In re S-Tek 1, LLC
| Decision Date | 06 February 2023 |
| Docket Number | 20-12241-j11 |
| Parties | In re: S-Tek 1, LLC, a New Mexico limited liability company, Debtor. |
| Court | U.S. Bankruptcy Court — District of New Mexico |
Nephi Hardman Attorney for Debtor Nephi D. Hardman Attorney at Law LLC
Jordan Michael Sickman Attorney for United States Trustee
Christopher M Gatton Attorney for Surv-Tek, Inc. Giddens & Gatton Law, P.C.
The Court held a final, evidentiary hearing on January 19, 2023 on the request for approval of compensation for Nephi D Hardman Attorney at Law, LLC ("Attorney") for the period from December 2, 2020 through July 31, 2022 (the "Fee Application").[1] Having considered the Fee Application in light of the evidence presented at the final hearing, the objections of the United States Trustee[2] and the Subchapter V Trustee,[3] and relevant caselaw, the Court finds and concludes that the Fee Application should be granted and approves Attorney's compensation in the amount requested.
Attorney requests approval of total compensation in the amount of $304,210.83 consisting of $274,923.50 in attorney's fees and paralegal fees, $7,629.17 in expenses, and $21,658.16 in taxes. Of that amount, Attorney has received $90,720.60, leaving an unpaid balance of $213,490.23. The requested compensation covers work Attorney performed in connection with this bankruptcy case and related adversary proceedings.
The Fee Application breaks down the work performed into nine categories: 1) general case administration; 2) statements and schedules; 3) plan of reorganization; 4) claims administration; 5) operating reports and other reports; 6) cash collateral matters; 7) employment and fee applications; 8) litigation with Surv-Tek, Inc. and related parties in adversary proceeding No. 20-1074-j; and 9) litigation with Salls Brothers Construction, Inc. Attorney's hourly rate was $300.00 for the work performed in the Fee Application and the paralegal's hourly rate was $115.00. For work in Adversary Proceeding No. 20-1074j, Attorney did not charge all of his time to Debtor because of his joint representation of non-debtor third parties in that litigation. In accordance with the Court's Order Conditionally Granting Motion for Joint Representation (Doc. 252), Attorney allocated 70% of the time spent to Debtor, and 30% of the time spent to the non-debtor third parties.
Attorney asks the Court to grant final approval of Fee Application with Attorney reserving the right to file additional applications for approval of compensation in this bankruptcy case for legal services provided to Debtor as debtor in possession. Even though the Fee Application is titled as a "First and Final" application, the Court determined that the Fee Application must be treated as an interim application for approval of compensation because Attorney intends to file another application for compensation for work performed after July 31, 2022. Section 331 of the Bankruptcy Code was enacted so that professionals seeking compensation from the bankruptcy estate could receive interim compensation instead of having to wait until the end of the case. See In re Moore, 36 B.R. 323, 327 (Bankr. M.D. Ga. 1984) (); In re Frontier Commc'ns Corp., 623 B.R. 358, 361 (Bankr. S.D.N.Y. 2020) (). Because Attorney has performed work subsequent to the period covered by the Fee Application and for which he intends to seek approval of compensation, the Fee Application must be treated as an interim application under 11 U.S.C. § 331,[4] subject to reconsideration prior to any final fee award. See In re Heritage Real Est. Inv., Inc., No. 14-03603-NPO, 2021 WL 1396570, at *12 (Bankr. S.D.Miss. Mar. 12, 2021) ( )).
The Fee Application includes a request for the Court to specify in its order on the Fee Application that the order is a judgment against the Debtor in the amount of the unpaid allowed compensation. It is not appropriate to issue a judgment in the amount of the unpaid allowed compensation because, as explained above, the Fee Application must be treated as an interim fee application subject to further review; consequently a ruling on the Fee Application will be interlocutory.
Background Case History and Overview of Work Attorney Performed[5]
Debtor filed a voluntary petition under chapter 11 of the Bankruptcy Code on December 2, 2020 and elected treatment under subchapter V.[6] Debtor filed Debtor's Motion to Employ Attorney on the same date.[7] The Court granted Debtor's Motion to Employ Attorney, authorizing Debtor to pay Attorney 75% of fees and 100% of reimbursable costs and applicable gross receipts taxes, subject to court approval.[8] Upon interim approval of compensation, the Court typically aphorizes the debtor to pay 100% of the approved compensation. Attorney did not receive 75% of the billed fees over the course of Attorney's representation of Debtor during the bankruptcy case, and instead accepted reduced payments averaging $5,000 per month.[9]
Debtor's bankruptcy filing was precipitated by litigation between Debtor and Surv-Tek, Inc. ("Surv-Tek") and related parties (together the "Surv-Tek parties") in state court. When Debtor filed its subchapter V case, the state court had entered an order that would enforce a non- compete provision that required Debtor to cease its operations if Debtor did not bring the indebtedness owed to Surv-Tek current by a fixed deadline.[10] Debtor did not have the financial ability to bring the indebtedness current. By filing the bankruptcy case, Debtor received the benefit of the automatic stay, which stayed the enforceability of the state court's order and allowed Debtor to continue to operate its business.[11]
Debtor removed the state court action to this Court, initiating Adversary Proceeding No. 21-1074-j (the "Surv-Tek AP"). Debtor asserted counterclaims in the Surv-Tek AP, which, if successful, would have resulted in eliminating the Surv-Tek parties' claims and generating substantial money for the estate. At the time, Debtor's alternative courses of action were 1) to pursue its claims and defenses in the Surv-Tek AP in an attempt to eliminate the Surv-Tek parties' claims and generate funds for the estate to pay creditors; 2) cease its business operations and agree to a dismissal the bankruptcy case or conversion of the chapter 11 case to a case under chapter 7,[12] which would have resulted in priority and nonpriority unsecured creditors receiving nothing on their claims; or 3) settle with the Surv-Tek parties. Settlement, however, was not a viable option. Prior settlement offers during the state court litigation had failed, and Debtor did not have sufficient funds to pay a large settlement to the Surv-Tek parties. Consequently, the third option, settlement, was not a viable option because it would essentially be the equivalent of shutting Debtor's business down.
Faced with these alternatives, Debtor chose to pursue the litigation in the Surv-Tek AP. In addition, Debtor and the Surv-Tek parties agreed that the Surv-Tek AP had to be resolved before the Court could consider plan confirmation.
Similarly, it appeared at the time to be critical for the Court to value Surv-Tek's collateral so that Debtor could amend its plan, if necessary, prior to confirmation. The Court held a two-day valuation hearing which resulted in valuation of Surv-Tek's collateral under § 506(a) in the amount of $499,709.54 for confirmation purposes,[13] approximately one-third of the amount of Surv-Tek's proof of claim.[14] Surv-Tek then elected to have its entire claim treated as a secured claim under § 1111(b).[15]
The Surv-Tek parties actively participated in Debtor's bankruptcy case throughout the entire case, regularly contesting Debtor's use of cash collateral in an effort to protect the Surv-Tek parties' interests, litigating the Surv-Tek AP, and contesting confirmation. Overall, the bankruptcy case and the Surv-Tek AP was hard fought by both Debtor and the Surv-Tek parties. Attorney zealously represented Debtor throughout the bankruptcy case and in the Surv-Tek AP, ultimately filing the Third Amended Plan[16] with the hope of achieving confirmation.
DISCUSSION
(A) reasonable compensation for actual necessary services rendered by the . . . attorney and by any paraprofessional person employed by . . . such person; and (B) reimbursement for actual, necessary expenses.
Compensation may not be allowed for "unnecessary duplication of services" or "services that were not reasonably likely to benefit the debtor's estate; or . . . necessary to the administration of the case." 11 U.S.C. § 330(a)(4)(A). See also In re Reynolds, No. 2:18CV398 DAK, 2019 WL 4645385, at *3 (D. Utah Sept. 24, 2019) (...
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