In re Vista Foods USA, Inc., Bankruptcy No. 96-12890-BH.
| Decision Date | 14 April 1999 |
| Docket Number | Bankruptcy No. 96-12890-BH. |
| Citation | 234 BR 121 |
| Parties | In re VISTA FOODS USA, INC., Debtors. |
| Court | U.S. Bankruptcy Court — Western District of Oklahoma |
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James Vogt, Reynolds, Ridings, Vogt & Morgan, Oklahoma City, Oklahoma, for the trustee.
Barbara A. Shangraw, Acting United States Trustee, by Herbert M. Graves, Assistant United States Trustee, Oklahoma City, Oklahoma.
The law firm of Reynolds, Ridings, Vogt & Morgan is counsel for the Chapter 7 trustee. It also represented the creditors who brought the involuntary petition, and then the Unsecured Creditors Committee while the case was one under Chapter 11. The firm has been allowed compensation of $14,853 for its services in connection with the case. Now it requests a "bonus" for extraordinary success in recovering assets for the estate. The United States Trustee objects. However, neither the debtor, which will have a surplus returned to it, nor any creditor objected. These are the only parties having a pecuniary interest in the case.
The movant originally represented an unsecured judgment creditor of the debtor. Investigation revealed that the debtor had ceased business and its principals had abandoned it.
Movant discovered a lien on the debtor's assets securing a note for $2,000,000 that had been recently perfected in favor of an entity named Mega Oil. The transaction raised serious questions as to the validity of the lien and indicated there was some affiliation between the debtor and Mega Oil.
Movant subsequently initiated an involuntary Chapter 7 petition against the debtor and testimony indicates it received a number of veiled threats. The debtor then succeeded in converting the case to one under Chapter 11, but failed to accomplish any significant steps in reorganization. As a result, the movant reconverted the case to one under Chapter 7.
The law firm was then employed by the Chapter 7 trustee and, inter alia, sought to avoid the lien as fraudulent, and this goal was achieved. It also successfully objected to a questionable $2,000,000 proof of claim by the former operations manager of the debtor. The assets of the estate were then efficiently and successfully liquidated.
Consequently, and as a result of the law firm's efforts, all creditors will be paid in full with interest. Moreover, even if the requested $20,000 "bonus" is awarded, the testimony indicated that over $100,000 will be returned to the debtor. Without the law firm's initiative, perseverance, and skill, this result plainly would not have occurred.
The issues are allowance of a "bonus" and the amount to be allowed. However, they are not as clear as the motion suggests.
One problem is movant's use of the term "bonus". Although the term, and its equivalents (such as "enhancement") have been used in a number of decisions, I hesitate to employ it, for its use belies the true issue.
For example, requesting a "bonus" implies that if attorneys did something less than a competent performance, they would still be entitled to "full" compensation. This could be tantamount to approving incompetence or allowing unreasonable compensation.
Also, using "bonus" implies that the movant actually performed more than was required of reasonably competent attorneys. This, in turn, implies not only that it is acceptable for attorneys in similar circumstances not to perform at the highest level but also that attorneys, as a matter of entitlement, deserve to be compensated no matter what services they performed or failed to perform in representing their client.
Additionally, these implications raise questions about lawyers' use of hourly billing, which is the very foundation of, not only the initial fee award to the movant in this case, but also the determination of legal fees currently in vogue in the American legal system. Indeed, the device is being subjected to increasing criticism. Moreover, the use of hourly billing as the basis for attorneys' fees calculations has been the subject of numerous judicial decisions.
Thus, the issues are multifold:
1) is a "bonus" proper in the allowance of legal fees in bankruptcy cases?;
2) is hourly rate billing, both as a sole measure and as an overriding criterion, proper in the determination of legal fees?;
3) how should reasonable legal fees be determined?; and
4) what are the reasonable legal fees in this case?
One additional preliminary matter must be addressed. The law firm has already been awarded compensation and now requests additional compensation in the form of a "bonus." Accordingly, the initial compensation already awarded to the movant will be considered its interim award and this request will be considered an application for final compensation.
In the early years of the Roman Empire advocates provided their services free of charge, because most were patrons and obliged to defend their clients. Over the years, the custom of paying advocates an honorarium for legal services developed. However, in 204 B.C.E., a statute was adopted which forbad compensation for pleading a case and, two centuries later, under Augustus, the Senate prohibited advocates from accepting compensation under severe penalties. However, even with the existence of these regulations, acceptance of gratuities by Roman advocates became widespread. Finally, under the Emperors Claudius and Justinian, payment for legal services was officially sanctioned.1
In medieval England, fees for legal services were permitted although regulated. During the 1600s, the regulations began to erode.2 In opposition to regulation, one early English legal work stated that the factors to be employed when determining fees are, the amount in dispute, the labor, the "usage" of the court, and the advocate's learning, eloquence, and reputation.3
A number of the American colonies regulated attorneys' fees.4 Over the years, these regulations came under increasing criticism and were frequently disused, until most were repealed in the 1800s.5
Philosophically, and as a matter of basic contractual and commercial law, there is little doubt that attorneys deserve compensation for their work.6 The days of advocates providing legal services, gratis, have, for the most part, passed. The problem, as a matter of practical application, is how to fix the fees in a fair and equitable manner.
In the 1950s, the practice of hourly billing came into common use in the United States and was viewed by many as an objective solution to the problem of awarding legal fees.7 Prior to this time, fees were charged according to the good judgment and discretion of the lawyer. Under this system of billing, it was common for different attorneys to charge different fees for the same legal services. Calculation of legal fees depended upon whatever subjective criteria each attorney wished to use and there were few objective standards for clients to evaluate the fees they were charged.
Other common methods of billing are fixed and contingent fees. However, these do not impact directly on this contested matter and need not be addressed.
The practice of hourly billing has been subject to severe criticism in recent years, both from without and within the profession.8 Some of the major complaints brought forth against the practice are: (1) padding of legal bills,9 (2) the provision of unnecessary legal services such as abuses of discovery,10 (3) penalizing efficiency and rewarding inefficient attorneys,11 and (4) the unfairness to certain clients because of attorney inexperience.12 To state the problem more plainly — hourly billing has contributed significantly to the decline of lawyering as a respected profession. Since the economic incentive provided the lawyer working for an hourly fee is to make the engagement more time consuming and complex, it is not hard to see why this decline has occurred.
One of the more philosophically attractive alternatives to hourly billing is "value" billing. It incorporates the concept of charging a fee based upon the value of services rendered.13
In an attempt to address this concept, one author advocates using three factors to determine value: responsibility, expertise, and productivity.14 However, he provides little practical guidance on how to assign monetary values to these factors. Other sources provide different ideas, but many of them tend to focus on accurate, technology-dependent, accounting of actual costs which benefit the client combined with client participation in fixing the fee. In other words, these methods tend to be more meaningful ways of determining reasonable fees, compared to the crude method of simply assigning hourly rates. Regardless of which method is used, the market place, both theoretically and judicially, is a factor to be considered.15
The question must then be asked, what consideration do these criticisms and any possible remedies, no matter how justified, merit in a judicial decision which must adhere to precedent? The response is threefold. First, criticism of strict hourly fees has been advanced by numerous courts in published decisions.16 Second, where the precedents are inconsistent, the justifications for a judicial decision must rest on, not only that part of the law which is clear and settled, but also on sound logic and philosophy, with due respect for equity, justice, and common sense. Third, there does exist precedent which, at least in part, addresses the problems and seems to embrace the legal, equitable, and philosophically sound principles of value billing, while retaining the objective benefits of hourly fees.
Thus, the basis to be employed in the calculation of legal fees must focus on the value of the legal services to the client. The difficulties inherent in determining this value are recognized. However, not only is there significant support for this position in current...
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