Matter of Hunt's Health Care, Inc., Bankruptcy No. 88-10311.
| Decision Date | 28 September 1993 |
| Docket Number | Bankruptcy No. 88-10311. |
| Parties | In the Matter of HUNT'S HEALTH CARE, INC., Debtor. |
| Court | United States Bankruptcy Courts. Seventh Circuit. U.S. Bankruptcy Court — Northern District of Indiana |
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Douglas Adelsperger, Fort Wayne, IN, for Trustee.
Daniel Serban, Fort Wayne, IN, for Lincoln Bank.
Grant F. Shipley, Fort Wayne, IN, for M-K Management.
DECISION
This matter is before the court on the application for attorney fees filed by counsel for the trustee in this case, Beckman, Lawson, Snyder, Sandler & Federoff. M-K Management and Lincoln Bank, creditors, object to the requested amounts. They object both to specific fees charged by the trustee's counsel and generally that the fees requested are excessive for the results obtained.
The purpose of § 330 is two-fold. First, compensation should be fair and reasonable. Second, in order not to deter competent counsel from entering the bankruptcy area, attorneys should receive in bankruptcy matters what they would receive on the open market. Matter of UNR Industries, Inc., 986 F.2d 207, 209 (7th Cir.1993).1
To determine the "reasonable compensation," a court determines the reasonable hourly rate and the hours reasonably spent. The court then multiplies the two to determine the "lodestar".2 City of Burlington v. Dague, ___ U.S. ___, ___, 112 S.Ct. 2638, 2640, 120 L.Ed.2d 449 (1992); Blum v. Stenson, 465 U.S. 886, 898-900, 104 S.Ct. 1541, 1548-1550, 79 L.Ed.2d 891 (1984). See also In re Boddy, 950 F.2d 334, 337 (6th Cir.1991). The Seventh Circuit has decided that the reasonable hourly rate is presumptively the lawyer's hourly rate on the open market. Gusman v. Unisys Corp., 986 F.2d 1146, 1150 (7th Cir.1993). The court may exclude hours that were not reasonably spent or are insufficiently documented from the application. Hensley v. Eckerhart, 461 U.S. 424, 433-34, 103 S.Ct. 1933, 1939-40, 76 L.Ed.2d 40 (1983). Once the reasonable hourly rate and the number of reasonable hours have been established and the resulting lodestar calculated, the Supreme Court has "established a `strong presumption' that the lodestar represents the `reasonable' fee." City of Burlington, ___ U.S. at ___, 112 S.Ct. at 2641. The lodestar can then be adjusted upwards or downwards upon consideration of other factors. Hensley, 461 U.S. at 434, 103 S.Ct. at 1940; Estate of Borst v. O'Brien, 979 F.2d 511, 515-16 (7th Cir.1992). Upward modifications should, however, be rare. Blum, 465 U.S. at 899-901, 104 S.Ct. at 1548-550. See also Pennsylvania v. Delaware Valley Citizens' Council, 478 U.S. 546, 565, 106 S.Ct. 3088, 3098, 92 L.Ed.2d 439 (1986), rev'd on other grounds, 483 U.S. 711, 107 S.Ct. 3078, 97 L.Ed.2d 585 (1987).
In determining the lodestar, the fee applicant has the burden of properly documenting the hours and hourly rates involved and producing evidence of both. Hensley, 461 U.S. at 433, 103 S.Ct. at 1939. The burden of going forward then shifts to an opposing party if it wishes to dispute the lodestar. It must submit evidence challenging the accuracy or reasonableness of any item in the application. Blum, 465 U.S. at 892 n. 5, 104 S.Ct. at 1545 n. 5. If the court reduces the hours spent or the lodestar figure it must articulate the reasons for these adjustments. Hensley, 461 U.S. at 437, 103 S.Ct. at 1941. See generally Estate of Borst, 979 F.2d at 515-16.
Notwithstanding the presumption which flows from the lodestar procedure outlined above, bankruptcy courts have vigorously interjected themselves into the consideration of fee applications. An explanation for this activism lies primarily in the perceived noninterest of other parties in examining fee applications closely. In re Rheam of Indiana, Inc., 133 B.R. 325, 332 (D.E.D.Pa.1991). Often, it seems, it may not be cost effective for a creditor to justify attacking the fees of another party when the dividend to each individual creditor will not be appreciably effected. In order to promote "fairness" and discourage "price gouging" a court, under the guise of exercising its independent duty with regard to the application, may take it upon itself to cut, sometimes drastically, the requested fees.
In the Seventh Circuit, the bankruptcy courts have been guided in their review of fee applications by the standards enunciated by the District Court in In re Continental Illinois Securities Litigation, 572 F.Supp. 931 (N.D.Ill.1983).3 Early on in that case, the District Court issued an order detailing the standards it anticipated using when reviewing the fee applications that would come before it.4Continental Illinois, 572 F.Supp. 931. These standards included requirements that conferral time within a firm was not to be charged; attorneys' hourly rates would be chosen by the type of work done and the level of expertise it demanded, not by the rate of the attorney who performed the work; only a minimum of compensation for legal research would be allowed; review of other attorneys' work was not compensable; time records would be detailed and itemized by activity; and so on. These standards were quickly adopted by bankruptcy courts which saw them as appropriate guidelines in their own review of fee applications. In re Rusty Jones, Inc., 134 B.R. 321, 333 (Bankr.N.D.Ill. 1991); In re Chicago Lutheran Hospital Ass'n., 89 B.R. 719, 725 (Bankr.N.D.Ill.1988); In re Prairie Central Railway Co., 87 B.R. 952, 956 (Bankr.N.D.Ill.1988); In re Pettibone Corp., 74 B.R. 293, 297 (Bankr.N.D.Ill. 1987); In re Wildman, 72 B.R. 700, 706 (Bankr.N.D.Ill.1987); In re Wittman Eng'g & Mfg. Co., 66 B.R. 488, 490 (Bankr.N.D.Ill. 1986). This court has, in turn, followed these cases in judging fee applications itself.
In Matter of Continental Illinois Securities Litigation, 962 F.2d 566 (7th Cir.1992), the Seventh Circuit reviewed the district court's sua sponte application of these standards to the attorney's fee application. The court identified three errors in how the district court reviewed and reduced the requested fees. First, the district court erred in bypassing the market rate for the services rendered. Second, the district court should not have cut the requested fees across the board; instead it should have only cut specific items. Third, the expense of paralegal time and computer research was to be charged at market rate — whatever the firm charged other clients — not at the firm's actual cost for the time or as part of overhead.
The circuit court criticized the district court for attempting to second guess the market. Although, the district court had reduced the fees to what it believed was their fair value, the Seventh Circuit held that it was not up to the trial judge to determine the market value of a service. The court stated:
it is not the function of judges in fee litigation to determine the equivalent of the medieval just price. It is to determine what the lawyer would receive if he were selling his services in the market rather than being paid by court order. Continental Illinois, 962 F.2d at 568.
Since there was no evidence that the hourly rates requested by the applicant were not market rates, it was improper for the District Court to reduce them.
The circuit court also criticized the district court for cutting the fees for research and conferral across the board, instead of disallowing specific items of unreasonable, noncompensable activity. They stated:
A judge is not permitted to destroy substantial entitlements to attorneys\' fees on the basis of his inarticulable and unsubstantiated dissatisfaction with the lawyers\' efforts to economize on their time and expenses. Continental Illinois, 962 F.2d at 570.
In later proceedings the Seventh Circuit reemphasized the need to rely on market factors to determine the appropriate fee award. The circuit court mandated that the district court rely on evidence of what the market would allow for comparable services rather than utilize a time sampling approach. Matter of Continental Illinois Securities Litigation, 985 F.2d 867 (7th Cir.1993).
The Seventh Circuit also criticized the district court for not allowing the firm to charge its customary rates for paralegal time and computer research expenses. Billing paralegals at their market rates has been approved by the Supreme Court, Missouri v. Jenkins, 491 U.S. 274, 286-89, 109 S.Ct. 2463, 2470-72, 105 L.Ed.2d 229 (1989), primarily as an incentive to attorneys to use less expensive help where possible. Similarly, the Seventh Circuit believed charges for computer research should also be billed in order to encourage its use.
The more important point, however, is that the market — the paying, arms\' length market — reimburses lawyers\' LEXIS and WESTLAW expenses, just as it reimburses their paralegal expenses, rather than requiring that these items be folded into overhead. Markets know market values better than judges do. Continental Illinois, 962 F.2d at 570.
The Seventh Circuit acknowledges that one of the goals in allowing payment for these services is to discourage lawyers from substituting their own more expensive time when a paralegal or computer research could do the same task more economically. The emphasis on allowing the market to determine value, however, extends to other expenses as well. The fee applicant is entitled to what the market would pay for them. Expenses need not be considered overhead or billed at their actual cost unless this is also done for other paying customers. Cont...
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