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October 13, 2010

Judge Markell Reduces Attorneys Fees from $800,000 to $38,000

brief by my law clerk Elizabeth Massaad:

In re Hotels Nevada, LLC, Inns Nevada, LLC, Case Nos. BK-S-09-31131-BAM & BK-S-09-31132-BAM

Issue:  Are the fees billed by debtor’s counsel in this chapter 11 reasonable, necessary, or reasonably likely to benefit the debtor’s estate?

Holding:  No

U.S. Bankruptcy Judge: Hon. Bruce A. Markell

The law firm of Quarles & Brady, LLP (“Quarles”) was retained by the debtors, Hotels Nevada, LLC and Inns Nevada, LLC, to represent them in their chapter 11 bankruptcy cases.  The cases, filed on November, 5, 2009, were related to a disputed commercial transaction with L.A. Pacific, Inc.  The cases were filed after the debtors and the former principal, Louis Habash, lost an arbitration in California.  The California arbitrator assessed $141 million in damages against the debtors and Habash.  Quarles was given approximately $800,000 as a retainer fee by another company that Habash controlled.
Quarles filed these chapter 11 cases because it wanted to “create a platform for the orderly administration of the [arbitration] Award.”  Also to give the debtors time to evaluate affirmative claims of the estate against the professionals who allegedly caused the debtors’ damage.  The debtors asserted that their former counsel committed professional malpractice in the arbitration proceeding causing the $141 million damage award. This claim against their former counsel was the only asset listed on both of the debtors’ schedules. 

When the chapter 11 cases were filed, the court expressed that the cases were a chapter 7 just “waiting to happen.”  Eventually, the court converted both cases to a Chapter 7.  At the conversion hearing, the court found that Quarles had not acted in good faith in initiating the cases and that the filings were not made in good faith.  Quarles then filed its fee application seeking $803,000 in fees and $77,000 in costs.  The court ruled that most of the services Quarles performed in the debtor’s case were duplicative, unnecessary and not reasonably likely to benefit the debtors or their estates at the time rendered. The court allowed $39,875 in fees and $3,872 in costs. 

Quarles’ exhibits demonstrated that $593,000 of the fees related to the arbitration award and to reviewing and analyzing claims for possible objections.  Quarles asserted that those hours of work were justified because the debtors’ estates were burdened with large claims, and the only hope of recovery was the litigation of the professional malpractice claim against the lawyers who lost the California arbitration.  Even though Quarles invested a lot of time, they produced no results.  They did not file any actions against the alleged negligent lawyers.

The court, in determining if Quarles’ fees were reasonable, pointed out that Quarles was retained by the debtor pursuant to § 327 (a) and therefore, it was allowed to seek compensation for fees and expenses in accordance with § 330.  Under section 330, a court may award to a professional person employed under section 327:

 a) reasonable compensation for actual, necessary services rendered by a professional   person or attorney, and
 b) reimbursement for actual and necessary expenses.

When determining the amount of reasonable compensation to be given to the professional in question, Section 330 provides that the court shall consider the nature, extent, and the value of the services taking all relevant factors into account.  Those relevant factors include: whether the services were necessary to the administration of the case, or beneficial at the time at which the service was rendered.  The court is not allowed to award compensation for unnecessary duplication of services or services that were not reasonably likely to benefit the debtor’s estate or were not necessary to the administration of the case.

Pursuant to the Bankruptcy Appellate Panel for the Ninth Circuit, “the question governing attorney compensation should be whether services were necessary or beneficial at the time at which the service was rendered.” In re Roberts, Sheridan & Kotel, P.C. v. Bergen Brunswig Drug Co. (In re Mednet), 251 B.R. 103, 107 (B.A.P. 9th Cir. 2000).  In practice, this means that “the statute does not require that the services result in a material benefit to the estate in order for the professional to be compensated; the applicant must demonstrate only that the services were reasonably likely to benefit the estate at the time the services were rendered.” Id.

After a review of the authorities, the court reasoned that the totality of circumstances demonstrates that Quarles’ actions were not necessary or beneficial and not reasonably likely to benefit the Debtors’ estate at the time rendered.  Also Quarles’ actions benefitted non-debtors primarily, and the estate only incidentally.  The debtors had no “operations to restructure, and their liabilities consisted of minor unpaid bills and the substantial arbitration award.”  The court found that the Chapter 11 cases were not filed in good faith.

Additionally, the court found that most of the submitted timesheets detailed conferences with Mr. Habash and his other attorneys.  Therefore, most of the actions that Quarles had taken were at the direction of Mr. Habash, and they were not beneficial to the estate. This failure to act in the best interests of the estate is further evidenced by Quarles’ failure to make any material progress toward turning these claims into tangible and beneficial assets of the estate.

The court also noted that Quarles spent a significant time reviewing the record of the prior proceedings.  After that thorough review, Quarles should have realized that any further action aimed at overturning the arbitration award would have been “duplicative, unnecessary, and not reasonably likely at the time rendered to benefit the Debtors’ estates.”  The court found that any amount of time that Quarles spent over 100 hours was useless and a waste of time.  Since Quarles did not specify how much of the $77,448 in costs were due to unnecessary actions, the court reduced the costs by the same percentage reduction administered to Quarles’ fees.

The court also found that Quarles double billed for preparing statements and schedules, so that 38.1 hours of the double billing was disallowed.  The court also did not allow the 133.7 hours that Quarles billed for preparing its employment and fee applications and responding to creditors’ objections to its employment.  The court reasoned that the amount of time needed to prepare fee applications is approximately four hours considering the circumstances of these cases.  Therefore, the court disallowed the remaining 129.7 hours for these categories.

The remaining 480.7 hours were reduced by the court by 95% or 456.7 hours.  Quarles’ remaining costs were also reduced by 95%.

October 13, 2010 in 9th Circuit Briefs | Permalink


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That is a huge reduction in attorneys fees. This is a very informative blog. For individuals who need a California bankruptcy attorney, they should visit http://www.liverpoollegal.com/Los_Angeles_Bankruptcy_Attorney.php

Posted by: Los Angeles Bankruptcy Attorney | Oct 26, 2011 10:04:23 PM

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