In re Vill. Apothecary, Inc.

• Decision Date: 16 August 2022
• Docket Number: 21-1555
• Citation: 45 F.4th 940
• Parties: IN RE: VILLAGE APOTHECARY, INC., Debtor. Silverman & Morris, P.L.L.C., Appellant.
• Court: U.S. Court of Appeals — Sixth Circuit

45 F.4th 940

IN RE: VILLAGE APOTHECARY, INC., Debtor. Silverman & Morris, P.L.L.C., Appellant.

No. 21-1555

United States Court of Appeals, Sixth Circuit.

Argued: March 8, 2022

Decided and Filed: August 16, 2022

ARGUED: Thomas R. Morris, MORRIS & MORRIS ATTORNEYS, P.L.L.C., Dexter, Michigan, for Appellant. ON BRIEF: Thomas R. Morris, MORRIS & MORRIS ATTORNEYS, P.L.L.C., Dexter, Michigan, for Appellant.

Before: GILMAN, STRANCH, and NALBANDIAN, Circuit Judges.

NALBANDIAN, Circuit Judge.

As special counsel, the law firm of Silverman & Morris recovered $38,000 for the estate in this bankruptcy proceeding. For its services, the firm wanted $37,063 in fees. But the bankruptcy court, finding that the benefit of the services did not warrant awarding the full amount, halved the award, and the firm appealed. On appeal, we must address two issues. The first is whether bankruptcy courts can consider "results obtained" when determining whether fees are reasonable under § 330(a)(3) of the Bankruptcy Code. The second is whether the bankruptcy court abused its discretion in reducing the fees by half. We answer yes to the first and no to the second. So we AFFIRM .

I.

We divide our discussion of the background into three parts. First, we explain the relevant statutory background. Then we recount the facts. And finally, the procedural history.

A.

Under the Bankruptcy Code, courts "may award" a "reasonable compensation" to a "professional person" for their services. 11 U.S.C. § 330(a). The main issue here deals with how courts determine the amount of reasonable compensation. Before 1994, § 330 instructed courts to look at "the time, the nature, the extent, and the value" of the services as well as the costs of "comparable services." Bankruptcy Reform Act of 1978, Pub. L. No. 95-598, § 330(a)(1), 92 Stat. 2549, 2564 (1978). But without more guidance, courts came up with different approaches to answer the question.

One approach looked to Title VII, which, like the Bankruptcy Code, gives courts discretion to award "reasonable ... fees." 42 U.S.C. § 2000e-5(k) ; Johnson v. Ga. Highway Express, Inc. , 488 F.2d 714 (5th Cir. 1974), abrogated on other grounds by Blanchard v. Bergeron , 489 U.S. 87, 109 S.Ct. 939, 103 L.Ed.2d 67 (1989). In Johnson , the Fifth Circuit used twelve factors to analyze whether attorney's fees were reasonable under Title VII.¹ 488 F.2d at 717–19. And some courts integrated these factors to the bankruptcy context. See, e.g. , Harman v. Levin , 772 F.2d 1150, 1152 n.1 (4th Cir. 1985) ; see also 3 Collier on Bankruptcy § 330.03(9) & n.71 (16th ed. 2022) (collecting cases).

Another approach, adopted by this Court, required bankruptcy courts to calculate reasonable compensation by using the "lodestar method." See In re Boddy , 950 F.2d 334, 337 (6th Cir. 1991). Under Boddy ’s approach, bankruptcy courts first determine the "lodestar" amount by "multiplying the attorney's reasonable hourly rate by the number of hours reasonably expended." Id. (quoting Grant v. George Schumann Tire & Battery Co. , 908 F.2d 874, 879 (11th Cir. 1990) ). Then, and only then, may the court "exercise its discretion" and vary the award based on the same Johnson factors.² Id. at 338 (citing Harman , 772 F.2d at 1152 n.1 ). Relevant here is the eighth factor, which asks courts to consider the "amount involved and the results obtained." Johnson , 488 F.2d at 718.

In 1994, Congress amended § 330, codifying many, but not all, of these factors. See Bankruptcy Reform Act of 1994, Pub. L. No. 103-394, § 224, 108 Stat. 4106, 4130–31 (1994); see also 3 Collier, supra , § 330.03(9) ("A majority of the Johnson criteria are now codified in section 330(a)(3)."). Section 330(a)(3) now instructs courts to "consider the nature, the extent, and the value of such services, taking into account all relevant factors, including" the time spent, rates charged, "whether the services were necessary to the administration of, or beneficial at the time at which the service was rendered," among others. 11 U.S.C. § 330(a)(3). But the statute does not mention the "results obtained" factor.

Although § 330 gives bankruptcy courts broad discretion to award fees, it categorically excludes fees in three circumstances. Under § 330(a)(4), "the court shall not allow compensation for" (1) "unnecessary duplication of services," (2) "services that were not reasonably likely to benefit the debtor's estate," or (3) services that were not "necessary to the administration of the case." Id. § 330(a)(4).

The interplay between § 330(a)(3) and § 330(a)(4) underlies much of our discussion below. Unlike § 330(a)(3), which concerns how to determine "the amount of reasonable compensation," § 330(a)(4) deals with a precursory question: whether the fees are compensable. In other words, if fees are not barred by § 330(a)(4), they are not automatically awarded. Instead, courts look at the factors in § 330(a)(3) to determine whether it should reduce those fees.

Since the 1994 Amendment, we have not considered whether bankruptcy courts may continue to consider, for the § 330(a)(3) analysis, other lodestar factors—like "results obtained"—that were not codified. This case raises that question.

B.

In 2015, the Village Apothecary, a pharmacy in Ann Arbor, Michigan, filed for Chapter 7 bankruptcy. Shortly after, the bankruptcy court appointed Douglas Ellmann as trustee and the law firm of Silverman & Morris as the trustee's special counsel. The law firm was brought on to investigate potential causes of action that, if successful, could have benefitted the estate by at least $1,655,962, or so the law firm thought.

The law firm embarked on a year-long investigation of the debtor's finances. It discovered, among other things, that the pharmacy could pursue certain actions against the pharmacy's president, Garry Turner. As it turned out, Turner had failed to repay a loan he owed the pharmacy. He also transferred some inventory from the pharmacy to a different company that he owned. And while the pharmacy had an option to buy the place it was renting, Turner and his wife had created a separate company, bought the property, and sold it for a profit. Believing that Turner had breached his fiduciary duty to the pharmacy and converted its property, the law firm drafted a complaint against Turner.

The law firm, however, never filed the complaint. Instead, it showed the complaint to Turner's attorney, who disputed the claims. Turner's attorney explained that the pharmacy could not purchase the property and that some of the other claims were untimely. As a result, the law firm (and the trustee) thought the claims would go nowhere and settled with Turner for $38,000. Apart from this $38,000, there was not much left in the pharmacy's assets, which totaled $40,710.87.

The law firm believed that it was entitled to fees for its services, so it filed a fee application under § 330. It asked for a little over $37,000, which, if granted, would have amounted to "90.6%" of the estate's assets. The trustee and the trustee's attorneys also filed for fees. The bankruptcy court considered all three together. Although there were no objections to the fee applications, the bankruptcy court thought it was necessary to hold a hearing to determine whether the fee amounts should be reduced "given the amount of the benefit to the estate."

C.

Following the hearing, the bankruptcy court determined that the fees should be reduced by half. It found that the law firm and the trustee's professional fees would amount to 100% of the amount collected for the estate, "leaving nothing to be distributed to ... creditors." (R. 4, Bankruptcy Order, PageID 198.) After a series of back-and-forths with the district court (where the latter reversed the bankruptcy court twice), the bankruptcy court considered the fee application for a third time, again holding that the law firm's fees should be reduced by half. The bankruptcy court based its decision on two separate rationales. First, the court applied the lodestar factors, balancing the "amount in controversy" with the "results obtained" and concluded that the level of success was essentially nothing (since nothing would be left over for the creditors). In the alternative, the court relied on a "billing judgment" argument, a term it used to capture the idea that attorneys in non-bankruptcy cases typically reduce their fees so their clients can get a share of the award. The court explained that this factor was unnecessary to its decision because it would have reduced the fees by 50% based on the first rationale.

The law firm appealed to the district court again. This time, the district court affirmed, finding that the bankruptcy court's application of the "results obtained" factor was proper. The district court held that "results obtained" is still a relevant lodestar factor and determined that the bankruptcy court did not abuse its discretion in reducing fees by 50%. The law firm appealed.

II.

We review a bankruptcy court's award of fees under the abuse of discretion standard. In re Boddy , 950 F.2d at 336. This is a "highly deferential" standard, so we disturb a decision only if it is based on clearly erroneous findings of facts, improperly applies the law, or relies on an incorrect legal standard. Doe v. Mich. State Univ. , 989 F.3d 418, 426 (6th Cir. 2021). The party requesting the fees has the "burden of proof as to entitlement to and reasonableness of" those fees. In re McLean Wine Co. , 463 B.R. 838, 846 (Bankr. E.D. Mich. 2011) (quoting In re Kieffer , 306 B.R. 197, 206 (Bankr. N.D. Ohio 2004) ); see also In re Mkt. Ctr. E. Retail Prop., Inc. , 730 F.3d 1239, 1246 (10th Cir. 2013) ("The burden is on the party requesting fees to establish that its request is reasonable.").

III.

On appeal, the law firm makes two arguments. First, it claims that § 330(a)(3) of the Bankruptcy Code now bars courts from considering "results obtained" as a factor in determining the reasonableness of fees. And second, it argues that the...