In re Watson Seafood & Poultry Co., Inc.
| Decision Date | 31 May 1984 |
| Docket Number | Bankruptcy No. S-83-00734-5. |
| Citation | 40 BR 436 |
| Court | U.S. Bankruptcy Court — Eastern District of North Carolina |
| Parties | In re WATSON SEAFOOD & POULTRY CO., INC., a North Carolina corporation, ID Number: XX-XXXXXXX Debtor. |
This cause is before the court upon the application of Andrew S. Martin and Herman Wolff, Jr., counsel for the chapter 11 debtor, for the allowance of attorney's fees in the amount of $40,625 plus expenses of $925.95. The trustee, Algernon L. Butler, Jr., filed an objection on February 27, 1984. A hearing was held on March 19, 1984, after which the trustee, with permission of the court, filed a "response" setting out further objections. Counsel for the debtor filed a "reply." The trustee's "response" raised the possibility of a conflict of interest on the part of counsel for the debtor, and a second hearing was held on May 9, 1984, to determine whether all requested fees and expenses should be denied or reduced.
The debtor is a North Carolina corporation which was engaged in the business of growing and marketing chickens. The debtor's flock included 80,000 breeder hens, and approximately 300,000 mature chickens (worth approximately $280,000) were sold each week.
After suffering losses in four of the last five years (aggregating $5,000,000), on April 21, 1983, the debtor filed for relief under chapter 11 of the Bankruptcy Code. At the time of filing, the debtor's schedules reflected assets of $9,875,000 and liabilities of $6,282,000.
The debtor operated as a debtor-in-possession from the time of filing until October 14, 1983, when the court appointed Algernon L. Butler, Jr. as trustee.
At the time of filing, the debtor had accounts receivable totalling approximately $1,100,000, which were pledged to secure loans from Cape Fear Feed Products, Inc. (loan of $848,921.87) and Coastal Production Credit Association (loan of $2,909,662.08). The debtor's request to use the proceeds of the accounts receivable ("cash collateral" as defined by 11 U.S.C. § 363(a)) was vigorously contested by both secured creditors, and after a lengthy hearing the debtor's request to use cash collateral was denied.
Both Cape Fear Feed Products, Inc. and Coastal Production Credit Association filed requests to lift the automatic stay. After a second protracted hearing the court continued the automatic stay but again denied the debtor's request to use cash collateral.
The debtor sought new capital, renegotiation of its contracts with its independent chicken growers, concessions from its primary purchaser, and a loan from the federal government. All of these efforts were unsuccessful.
The debtor's biggest problem, however, was that operations were unprofitable. Finally, when it appeared that the possibility for reorganization was remote, Coastal Production Credit Association asked for the appointment of a trustee. Since his appointment on October 14, 1983, the trustee has conducted an orderly liquidation of the debtor's estate.
The appointment of Andrew S. Martin and Herman Wolff, Jr. as counsel for the debtor was authorized by order of this court on April 21, 1983. On February 6, 1984, Mr. Martin and Mr. Wolff filed an Application for Allowance requesting compensation for 325½ hours of legal services rendered from April 21, 1983 to February 2, 1984, at a rate of $125 per hour for a total fee request of $40,625. Additionally, counsel requested reimbursement for the following expenses: postage $84.32; telephone $375.31; travel $280.60; and copy expenses $212.72, for a total expense reimbursement request of $952.95. The total of the requested fees and expenses is $41,577.95.
The bankruptcy court has a duty to examine all applications for attorney's fees. This duty exists even in the absence of objections, and when objections are raised the court's review is not limited to the items in controversy. 11 U.S.C. § 329. In re Darke, 18 B.R. 510, 8 BCD 1059 (Bkrtcy. ED MI 1982); In re Hamilton Hardware Co., Inc., 11 B.R. 326, 7 BCD 963 (Bkrtcy. ED MI 1981); In re Penn Fruit Co. Inc., 26 B.R. 81 (Bkrtcy. ED PA 1982).
When reviewing fee applications, bankruptcy courts in the Fourth Circuit must consider the 12 factors originally set forth in Johnson v. Georgia Highway Express, Inc., 488 F.2d 714 (5th Cir.1974). Barber v. Kimbrell's, Inc., 577 F.2d 216 (4th Cir.1978) cert. den., 439 U.S. 934, 99 S.Ct. 329, 58 L.Ed.2d 330. The twelve Johnson factors adopted by Barber are:
(1) the time and labor expended; (2) the novelty and difficulty of the questions raised; (3) the skill required to properly perform the legal services rendered; (4) the attorney\'s opportunity costs in pressing the instant litigation; (5) the customary fee for like work; (6) the attorney\'s expectations at the outset of the litigation; (7) the time limitations imposed by the client or circumstances; (8) the amount in controversy and the results obtained; (9) the experience, reputation and ability of the attorney; (10) the undesirability of the case within the legal community in which the suit arose; (11) the nature and length of the professional relationship between attorney and client; and (12) attorney\'s fees awards in similar cases.
The twelve factors are easier to state than they are to apply. The procedure for applying the 12 factors in the Fourth Circuit is as follows:
The court must first ascertain the nature and extent of the services supplied by the attorney from a statement showing the number of hours worked and an explanation of how these hours were spent. The court should next determine the customary hourly rate of compensation. These are essentially Johnson factors 1 and 5. The court should then multiply the number of hours reasonably expended by the customary hourly rate to determine an initial amount for the fee award. Finally, the court should adjust the fee on the basis of the other factors, briefly explaining how they affected the award. Anderson v. Morris, 658 F.2d 246, 249 (4th Cir.1981).
In this case, counsel seeks compensation for 325½ hours at the rate of $125 per hour for a total of $40,625. (Actually, 325½ hours × $125 = $40,687.50). For the reasons stated herein, the fee will be reduced to $16,817.50.
Before applying the 12 Johnson factors, the court must consider the alleged conflict of interest and its effect on counsel's fee application.
The trustee objected to parts of the fee application because certain services were performed for parties holding interests adverse to the estate. If a conflict exists, the consequences may be considerably more severe than a disallowance of the questioned portion of the application.
The bankruptcy court for the Western District of Kentucky recently concluded that the presence of a conflict of interest requires a denial of all fees.
A review of the cases leads to the conclusion that once a conflict of interest is shown, attorney\'s fees should be entirely denied, even though the services rendered had intrinsic value and brought a benefit to the bankrupt estate. In re Chou-Chen Chemicals, Inc., 31 B.R. 842, 851, 10 BCD 1103 (Bkrtcy. WD KY 1983).
The doctrine has been applied with great severity. All fees were denied in the following bankruptcy cases in which debtor's counsel represented an interest adverse to the estate: In re Chou-Chen Chemicals, Inc., 31 B.R. 842, 10 BCD 1103 (Bkrtcy. WD KY 1983); In re Paine, 14 B.R. 272 (D.C. WD MI 1981); In re 765 Associates, 14 B.R. 449 (Bkrtcy. HI 1981); and In re B.E.T. Genetics, Inc., 35 B.R. 269, 11 BCD 845 (Bkrtcy. ED CA 1983). See also In re Philadelphia Athletic Club, 20 B.R. 328 (D.C. ED PA 1982); In re Buchanan, 25 B.R. 162 (Bkrtcy. ED TN 1982) and In re Sambo's Restaurants, 20 B.R. 295 (Bkrtcy. CD CA 1982).
The United States Supreme Court has said "Where an actual conflict of interest exists, no more need be shown in this type of case to support a denial of compensation." Woods v. City National Bank & Trust Co. of Chicago, 312 U.S. 262, 268, 61 S.Ct. 493, 497, 85 L.Ed. 820 (1941).
There is also a line of cases decided under the Bankruptcy Act of 1898 beginning with Silbiger v. Prudence Bonds Corporation, 180 F.2d 917 (2nd Cir.1950), cert. den., 340 U.S. 813, 71 S.Ct. 40, 95 L.Ed. 597 (1950) which holds that the rule denying all compensation should be relaxed somewhat in corporate reorganization cases. See also Securities & Exchange Commission v. Cogan, 201 F.2d 78 (); Chicago & West Towns Railways v. Friedman, 230 F.2d 364 (7th Cir.1956), cert. den., 351 U.S. 943, 76 S.Ct. 837, 100 L.Ed. 1469 (1956); Cle-Ware Industries, Inc. v. Sokolsky, 493 F.2d 863 (6th Cir.1974).
Several courts have followed the Silbiger line of cases and allowed partial fees where conflicts were present in Bankruptcy Code cases. See In re King Resources Co., 20 B.R. 191 (D.C. CO 1982); In re Devers, 33 B.R. 793 (D.C. DC 1983); and In re Georgetown of Kettering Ltd., 28 B.R. 120 (Bkrtcy. SD OH 1983), sub nom., Hunter Savings Association v. Baggott Law Offices Co., L.P.A., 34 B.R. 368 (D.C. SD OH 1983).
The applicable section of the Bankruptcy Code is 11 U.S.C. § 328(c), which says:
(c) except as provided in section 327(c), 327(e) or 1107(b) of this title, the court may deny allowance of compensation for services and reimbursement of expenses of a professional person...
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