In re Heck's Properties, Inc.

• Decision Date: 26 March 1992
• Docket Number: Civ. A. No. 2:89-0226 to 2:89-0229,2:89-0451 and 2:90-0223.
• Citation: 151 BR 739
• Parties: In re HECK'S PROPERTIES, INC., Debtor in Possession. Appeal of The OFFICIAL COMMITTEE OF EQUITY SECURITY HOLDERS OF HECK'S, INC., Appellant. (Five Cases) In re HECK'S, INC., Debtor in Possession. (Three Cases) In re TAUBERG COMPANY, Debtor in Possession. In re HECK'S PROPERTIES II, INC., Debtor in Possession. Appeal of BERLACK, ISRAELS & LIBERMAN, Appellant.
• Court: U.S. District Court — Southern District of West Virginia

151 B.R. 739 (1992)

In re HECK'S PROPERTIES, INC., Debtor in Possession Appeal of The OFFICIAL COMMITTEE OF EQUITY SECURITY HOLDERS OF HECK'S, INC., Appellant. (Five Cases) In re HECK'S, INC., Debtor in Possession. (Three Cases) In re TAUBERG COMPANY, Debtor in Possession In re HECK'S PROPERTIES II, INC., Debtor in Possession Appeal of BERLACK, ISRAELS & LIBERMAN, Appellant.

Civ. A. Nos. 2:89-0226 to 2:89-0229, 2:89-0451 and 2:90-0223.

United States District Court, S.D. West Virginia, at Charleston.

March 26, 1992.

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

Robert M. Miller, Berlack, Israels & Liberman, New York City, for Official Committee of Equity Sec. Holders of Heck's, Inc.

Thomas R. Goodwin, Goodwin & Goodwin, Charleston, WV, for Heck's, Properties, Inc.

David Murdoch, Kirkpatrick & Lockhart, Pittsburgh, PA, for Bank Committee.

William F. Dobbs, Jr., Jackson & Kelly, Charleston, WV, for Trade Committee.

Marc E. Richards, Mierson & Kuhn, New York City, for Members of the Bd. of Directors of Heck's, Inc.

John Nesius, Asst. U.S. Trustee, Charleston, WV.

John R. Isaac, Jr., Heck's, Inc., Guy F. Hanna, Heck's, Inc., Nitro, WV, P. Michael Pleska, Bowles, Rice, McDavid, Graff & Love, Charleston, WV, Scott L. Hazan, Otterbourg, Steindler, Housten & Rosen, New York City, Alvin J. Hardee, Jr., Credit Manager, Murray Ohio Mfg., Brentwood, TN, Charles F. O'Hanlon, III, Mellon Bank, N.A., Pittsburgh, PA, Charles I. Jones, Jr., Campbell, Woods, Bagley, Emerson, McNeer & Herndon, Charleston, WV, Joseph M. Scott, Jr., Stoll, Keenon & Park, Lexington, KY, Karl M. Henkels, Credit Manager, Outdoor Sports, Dayton, OH, for various interested parties.

                                                       INDEX
                                                                                                  Page
                  I. Background                                                                    743
                 II. General Issues                                                                745
                III. Denial of Fees                                                                745
                     A. Determination of Necessary Services                                        746
                     B. Section 330(a) Notice and Hearing                                          747
                     C. Denial of Fees and Expenses Aggregating $214,362.45                        748
                         1. Fees for Intervention in Breach of Contract Action                     748
                         2. Fees Sought for BI & L's Analysis of Sullivan & Cromwell
                             Documents Relating to Accounting Liability                            750
                         3. Fees Sought for Review and Summaries of Pleadings                       751
                         4. Fees Sought for Review of Net Operating Loss by Tax Partners           751
                         5. Fees Sought for Fraudulent Conveyance and Preferential Transfer
                              Research                                                             752
                         6. Fees Sought for Preparation of Statements of Position                  753
                         7. Fees Sought for Analysis of Motion for Setoff                          753
                         8. Fees Sought for Appeal by Laventhol & Horwath                          753
                         9. Motion of BI & L to Reconsider Order of August 11, 1987                754
                 

                                                                                                Page
                        10. Increased Rates Sought by Certain BI & L Associates                    754
                        11. Fees Sought for Fee Application Preparation                            754
                        12. Fees Sought for Pre-Disclosure Statement Hearing Litigation            754
                            (a) Application for Appointment of Operating Trustee                   755
                            (b) Application to Compel Annual Stockholders Meeting                  757
                            (c) State Court Action Against Officers and Directors                  760
                 IV. Sanctions                                                                     764
                     A. The $91,582.25 Indemnification                                             764
                        1. Bankruptcy Rule 9011                                                    764
                        2. Heck's Authority to Indemnify                                           766
                        3. Due Process re Sanctions                                                768
                           a.                                                                      768
                           b.                                                                      768
                        4. The Propriety of Sanctions                                              769
                     B. The Withholding of Robert Miller Compensation of $57,596                   770
                  V. Conclusion                                                                    771
                

MEMORANDUM ORDER

COPENHAVER, District Judge.

The appellant, Berlack, Israels & Liberman (hereinafter, "BI & L"), is now before the court in these consolidated appeals from three orders¹ entered by the United States Bankruptcy Court for the Southern District of West Virginia. The orders appealed from, BI & L contends, improperly denied it fees and expenses incurred during the course of its legal representation of the Equity Security Holders' Committee of Heck's, Inc., in the amount of $210,662.45, and imposed sanctions upon it in the amount of $149,178.25,² for a cumulative penalty of $359,840.70. The court notes that the fees and expenses denied are actually $214,362.45³ and, when added to the sanctions of $149,178.25, the aggregate is $363,540.70.

I. Background

On March 5, 1987, Heck's, Inc., and three of its subsidiaries filed voluntary petitions for bankruptcy relief under Chapter 11 of Title 11 of the United States Code, 11 U.S.C. ?? 101, et seq. (hereinafter, "the Code"). After the filing of the voluntary petitions, Heck's and its subsidiaries continued in the possession of their properties and the operation of their businesses as debtors-in-possession (hereinafter, "DIP" or "Heck's") pursuant to Sections 1107 and 1108 of the Code.

During the course of the Heck's bankruptcy case, three committees were appointed to represent creditors: (1) the Unsecured Trade Creditors' Committee which represented Heck's trade creditors (hereinafter, "Trade Committee"), (2) the Bank Committee which represented Heck's bank creditors (hereinafter, "Bank Committee"), and (3) the Equity Security Holders' Committee which represented Heck's common stockholders (hereinafter, "Equity Committee"). Appellant BI & L was, pursuant to order of the bankruptcy court, authorized to represent the Equity Committee as legal counsel during the pendency of the Heck's bankruptcy case. It is observed that the bankruptcy court, despite having approved the employment of BI & L by order of May 1, 1987, subsequently denied the permanent employment of BI & L as counsel for the Equity Committee, concluding that BI & L had acted inconsistently with Administrative Order III in conjunction with, inter alia, its billing rates and practices and the quality of services rendered. See Bankruptcy Court's Order of October 19, 1987, stayed by order of this court on November 2, 1987. On February 4, 1988, this court reversed the bankruptcy court's denial of the permanent employment of BI & L, finding that the circumstances presented did not warrant depriving the Equity Committee of the privilege of selecting and continuing with its chosen counsel.

The bankruptcy court's final fee order appealed from focuses largely upon actions taken by BI & L on behalf of the Equity Committee during a relatively brief period in the Heck's reorganization case, namely June, 1988, through October, 1988. BI & L contends that, during that period Heck's, as debtor in possession, and its other two official committees, the Bank and Trade Committees, were negotiating intensively in an effort to draft a non-consensual plan of reorganization, while excluding the Equity Committee from the negotiations to the detriment of the Heck's shareholders. During the course of those negotiations, BI & L contends, the debtor proposed a nonconsensual plan of reorganization which would have diluted the shareholders' interests to 10% of the company, while granting Heck's senior management 5% of the stock of the reorganized company and other lucrative benefits.

According to BI & L, the Equity Committee was "outraged" by the proposed nonconsensual plan, finding that it unfairly benefited management and the banks. Although negotiations were allegedly attempted between the Equity Committee and the debtor and its management, such negotiations proved to be of no avail, with BI & L asserting that senior management threatened to "cram down their self-serving plan on Heck's shareholders."

In light of the actions and positions taken by the debtor and the two other committees, BI & L contends that the Equity Committee, through BI & L, took immediate steps to protect its constituents' interests prior to a disclosure hearing which was scheduled to occur on October 12, 1988. These steps included "accelerated discovery" of the debtor and Bank and Trade Committees, which discovery, BI & L states, "confirmed that . . . projections contained in Heck's first Disclosure Statement and Plan of Reorganization were too optimistic." See Brief of BI & L, p. 13.

On September 19, 1988, the Equity Committee and three of its individual members/shareholders filed an action against Heck's in the Circuit Court of Putnam County, West Virginia, seeking an order to compel Heck's to hold an annual shareholders' meeting. The individual shareholders also brought a separate complaint in the same state court against senior management and certain of Heck's directors for post-petition breach of fiduciary duty and duty of loyalty and good faith. On October 4, 1988, the Equity Committee moved the bankruptcy court for the appointment of an operating trustee, based upon an analysis of the full magnitude of Heck's losses by the accountants for the Equity Committee, Laventhol &...