Matter of Hamilton Hardware Co., Inc., Bankruptcy No. 80-04032-B.

Decision Date20 May 1981
Docket NumberBankruptcy No. 80-04032-B.
Citation11 BR 326
PartiesIn the Matter of HAMILTON HARDWARE CO., INC., a/k/a Pro Mart of Milan, Inc., a Michigan Corporation, Debtor.
CourtU.S. Bankruptcy Court — Eastern District of Michigan

August, Thompson, Sherr, Clarke & Schafer, P.C. by Irving A. August, Birmingham, Mich., for debtor.


GEORGE BRODY, Bankruptcy Judge.

This involves the consideration of an application for fees filed by counsel for the debtor in a chapter 11 proceeding.

Hamilton Hardware Co., Inc., a/k/a Pro Mart of Milan, Inc., a Michigan corporation (the "debtor"), filed a voluntary chapter 11 petition on July 21, 1980. The filing of the petition was apparently triggered by a breach of contract action instituted by Bostwick-Braun Company ("Bostwick") in the United States District Court for the Eastern District of Michigan, against the debtor, to recover approximately $291,000.00 for goods sold to the debtor.

The debtor filed a plan on September 16, 1980. The plan provided that all creditors, other than Bostwick, were to be paid in cash upon confirmation of the plan. Bostwick was to be paid in accordance with an agreed-upon schedule. The plan was confirmed on October 24, 1980. Counsel for the debtor filed an application for compensation. The application stated that he had received a retainer of $5,500.00 and requested an additional award of $10,000.00. Based upon the time record submitted, the hourly rate is in excess of $300.00. At the hearing scheduled to consider counsel's application, the court indicated the compensation requested appeared to be excessive. Counsel requested an opportunity to submit additional documentation in support of the application. The court granted this request and adjourned the compensation hearing. Additional documentation was not submitted but, at the adjourned hearing, counsel did make an oral statement in justification of the fee request.

Under the Bankruptcy Act of 1898, as amended, attorney fees were allowable as an expense of administration. § 62. The amount to be allowed was left to the sound discretion of the court. In the Matter of Urban American Development Co., 2 B.C.D. 474 (S.D.Iowa 1976). This discretion, however, was to be reasonably exercised. Courts were not at liberty to indulge in the luxury of "vicarious generosity" by awarding more than a fair and reasonable fee. York International Building, Inc. v. Chaney, 527 F.2d 1061 (9th Cir. 1975), reh'g den. 1976; In re Owl Drug Co., 16 F.Supp. 139 (Nev.1936), aff'd Cohn v. Edler, 90 F.2d 823 (9th Cir. 1937). Depletion of estates, as a result of unreasonable compensation demands and awards, has been a constant source of concern in bankruptcy cases. "Extravagant costs of administration in the winding up of estates in bankruptcy have been denounced as crying evils." Realty Associates Securities Corp. v. O'Connor, 295 U.S. 295, 299, 55 S.Ct. 663, 665, 79 L.Ed. 1446 (1935). Courts were, therefore, admonished that the aim of economy of administration was always to be borne in mind in exercising its discretion in fixing compensation. In re Owl Drug Co., supra. The criteria developed to enable the court to evaluate fee applications to accommodate the competing concerns of reasonableness and economy of administration is succinctly set forth in In re Owl Drug Co., supra, viz.:

"So, the test of reasonableness and the aim of economy of administration are always borne in mind in determining the amount. And in applying them certain criteria are allowed which are a modification of the usual ones adopted by court decisions and by the ethics of the profession in determining the value of all legal services. They are: The time spent, the intricacy of problems involved, the size of the estate, the opposition met, the results achieved — all subject to the economical spirit of the Bankruptcy Act. . . ." At p. 142. See also Paramount Merrick, Inc., 252 F.2d 482, 485 (2d Cir. 1958), and cases cited on p. 329, infra.

The award of compensation under the Bankruptcy Reform Act of 1978 is governed by section 330, which provides that the court may award to certain specified individuals, including the attorney for the debtor:

"(1) reasonable compensation for actual, necessary services rendered by such trustee, examiner, professional person, or attorney, as the case may be, and by any paraprofessional person employed by such trustee, professional person, or attorney, as the case may be, based on the time, the nature, the extent, and the value of such services, and the cost of comparable services other than in a case under this title. . . . "

Prior to the adoption of the Bankruptcy Code, the House and Senate each drafted their own versions of a proposed Act. Both versions contained a proposed section 330, similar in content to that which was ultimately adopted. However, the legislative history accompanying each version differed.

The Senate did not intend to change existing law. The Senate comments to section 330, state:

"The reference to `the cost of comparable services\' in a nonbankruptcy case is not intended as a change of existing law. In a bankruptcy case fees are not a matter for private agreement. There is inherent a `public interest\' that `must be considered in awarding fees,\' Massachusetts Mutual Life Insurance Co. v. Brock, 405 F.2d 429, 432 (C.A.5, 1968), cert. denied, 395 U.S. 906 89 S.Ct. 1748, 23 L.Ed.2d 220 (1969). An allowance is the result of a balance struck between moderation in the interest of the estate and its security holders and the need to be `generous enough to encourage\' lawyers and others to render the necessary and exacting services that bankruptcy cases often require. In re Yale Express System, Inc., 366 F.Supp. 1376, 1381 (S.D.N.Y.1973). The rates for similar kinds of services in private employment is one element, among others, in that balance. Compensation in private employment noted in subsection (a) is a point of reference, not a controlling determinant of what shall be allowed in bankruptcy cases.
"One of the major reforms in 1938, especially for reorganization cases, was centralized control over fees in the bankruptcy courts. See Brown v. Gerdes, 321 U.S. 178, 182-184 64 S.Ct. 487, 489-490, 88 L.Ed. 659 (1944); Leiman v. Guttman, 336 U.S. 1, 4-9 69 S.Ct. 371, 372-375, 93 L.Ed. 453 (1949). It was intended to guard against a recurrence of `the many sordid chapters\' in the history of fees in corporate reorganizations.\' Dickinson Industrial Site, Inc. v. Cowan, 309 U.S. 382, 388 60 S.Ct. 595, 599, 84 L.Ed. 819 (1940). . . . "

In contrast, the House legislative history indicated that section 330 was intended to change existing law by eliminating the principle of economy of administration as a factor to be considered by the courts in determining a compensation award. The legislative history, in pertinent part, states:

". . . The compensation is to be reasonable, for actual necessary services rendered, based on the time, the nature, the extent, and the value of the services rendered, and on the cost of comparable services other than in a case under the bankruptcy code. The effect of the last provisions is to overrule In re Beverly Crest Convalescent Hospital, Inc., 548 F.2d 817 (9th Cir. 1976, as amended 1977), which set an arbitrary limit on fees payable. . . . "

Section 330, as enacted, adopts the House approach. The legislative history accompanying section 330 makes it clear that:

"Notions of economy of the estate in fixing fees are outdated and have no place in a bankruptcy code."

Section 330, in effect, adopts the criteria established for fixing fees under the Bankruptcy Act, except that economy of administration is no longer a factor to be considered. Thus, as under the Bankruptcy Act, the compensation awarded must be for actual and necessary services, and must not exceed that which is reasonable. And, in determining what is reasonable, the court must consider the time, the nature, the extent and the value of such actual and necessary services, and the cost of comparable services.

Counsel argues that the court must award the fee he has requested since no objections to his request were filed. This argument, whenever raised, has been firmly rejected. The burden of establishing the reasonableness of a fee rests upon the party making the request. The court has a duty, regardless of whether or not objections are filed, to determine whether the compensation requested is or is not reasonable. York International Building, Inc., supra, reh'g den. 1976. See also In re Detroit International Bridge, 111 F.2d 235 (6th Cir. 1940); In the Matter of Interstate Stores, Inc., 437 F.Supp. 14 (S.D.N.Y.1977); In the Matter of Dole Co., 244 F.Supp. 751 (N.D. Me.1965); In re Kentucky Electric Power Corp., 11 F.Supp. 528 (W.D.Ky.1935); In the Matter of Piedmont Development and Investment Corporation, 3 B.C.D. 97 (N.D. Ga.1976); In the Matter of Urban American Development Co., supra. Such holdings reflect the clear mandate of section 330 of the Bankruptcy Code, and its predecessors, section 62 of the Bankruptcy Act and Rule 219 of the Rules of Bankruptcy Procedure — a mandate grounded in reality. Seldom are objections lodged to fee requests. In re Kentucky Electric Power Corp., supra. A debtor, harassed by creditors and envisioning the ultimate demise of his business, in desperation files a chapter 11 proceeding. With the aid of his attorney, he is able to submit a plan which creditors accept and which is confirmed by the court. Not only is the debtor in no position to make an objective judgment as to the value of the legal services involved, but he also has no inclination to object to whatever fee is requested by the attorney who has made it possible for him to continue in business. Attorneys for creditors' committees all too often sacrifice the rights of their clients and violate their duty as court-appointed officers on the altar of self-interest. The knowledge that voiced objections may invite retaliation,...

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