtracted from 2.6 first, before dividing the result in half. This means .80 must be deducted under the Court's rule rather than .30 as Morrison calculated.

 

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