Fee Dispute Hotline
(312) 907-7275

Assisting with High-Stakes Attorney Fee Disputes

The NALFA

News Blog

Category: Bankruptcy Fees / Expenses

USTP Opposes Chapter 11 Fees for MTE Service Providers

August 20, 2021

A recent Law 360 story by Jeff Montgomery, “US Trustee Opposes Ch. 11 Fees For MTE Service Providers”, reports that the Office of the U.S. Trustee opposed a $2 million fee award for the ad hoc committee of service providers in MTE Holdings LLC's contentious Chapter 11 in Delaware, arguing that the committee failed to show how it benefited the estate.  Several other participants in MTE's case, including MTE itself, had also opposed the request, asserting that the committee failed to show that its efforts were for the benefit of any constituency "other than its own members."

No official committee of unsecured creditors was formed in the case, with the ad hoc group asserting rights under liens.  An insufficient number of creditors agreed to serve in a traditional unsecured creditor capacity, the trustee observed.  The debtors waded through complex disputes, the trustee wrote, including a push for the appointments of a Chapter 11 trustee and a new board, chief restructuring officer and other key figures, as well as the appointment of a mediator.

"There is nothing in the mediator motion, or in the ad hoc committee's motion for substantial contribution, that indicates that the ad hoc committee played a role in negotiating the appointment of a mediator," the trustee objection said, adding separately that "Creditors are presumed to act in their own interest until they satisfy the court that their efforts have transcended self-protection."  Committee members failed to show they acted beyond self-interest, the trustee wrote, or filed motions that duplicated those of the other groups in the case.

"Importantly, the motion fails to present any evidence that the ad hoc committee's actions permitted the reorganization to proceed with a minimum of litigation, keeping costs low and hastening the reorganization by, for example, ensuring that key parties were satisfied with the direction of the case," the trustee wrote.  MTE's own objection went further, arguing that "voicing support for work already done by other creditors or constituencies hardly rises to the lofty level of 'substantial contribution.'"

The committee presented a different picture in its motion, which included a request for more than $1 million in fees for its counsel from Potter Anderson & Corroon LLP.  "With no official committee of unsecured creditors appointed in these cases, the ad hoc committee stepped in and led the charge on behalf of all statutory lienholders," the group's motion said.  Its actions were said to have "ultimately resulted in the filing of a plan of reorganization, which benefited all interested parties and the debtors' estates."  A decision on the motion is pending.

Bankruptcy Court Denies Professional Fees to Law Firm

July 30, 2021

A recent Law 360 story by Rose Krebs, “Ashby & Geddes’ Appeal in Del. Bankruptcy Fee Row Tossed,” reports that a Delaware federal judge denied Ashby & Geddes PA's bid to force a lender to fund a roughly $980,000 carve-out reserve to pay professional fees in the now-closed bankruptcy case of life sciences company NeuroproteXeon Inc.  In a memorandum opinion, U.S. District Court Judge Maryellen Noreika said that she does not have jurisdiction to decide a cross-appeal mounted by Ashby & Geddes, former counsel to NeuroproteXeon in its Delaware bankruptcy case, related to a dispute over whether the lender should have been required to fund the carve-out for professional fees.

The judge rejected Ashby & Geddes' contention that she should weigh in on an August order issued by U.S. Bankruptcy Court Judge Mary F. Walrath, which the firm contended did not direct debtor-in-possession lender JMB Capital Partners Lending LLC to fund the carve-out as it should have per a financing agreement.  "As the [August] order cannot be considered final, and interlocutory review is not warranted, the court lacks jurisdiction over the cross-appeal, and it will be dismissed," the opinion said.

The firm incurred roughly $400,000 in fees while serving as the debtors' counsel during the bankruptcy case, according to court filings.  NeuroproteXeon, a pharmaceutical company that also develops medical devices and life sciences technologies, and its affiliates filed for Chapter 11 in late 2019 amid a liquidity crisis and with plans to sell its assets.  The debtors' had little unsecured debt and owed a $250,000 bridge loan that JMB provided to help the company fund operations as it prepared for bankruptcy, according to court filings.

JMB also provided up to $5 million in post-petition financing to fund operations during the Chapter 11 case, according to court filings.  Under a final DIP order, the lender was granted first-priority liens on the debtors' assets, subject to the terms of a carve-out being set aside to pay U.S. Trustee fees and professional fees, according to the opinion.  In January 2020, JMB notified the debtors of a default on the DIP agreement because a stalking horse bidder had not been selected by a required date, the opinion said.  As of that time, "the aggregate amount set forth in the budget for allowed professional fees plus budgeted U.S. Trustee fees" and other fees was about $980,000, an amount JMB did not contest, the ruling said.

NJ Law Firm Wants Out After Unpaid Attorney Fees

July 29, 2021

A recent Law 360 story by Nick Muscavage, “Zayat’s Bankruptcy Attys Want Out Over Unpaid Fees,” reports that the law firm representing thoroughbred race horse owner Ahmed Zayat in his bankruptcy proceeding has asked a judge to be removed from the case, claiming that the businessman owes the firm hundreds of thousands of dollars in legal fees.  Jay L. Lubetkin, a partner at Livingston, New Jersey-based firm Rabinowitz Lubetkin & Tully LLC, told a New Jersey bankruptcy judge that Zayat owed his firm $368,273 as of June 29.

The attorney said he tried to communicate with Zayat — who bred and owns the 2015 Triple Crown winner American Pharoah — at least nine times in July, but the businessman never responded.  "The debtor has been consistently advised that absent satisfactory arrangements for the payment of the outstanding fees and expenses due to our firm and newly incurred billings, the firm would have no alternative but to seek to withdraw from the representation of the debtor," Lubetkin wrote in a motion his firm filed.

The fee dispute arises from Zayat's $18.8-million bankruptcy case in the U.S. Bankruptcy Court of the District of New Jersey.  In an adversary case related to Zayat's bankruptcy, MGG Investment Group LP filed claims against Zayat and his company, Zayat Stables LLC, alleging that Zayat engaged in a "fraudulent scheme" by selling off assets he had secured as collateral to loans from the investment firm.

Zayat lied to MGG about his assets and submitted false financial statements that concealed or distorted Zayat Stables' sales revenue and other financial information to deceive MGG, the investment firm claimed in court documents.  According to MGG, Zayat owes more than $24 million in unpaid loans, plus accrued interest.

Article: Actual and Necessary: A Guide to Keeping Time So You Get Paid

June 6, 2021

A recent ABI Journal article by Brittany B. Falabella and Allison P. Klena, “Actual and Necessary: A Guide to Keeping Time So You Get Paid,” reports on good billing practices in large Chapter 11 bankruptcy.  This article was posted with permission.  The article reads:

Billing time is one of the most dreaded aspects of private practice in any field of law, but not because it is hard or overly time-consuming. The extra step of recording discrete, detailed time entries is much more than an annoyance. For bank­ruptcy practitioners employed under §§ 327, 1103 and 1051 of the Bankruptcy Code and certain credi­tors’ counsel,2 it is a step that cannot be done in a sloppy, haphazard way — at least, if the attorney wants to be paid.

In non-bankruptcy areas of practice, an attorney may have to explain generic, unclear and blocked billing to a client. However, a bankruptcy practi­tioner’s bills are subject not only to this review, but also to that of multiple other parties, including the U.S. Trustee’s Office, debtors, committees, interest-holders and, most importantly, the court, before the practitioner will be awarded compensation under §§ 330 and/or 331. Developing proper billing habits from the start will pay for itself — literally.

Although most new attorneys who enter an established bankruptcy practice will have standard forms for fee applications, taking the time to under­stand the law informing a court’s analysis is the first step in understanding how to effectively and proper­ly keep time for easy approval. The first part of this article discusses the Code sections and cases that likely apply to every fee application. The second part discusses the common pitfalls that can result in a court reducing a fee request, and easy and practi­cal tips to avoid them. By making proper billing a habit rather than a dreaded task, the foundation will be laid to get paid in full.

The Laws of Getting Paid: Section 330 of the Bankruptcy Code

Under § 330, after notice and a hearing an attor­ney may be awarded (1) “reasonable compensa­tion for actual, necessary services rendered” and (2) “reimbursement for actual, necessary expens­es.”4 On the court’s own motion or that of any party-in-interest, a court can, however, reduce the com­pensation requested.5 In making the determination of whether and how much to reduce a request, the court is directed to

consider the nature, the extent, and the value of such services, taking into account all rel­evant factors, including —

(A) the time spent on such services;

(B) the rates charged for such services;

(C) whether the services were neces­sary to the administration of, or ben­eficial at the time at which the service was rendered toward the completion of, a case under this title;

(D) whether the services were per­formed within a reasonable amount of time commensurate with the com­plexity, importance, and nature of the problem, issue, or task addressed;

(E) with respect to a professional per­son, whether the person is board cer­tified or otherwise has demonstrated the skill and experience in the bank­ruptcy field; and

(F) whether the compensation is rea­sonable based on the customary com­pensation charged by comparably skilled practitioners in cases other than cases under this title.6

In addition, the court “shall not allow compensation for — (i) unnecessary duplication of services; or (ii) services that were not (I) reasonably likely to benefit the debtor’s estate, or (II) necessary to the administration of the case.”

The Lodestar Method

The lodestar method is a court’s starting point for deter­mining whether fees billed were reasonable. The “lodestar” equals a reasonable amount of time for the matter multiplied by a reasonable hourly rate.8 Reasonable time is the time that the court believes a billing attorney should have spent on the matter. Then, a “reasonable hourly rate” is calculated with reference to a billing attorney’s experience and skill, as well as prevailing rates in the community for similar services provided by reasonably comparable attorneys. The sum (i.e., the lodestar) may then be adjusted to account for the specific demands of the case, often with reference to some or all of the 12 Johnson factors.

The Johnson Factors

The Johnson factors are derived from the Fifth Circuit’s decision in Johnson v. Georgia Highway Express Inc.,9 and consist of the following: (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) attorneys’ fee awards in similar cases.

However, courts have not taken a uniform approach to the Johnson factors. Some courts view the factors as already subsumed into the lodestar method,10 while others apply the lodestar method and then look to the Johnson factors to decide whether the lodestar amount should be modified.11 Still other courts consider the Johnson factors in conjunction with calculation of the lodestar.12 Although these distinctions may matter in some cases, the one- and two-step processes will often generate essentially similar results, especially given that enhancement of the lodestar is a rare occurrence.

Biggest Pitfalls and Strategies to Avoid Them

Even with an understanding of the law, unless time records are maintained in anticipation of bankruptcy court review, a practitioner will often fall into some of the pitfalls discussed below. In many cases, a simple fix can nip errors in the bud. This avoids the headache of reviewing and editing voluminous invoices at the end of a fee-application period or the end of a case, and, most importantly, permitting the court to allow fees in full and without objection.

Not Enough Detail/Excessive Billing

Vague time entries are virtually always a problem. A gen­eral, shorthand description might be easy to understand for the time-keeper doing the work and making a contemporane­ous record (it goes without saying to always keep contem­poraneous time). However, the court and other parties who analyze vague, generic time entries do not have the benefit of the billing attorney’s on-the-spot thoughts.

Time entries should be drafted with an eye toward explaining and justifying why the work was “reasonable and necessary,” and how it benefited the estate or a constituent. Entries such as “reviewed emails” are certainly insufficient, but even additional details, such as “conference with X con­cerning research and strategy” or “conference with X con­cerning pending matter related to debtor” might not provide enough detail for a court to determine whether the time was justified.14 Vague entries can cause the court to spend time attempting to decipher the context, conduct an evidentiary hearing,15 or simply deny the compensation.

While courts frequently complain that counsel have engaged in excessive billing, the heart of the issue is fre­quently that the court does not understand how the amount of time billed was “reasonable and necessary.” In other words, the billing entry was not specific or detailed enough to explain to the court that the full amount of time delegated to a task benefited the estate or was necessary to the admin­istration of the case. This issue is often remedied if detailed descriptions are crafted with an eye toward the benefit to the case as previously explained.

Vague and ambiguous entries are a common and costly mistake. No attorney, particularly a new associate, wants their entries to be the reason that the firm’s fee application is reduced or its approval delayed. Taking the time to carefully prepare time entries is essential, not optional.

Tip: Have an attorney or professional assistant who is not working on the case review the time entries. If that person cannot understand the value of the time billed or the task that was completed, more detail should be included until it becomes clear. If it becomes necessary to bill significant time to certain tasks, make sure the explanation is particularly thorough to explain the circumstances.

Block-Billing

Similar to time entries that are insufficiently detailed, time entries that are block-billed — multiple tasks com­bined in a one-time entry — do not establish for the review­er (1) how much time was spent on a particular task, or (2) whether the time spent on each task was reasonable. For example, if an attorney records 3.0 hours total for “review of a motion for approval of DIP financing; telephone call with debtor’s counsel concerning alternative financing sought; and email to client regarding financing options for debtor’s continued operation under chapter 11 and recommendation not to object to the filed DIP financing motion,” the court has no idea whether the review of the motion took 0.6 hours (presumably reasonable) or 2.7 hours (perhaps unreason­able absent additional undescribed factors). According to the U.S. Trustee’s guidelines, while block-billing is gener­ally not allowed, a single daily entry that combines de mini­mus tasks can be combined, provided that the entry does not exceed 0.5 hours.16

A consequence of block-billing is that the court may conclude that it lacks the information to trim excessive time from a particular task among those blocked, and may choose to reduce the total time billed by a discretionary percentage.17 The goal is to establish that your work was reasonable and necessary. Do not give a court an “excuse” to question the reasonableness of your time by block-billing.

Tip: Break up time entries so that each task corresponds to the amount of time spent on that task — even if the amount of time is modest. Making use of time-tracking software or timers and developing good habits can be quite helpful in mastering detailed task-billing.

Not Delegating to Proper Staff/Duplicative Billing

Whether certain tasks are properly completed by senior-level attorneys, lower-level attorneys or support staff is largely out of the control of an associate. Nevertheless, there will be times when tasks that would be more suitable for a junior-lev­el attorney must be completed by a senior attorney, or where an attorney may need to complete a task that would ordinar­ily be delegated to a staff person. Similarly, there are times when multiple attorneys must participate in the same hearing or conference, which reviewing courts often view skeptically.

In such situations, courts are more inclined to allow the “double billing” if the exigent circumstances are explained in the entry and such staffing situations are kept to a mini­mum.18 When matters are not explained or apparent from the time description, the court is left to question how the time and/or rates are reasonable and necessary.

Tip: While a junior associate might not have much con­trol over the delegation of tasks, associates typically draft the fee applications, so they should keep this issue in mind when reviewing bills and flag any issues with a supervising attorney prior to filing. A good-faith reduction for certain tasks might go a long way with the court and other parties-in-interest. At a minimum, make sure your own time is not subject to objection or reduction. If you find yourself bill­ing time to routine tasks, be sure the circumstances are fully explained in the entry.

Conclusion

Given the consequences of failing to record time properly, it is well worth the time to develop the habit ofrecording specific time entries that are separated by each task performed and that indicate that how the time spent was both reasonable and necessary. With such a “reason­able and necessary” standard as a guide, a professional can ensure that the court and other interested parties under­stand the value being added to the case and that the fees requested are fully warranted.

NRA Agrees To Pay Creditors’ Chapter 11 Fees

May 15, 2021

A recent Law 360 story by Vince Sullivan, “NRA Reaches Deal To Pay Creditors’ Ch. 11 Fees” reports that days after the National Rifle Association's Chapter 11 case was dismissed, the organization told a Texas bankruptcy judge that it had reached an agreement with the official committee of unsecured creditors to handle payments of professional fees.  During a status conference requested by the committee, its attorney Louis Strubeck Jr. of Norton Rose Fulbright said the committee had pending fee applications in the case and would likely have at least a further request for payment of professional fees, which are typically paid for by the debtor in a Chapter 11 case.

Since the case was dismissed via an order from U.S. Bankruptcy Judge Harlin D. Hale, Strubeck said he wanted to present the situation to the court to be sure it was being handled properly.  "We wanted to make sure there was full transparency around this," Strubeck said.  "We didn't want to agree to anything that wasn't going to be discussed with the court to make sure we weren't doing something differently."  After the dismissal order came down, Strubeck said he engaged in discussions with Patrick J. Neligan Jr. of Nelligan LLP, the NRA's bankruptcy counsel, to figure out how to move forward.

At the hearing, Nelligan said he was of the legal opinion that once the Chapter 11 dismissal order was issued, the bankruptcy court relinquished its jurisdiction over the parties and restored them to their prebankruptcy circumstances.  That means, he said, that the NRA would treat any invoices from the committee's professionals incurred before the dismissal as it would treat any other unsecured obligation.

"The impact of a dismissal ... is that as we put the entities into their prebankruptcy positions, we need to go forward with payment of the unsecured creditors on their prep claims," Nelligan said.  "The NRA is preparing to make those payments.  Out of an abundance of caution we have not gone forward with those payments until this status conference."  Any disputes among the parties about any invoices will be resolved as they normally would as if the bankruptcy had never occurred, Nelligan said.

The dismissal also restores the parties to their prebankruptcy standing with regard to the litigation in which the NRA is involved, Nelligan said.  As he understands it, the case brought by the New York attorney general seeking to dissolve the organization will continue uninterrupted in New York state court, he said.  The NRA's litigation against its former media consulting firm Ackerman McQueen will also resume in Texas state court, he said.

Attorneys for NRA board member Phillip Journey — whose motion seeking the appointment of an examiner in the Chapter 11 case was denied — said their client is considering whether to appeal the denial of his motion, or whether to pursue an administrative expense claim against the NRA for the fees incurred in litigating the examiner and dismissal motions.

Ackerman McQueen attorneys also said they were exploring whether the dismissal of the Chapter 11 case for a lack of good faith in making the bankruptcy filing could give rise to the shifting of legal fees.  After taking some time to consider the issues, Judge Hale said he wouldn't be altering his dismissal order to retain jurisdiction over the fee issues, saying he trusted the parties and their counsel to resolve any disputes professionally and amicably.