In re Miniscribe Corp.
| Decision Date | 31 October 2002 |
| Docket Number | No. 01-1263.,01-1263. |
| Parties | In re MINISCRIBE CORPORATION, Debtor. Thomas H. Connolly, Trustee, Appellant, v. HARRIS TRUST COMPANY OF CALIFORNIA, as Indenture Trustee for the MiniScribe Corporation 7 1/2% Convertible Subordinated Debentures Due 2012, Appellee. |
| Court | U.S. Court of Appeals — Tenth Circuit |
Gregory L. Williams and Donald J. Quigley, Block Markus Williams, Denver, CO, for Appellant.
David P. Hutchinson, Otten, Johnson, Robinson, Neff & Ragonetti, Denver, CO, and James M. Breen, Chapman and Cutler, Chicago, IL, for Appellee.
Before MURPHY, ANDERSON, and HARTZ, Circuit Judges.
Thomas H. Connolly, Chapter 7 trustee for the debtor, MiniScribe Corporation, appeals from orders of the district court (1) reversing an order of the bankruptcy court awarding him a trustee's fee of $3,044,953.69, and (2) ordering that he be allowed a fee of $1,828,812. We affirm.
On January 1, 1990, the debtor filed a voluntary petition in bankruptcy under Chapter 11. It converted the case to a Chapter 7 liquidation on April 16, 1991. Ten days later, Connolly was appointed Chapter 7 trustee.
At the time Connolly assumed his duties as trustee, the MiniScribe estate was insolvent. The estate had only $150,000 cash on hand, and faced Chapter 11 administrative expenses exceeding $3.0 million, a superpriority claim against it by Standard Chartered Bank (SCB) in the amount of $17 million, and total claims of approximately $900 million. The only opportunities to develop a bankruptcy estate lay in recoveries on avoidance claims and in a fraud action against former MiniScribe officers and outside accountants and consultants.
The bankruptcy court found that Connolly performed admirably in obtaining funds for the estate. He not only convinced SCB to reduce its claim from $17 million to $1 million, but also further persuaded it to loan the estate $1 million to defray the cost of prosecuting its fraud action. This action was eventually settled on terms highly favorable to the bankruptcy estate and its creditors, yielding over $80 million for the payment of claims. Connolly also conducted 45 adversary proceedings that realized over $17 million for the estate and that resulted in the reduction of claims against the estate from approximately $900 million to approximately $168 million. Finally, Connolly settled a recovery action against one of MiniScribe's creditors by taking an equity interest in the creditor which Connolly ultimately sold for over five times the value of the settlement.
The bankruptcy court made a number of interim fee payments to Connolly as trustee. In his final fee application, he sought additional compensation that would have resulted in a total fee of $3,044,953. This was the maximum fee permitted at that time under the percentage fee scheme (the "cap") outlined in 11 U.S.C. § 326(a) (1986).1 Appellee Harris Trust Company, representing MiniScribe's debenture holders, opposed the request, as did the United States trustee.
The bankruptcy court carefully analyzed Connolly's fee request and issued an extensive order and opinion approving the statutory maximum payment. Connolly v. Harris Trust Co. (In re Miniscribe Corp.), 241 B.R. 729 (Bankr.D.Colo.1999). The court determined that during his administration, Connolly had disbursed $101,492,332 through his accounts. This amount, which included settlements of fraud actions that the trustee and other litigants had brought against third party defendants, would be used in calculating the statutory maximum under the "cap" set out in § 326(a).
The bankruptcy court next applied a lodestar analysis, focusing on a reasonable number of hours spent by the trustee on his duties multiplied by a reasonable hourly rate. It noted that Connolly's time records reflected 1,779 hours spent on the case, along with an additional 1,347 hours spent by his paralegals. The bankruptcy court concluded that this amount of time, however, was misleadingly low because Connolly had performed more efficiently than expected. It rejected the objectors' position that the hourly rate should be differentiated, with a rate of $1,000 to $1,500 awarded for time spent on the fraud litigation and a more modest rate of $250 awarded for time spent on other activities. The court determined that a uniform, reasonable hourly rate of $500 should be applied to the 1,779 hours reasonably expended by Connolly, resulting in a lodestar fee of $889,500.
The court next adjusted the lodestar fee by considering the factors outlined in Johnson v. Georgia Highway Express, Inc., 488 F.2d 714 (5th Cir.1974). It determined that these factors (novelty and difficulty of the issues; requisite skill; preclusion of other employment; contingent nature of the fee; time limitations; amount involved and results obtained; and the experience, reputation, and ability of the trustee) justified a lodestar multiplier of 3.5, resulting in a total fee of $3,113,250.
Alternatively, the court applied a "common fund" or "percentage of the fund" analysis to arrive at an appropriate fee. If the trustee were allowed his claimed fee of $3,044,954, the total adjusted costs for raising and administering the "common fund" of the bankruptcy estate would be $10,864,402, approximately 10.7 percent of the total funds ($101,492,456) that had been administered by the trustee. This percentage, the bankruptcy court determined, was well within the range of permissible costs on a percentage basis.
Harris Trust appealed from the bankruptcy court's award. In an unpublished order and judgment, the district court rejected application of the common fund analysis under the circumstances of this case. Under a common fund theory, the court reasoned, the entire cost of recovery of the amount disbursed by Connolly would be borne by the only remaining creditors, the subordinated debenture holders. Moreover, Connolly was not solely responsible for creation of the fund; the plaintiffs whose fraud claims had been consolidated with his own had also been represented by able counsel and the bankruptcy court had not factored in the fees, costs and expenses paid to them.
The district court also rejected the $500 per hour unified lodestar rate as lacking in evidentiary support. It found the 3.5 multiplier unjustified because it overstated the risk of non-payment to Connolly, ignored the routine nature of much of the work he had performed, and overlooked the contribution of the trustee's counsel and counsel for the other fraud plaintiffs to the recovery of the fund. The bankruptcy court would have to recalculate the adjusted lodestar amount on remand.
Finally, the district court addressed the statutory cap. It found that MiniScribe's bankruptcy estate had been unusual because of the amount of money passing through the trustee's accounts and because of the circumstances surrounding those disbursements. It noted that $70 million of the approximately $101 million that had passed through the trustee's accounts had been paid to other parties who had consolidated their fraud actions with the trustee's fraud action for purposes of trial. The correct measure of the results achieved for purposes of computing the statutory cap lay somewhere between the $31.5 million contended for by Harris Trust, and the $101.5 million figure adopted by the bankruptcy court. The precise figure was left to be calculated by the bankruptcy court on remand.
The bankruptcy court held further hearings on remand and took up the fee issues in a second published decision, Connolly v. Harris Trust Co. (In re MiniScribe Corp.), 257 B.R. 56 (Bankr.D.Colo.2000). It recalculated the size of the estate, leaving a figure of $67.4 million attributable to Connolly's efforts.
The bankruptcy court did not read the district court's order to preclude application of a common fund analysis; it believed the district court had only rejected its application based on the bankruptcy court's prior findings. Therefore, having adjusted these findings, the bankruptcy court once again applied a common fund percentage analysis to the $67.4 million estate realized by Connolly's efforts. Assuming Connolly were awarded the $3.04 million he sought, the $10.86 million total administrative burden would still be within a reasonable range under a common fund analysis.
The bankruptcy court next turned to the lodestar analysis. Addressing the district court's criticism of its previous effort, it conceded that there was no direct support for the $500 per hour figure in the record. Upon consideration of Connolly's highly responsible role and the fees charged by other professionals, however, the bankruptcy court determined that while a fee of $500 per hour would not be unreasonable, a rate of $400 per hour would also be reasonable. Applied to the 1,779 hours accounted for by Connolly, the base lodestar amount would be $711,600.
The bankruptcy court next turned to the district court's criticism of its use of a 3.5 lodestar multiplier. After again analyzing the trustee's contribution to and success achieved in the case, it concluded that a multiplier of 2.57 would be appropriate. Thus, the adjusted lodestar fee would be $1,828,812. Once again, however, the bankruptcy court concluded that the lodestar fee was not the appropriate measure of reasonable compensation; instead, it allowed a larger amount of $3,044,953.69, calculated under a common fund approach.
Harris Trust again appealed from the bankruptcy court's award. The district court again concluded that a common fund analysis was inappropriate in this case. It found that there was no way to quantify Connolly's contribution to the bankruptcy estate that would be comparable to the fund creation theory supporting application of the common...
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