In re Worldwide Direct, Inc.
| Decision Date | 29 October 2004 |
| Docket Number | No. 99-122(MFW).,No. 99-126(MFW).,No. 99-112(MFW).,No. 99-117(MFW).,No. 99-124(MFW).,No. 99-119(MFW).,No. 99-113(MFW).,No. 99-123(MFW).,No. 99-116(MFW).,No. 99-114(MFW).,No. 99-115(MFW).,No. 99-109(MFW).,No. 99-111(MFW).,No. 99-118(MFW).,No. 99-108(MFW).,No. 99-121(MFW).,No. 99-125(MFW).,No. 99-120(MFW).,No. 99-127(MFW).,No. 99-110(MFW).,99-108(MFW).,99-109(MFW).,99-110(MFW).,99-111(MFW).,99-112(MFW).,99-113(MFW).,99-114(MFW).,99-115(MFW).,99-116(MFW).,99-117(MFW).,99-118(MFW).,99-119(MFW).,99-120(MFW).,99-121(MFW).,99-122(MFW).,99-123(MFW).,99-124(MFW).,99-125(MFW).,99-126(MFW).,99-127(MFW). |
| Parties | In re WORLDWIDE DIRECT, INC., et al., Debtors. |
| Court | U.S. Bankruptcy Court — District of Delaware |
Bruce Bennett, Hennigan, Bennett & Dorman, Los Angeles, CA, James L. Patton, Robert S. Brady, Young, Conway, Stargatt & Taylor, LLP, Wilmington, DE, Michael Seidl, Pachulski, Stang, Ziehl, Young & Jones, Wilmington, DE, Steven K. Kortanek, Klehr, Harrison, Harvey, Branzburg & Ellis, Wilmington, DE, for Debtor.
Gwendolyn M. Lacy, Connolly, Bove, Lodge & Hutz, Wilmington, DE, for trustee.
Julie L. Compton, Office of U.S. Trustee, Wilmington, DE, U.S. Trustee.
Steven K. Kortanek, Klehr, Harrison, Harvey, Branzburg & Ellis, Wilmington, DE, for Official Committee of Reclamation Creditors.
This case is before the Court on the Objection of the Liquidating Trustee to the Sixth and Final Verified Application of Hennigan, Bennett & Dorman ("HBD") for Allowance of Compensation and for Reimbursement of Expenses ("the Final Fee Application"). For the reasons stated below, we sustain the objection in part and reduce the fees requested accordingly.
On January 19, 1999, Worldwide Direct, Inc., SmarTalk TeleServices, Inc., and several affiliates (collectively "the Debtors") filed voluntary petitions under chapter 11 of the Bankruptcy Code. HBD was retained as counsel for the Debtors. Immediately prior to the filing, the Debtors had executed an asset purchase agreement with AT & T for the sale of substantially all of the Debtors' assets. Pursuant to auction procedures approved by Order dated February 26, 1999, the sale was advertised and prospective alternative bidders were contacted, but ultimately no other bidder submitted an alternative offer for the Debtors' assets and businesses. By Order dated March 18, 1999, we approved the sale to AT & T pursuant to the original asset purchase agreement.
On April 27, 2000, the Debtors and the Official Unsecured Creditors Committee ("the Committee") filed a Second Amended Joint Consolidated Liquidating Plan of Reorganization ("the Plan") which was ultimately confirmed by Order dated June 7, 2001. Under the Plan, Goldin Associates, L.L.C. ("the Liquidating Trustee") was appointed to liquidate the Debtors' remaining assets, review claims, and make a distribution to creditors.
Throughout the case, HBD and the other professionals served monthly bills on interested parties and filed quarterly fee applications which were generally approved. On August 14, 2001, HBD filed the Final Fee Application, which seeks fees of $5,872,609.90 (after voluntary reductions of $763,225.23) and expenses of $1,042,422.46.
The Liquidating Trustee filed an objection to the Final Fee Application on December 3, 2001, based on a draft fee audit report ("the Fee Audit Report") performed by Legal Cost Control ("the Fee Auditor") which raised 24 categories of objections. A Supplemental Objection was filed by the Liquidating Trustee on March 1, 2002, which objected principally to the allowance of fees for temporary attorneys and paralegals used by HBD for document review and analysis. The sum of the categories of objections raised by the Liquidating Trustee totals $1,740,695.95 in fees and $988,641.05 in expenses.
HBD filed a Reply to the Liquidating Trustee's Objections on March 15, 2002, and an initial hearing on the Final Fee Application was held on May 16, 2002. A final hearing was held on December 5, 2002, where the scope of the Objections was narrowed to four categories. The matter is ripe for decision.
This Court has jurisdiction over this matter as a core proceeding pursuant to 28 U.S.C. §§ 1334 & 157(b)(1), (b)(2)(A), (B), & (O).
At the hearing, HBD objected to our consideration of the Fee Audit Report, asserting that it was unreliable and not based on any acceptable method of review. Although the Fee Auditor asserted that his analysis was done in accordance with "generally accepted legal auditing principles," he acknowledged that there is no such thing and that, instead, he utilized internal procedures only (which he refused to produce asserting they are proprietary). Although the engagement letter and other promotional material described what his firm did, the Fee Auditor testified that they did not explain what he did in this case. Consequently, we agree with HBD that the Fee Audit Report cannot be considered an expert report done in accordance with generally accepted methodologies of performing such a report. See, e.g., Daubert v. Merrell Dow Pharmaceuticals, Inc., 509 U.S. 579, 593-94, 113 S.Ct. 2786, 125 L.Ed.2d 469 (1993) ().
Even as a factual witness, however, the Fee Auditor was less than helpful. The Fee Auditor testified that in preparing the report he only reviewed the fee applications themselves. He did not review any pleadings, transcripts of hearings, the docket or claims in the case to familiarize himself with the issues or litigation that HBD handled. Nor did he talk to HBD or to anyone else involved in the case to ascertain what HBD had done.
On cross examination of the Fee Auditor it became evident that the Fee Audit Report was factually inaccurate in numerous ways. For example, the Fee Auditor retyped the HBD time entries into his computer base and there were numerous errors in that process (in description and in amount of time recorded). Further, in doing so, the entries were removed from their categories and other entries that provided context to what was done. In addition, the Fee Auditor admitted that there were duplications in his categories of objections; that is, some time entries or expenses were objectionable on more than one basis. Therefore, the overall objection to the fees and expenses was less than the sum of the categories ($2,729,337). The Fee Auditor could not identify the exact amount of reduction being requested, however. Finally, the Fee Auditor was not aware that HBD had already agreed to reduce its fees and expenses. Therefore there were some items in the Fee Audit Report which had already been reduced (namely, charges for copies and facsimiles).
Because the Fee Auditor did not follow an accepted methodology of performing a fee examination and the Fee Audit Report itself has numerous factual errors, we conclude that it is not reliable. We, therefore, have reviewed the Final Fee Application itself to determine the validity of the remaining objections of the Liquidating Trustee.
The Liquidating Trustee continues to press an objection to the entries identified as "blocked/grouped" in the Fee Audit Report. It appears from our review of these entries that the Liquidating Trustee is objecting because the time is "lumped" and it is unclear how much time was spent on each function within the entry.
"Courts have refused repeatedly to approve unitemized disbursements for services that are lumped together in a single entry, because such action inhibits the court from estimating the reasonableness of the individual services and their value to the debtor's estate." In re Ward, 190 B.R. 242, 246 (Bankr.D.Md.1995). See also, In re Green Valley Beer Corp., 281 B.R. 253, 259 (Bankr.W.D.Pa.2002); In re Poseidon Pools of America, Inc., 180 B.R. 718, 731 (Bankr.E.D.N.Y.1995).
The Court in In re Leonard Jed Co. noted that lumping is not favored because
One, it permits an applicant to claim compensation for rather minor tasks which, if reported individually, would not be compensable. Two, it prevents the Court from determining whether individual tasks were expeditiously performed within a reasonable period of time because it is impossible to separate into components the services which have been lumped together.
103 B.R. 706, 713 (Bankr.D.Md.1989). See also, In re Recycling Ind., Inc., 243 B.R. 396, 406 (Bankr.D.Colo.2000).
While the objection is technically correct, we do not find generally that the time entries are lumped to such an extent that we cannot ascertain whether an appropriate amount of time was spent on each task. It appears that all the activity within many of the entries related to one issue (i.e., cash collateral or the sale of assets) rather than unrelated issues. Further, the time entries generally combined only work on that one issue plus a telephone conference with the client or opposing counsel on that same issue. We do not find those types of entries objectionable.
However, there were some entries that combined more than one discrete task and issue from which we cannot determine the amount of time devoted to each. Therefore, we are unable to determine if the amount of time spent on each task was reasonable. Consequently, we will disallow those entries identified on Exhibit A hereto which total $6,205.25 in fees.
The Liquidating Trustee also objects to several entries that it asserts were secretarial or clerical in nature and, therefore, inappropriately performed by attorneys or paralegals charging rates from $80 to $325 per hour. The Third Circuit has cautioned that simply defining a task as "clerical" is not helpful, the question is "whether comparable non-bankruptcy firms typically charge the particular task to their clients as paralegal services [and] the market rate at which such services...
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