Hillsborough Holdings Corp., In re

Decision Date18 November 1997
Docket NumberNo. 96-2605,96-2605
Citation127 F.3d 1398
Parties38 Collier Bankr.Cas.2d 1839, 31 Bankr.Ct.Dec. 917, Bankr. L. Rep. P 77,611, 11 Fla. L. Weekly Fed. C 778 In re HILLSBOROUGH HOLDINGS CORP., et al., Debtors. STROOCK & STROOCK & LAVAN; Kaye, Scholer, Fierman, Hayes & Handler, Plaintiffs-Appellants, v. HILLSBOROUGH HOLDINGS CORP., et al., Defendants-Appellees.
CourtU.S. Court of Appeals — Eleventh Circuit

David C. Pollack, Stroock & Stroock & Lavan, Miami, FL, Andrew A. Kress, Kaye Scholer, Fierman, Hays & Handler, LLP, New York City, for Plaintiffs-Appellants.

Scott A. Stichter, Tampa, FL, for Defendants-Appellees.

Appeals from the United States District Court for the Middle District of Florida.

Before CARNES, Circuit Judge, and CLARK and CAMPBELL *, Senior Circuit Judges.

CAMPBELL, Senior Circuit Judge:

This case concerns a bankruptcy court's refusal under 11 U.S.C. § 330(a)(2) to reimburse two law firms for certain categories of expenses the firms incurred in their work on a bankruptcy case because the court believed that the expenses of these generic types were part of a firm's "overhead" and were already built into its hourly billing rates.

I. Background

Hillsborough Holdings Corporation and thirty-one of its affiliates filed for bankruptcy under Chapter 11 of the United States Bankruptcy Code on December 27, 1989. Kaye, Scholer, Fierman, Hays & Handler, L.L.P. ("Kaye, Scholer") was retained as co-counsel to the Debtors, and Stroock & Stroock & Lavan ("Stroock") was retained as counsel to the Official Bondholders Committee. Both law firms were thus authorized to receive reasonable compensation for the actual, necessary services they rendered and to reimbursement for actual, necessary expenses they incurred in providing those services under 11 U.S.C. § 330(a). 1

The Bankruptcy Court entered its first order on interim fee applications ("the first order") on October 5, 1990. In that order, the court declared that several categories of expenses were attributable to "overhead" and therefore non-compensable because they were already "built into the Applicant's hourly billing rate." The court described these categories as: postage; secretarial charges, including overtime charges; word processing; clerical tasks; local travel expenses; meals; express mail; messenger delivery expenses; copy charges; laundry; office supplies; typesetting; and computer research charges.

Over the next several years, the court periodically issued further orders on interim fee applications. In these orders, the court denied without discussion many of the firms' requests for reimbursement of their expenses, referring back to the principles set forth in the first order. In each order, the court reserved jurisdiction to reconsider the fee applications at the close of the case.

When the case concluded, the law firms in their final fee applications asked the court to reconsider all of the requests for expense reimbursements it had previously denied. They argued that their employment of a "user fee" billing system, which charges certain expenses directly to the particular client for whom they were identifiably incurred, and which excludes those separate expenses when setting the hourly billing rate, precluded the court from holding that such individually charged expenses constituted non-compensable "overhead."

On October 31, 1995, the court denied this request. While recognizing that the law firms' efforts were often "herculean," the court stated:

[T]his Court is of the opinion, and repeatedly stated this opinion on numerous occasions that the awards made during the pendency of this case were a determination of the reasonable fees to be allowed for the tasks and services provided to the Debtors and the Debtors' estates. For this reason, this Court is satisfied that the reconsideration of the fees and expenses previously disallowed by the Court is inappropriate.

On the same day, the bankruptcy court also issued an order denying reimbursement for a portion of Stroock's expenses from Stroock's final fee application.

Over the course of the case, Stroock requested reimbursement for $787,791.43 in expenses of which $341,953.01 (43%) was disallowed, and Kaye, Scholer requested reimbursement for $679,711.91 in expenses of which $514,636.97 (76%) was disallowed.

The firms appealed these decisions to the district court, arguing principally that the disallowed expenses were not part of their "overhead" and were of a type ordinarily billed separately to their non-bankruptcy clients. The district court affirmed the bankruptcy court's rulings. The firms then brought this appeal.

II. Discussion

"We note initially that an award of attorneys' fees in a bankruptcy proceeding will be reversed only if the court abused its discretion." In re Red Carpet Corp. of Panama City Beach, 902 F.2d 883, 890 (11th Cir.1990). "An abuse of discretion occurs if the judge fails to apply the proper legal standard or to follow proper procedures in making the determination, or bases an award upon findings of fact that are clearly erroneous." Id.

The Bankruptcy Code provides that the bankruptcy court may award to the debtor's attorney and professionals employed by an appointed committee under 11 U.S.C. § 1103 not only reasonable compensation for actual, necessary services rendered, but, "reimbursement for actual, necessary expenses." 11 U.S.C. § 330(a). See note 1, supra.

Early in the present case, the bankruptcy judge entered an order advising counsel that he would not reimburse certain listed broad categories of expenses, supra, p.3. The judge stated that such categories were attributable to "overhead" and therefore already "built into the applicant's hourly billing rate." The judge's declaration was made before most of the expense items in dispute were incurred and was plainly not based on findings as to the individual characteristics of expense items billed in this case. Rather it seems to have reflected the court's more general view that attorneys' claimed expenses falling within any of the listed categories must be deemed non-reimbursable because they are, in effect, not true "expenses," i.e. they are by definition "overhead" and so built (apparently by their very nature) into the applicant's hourly billing rate. There is no evidence or finding of record that the present attorneys had actually taken these classes of expenses into account when determining the hourly billing rates they charged. To the contrary, the attorneys profess to bill on a "user fee" basis, under which the hourly rate is set on the assumption that items of the classes prohibited by the court will, in many instances, be separately billed as expenses. Hence the court's prior order, made independently of the specifics of the appellants' billing methods, appears to reflect a legal conclusion that expenses of certain types must inevitably be presumed to be "overhead" rather than reimbursable "expenses" under 11 U.S.C. § 330(a)(2).

We emphasize the last point because our review standard varies depending upon whether we are examining a legal ruling or a fact-based issue entrusted to the bankruptcy judge's broad discretion. Most fees issues are undoubtedly of the latter type. To the extent a bankruptcy judge were to find that claimed expenses were not actually incurred, did not sufficiently relate to the case, were unnecessary, or were excessive, we would overturn his determination only if convinced the findings were "clearly erroneous"--a very high standard, and one we would rarely be likely to find, especially in a fees situation.

Our review standard is different, however, when dealing with legal rulings. The controlling fees statute allows a court to award not only reimbursable compensation for attorney's services but--in a separate clause--allows "reimbursement for actual, necessary expenses." Here the bankruptcy judge declined in advance to reimburse many described categories of expenses, apparently because of his belief that the categories he listed could never, because of their very nature be true "expenses" (or "actual, necessary expenses") within 11 U.S.C. § 330(a)(2). A ruling like this, not tied to an evaluation of the particular facts of the case but based on a general interpretation of the meaning of the word "expenses" as uniformly applied in all cases, is a legal ruling. 2

In saying this, we do not mean to suggest that appellate courts should be eager to fly-speck the niceties of fee awards. If, for example, the bankruptcy judge, upon analysis of the methodology used by these attorneys to bill computer research expenses, had determined that their calculus did not fairly mirror the actual costs of such research in the instant case, we would review that determination with marked deference to the bankruptcy court. Similarly, if the judge, on some reasonable basis, found that certain expenses claimed were items not ordinarily viewed by the bar as billable expenses, we would examine the ruling with considerable, if not unlimited, deference.

Here, however the bankruptcy judge prohibited reimbursement of whole categories of expenses, ruling that none of them were allowable, being presumptively "overhead" and built into the hourly billing rate. An assertion at this level of generality poses a legal issue. If we were to refuse to review such a ruling, we would leave attorneys in a situation where many items ruled nonreimbursable as expenses in one court might be deemed perfectly reimbursable in another. We do not think that the meaning of the statutory provision for reimbursement of "actual, necessary expenses" can fluctuate between such extremes.

Reviewing the merits of the ruling, we do not agree with the bankruptcy judge that reimbursable expenses within § 330(a)(2) are limited in the manner suggested in his first order. We accept that true "overhead" costs--the ordinary operating costs of a firm, such as rent, heat, and the like, that cannot readily be attributed...

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