Michael J. Schneider

UNITED STATES BANKRUPTCY COURT
For The Northern District Of California
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MEMO. DECISION & ORDER ON 2ND INTERIM FEE AND FINAL APPLICATIONS OF HOWARD RICE
NOT INTENDED FOR PUBLICATION
UNITED STATES BANKRUPTCY COURT
NORTHERN DISTRICT OF CALIFORNIA
In re:
MICHAEL J. SCHNEIDER,
Debtor.
Case No. 06-50441-MM
Chapter 11
MEMORANDUM DECISION AND
ORDER ON SECOND INTERIM AND
FINAL APPLICATIONS OF HOWARD
RICE NEMEROVSKI CANADY FALK &
RABKIN, COUNSEL TO THE
CHAPTER 11 TRUSTEE, FOR
COMPENSATION AND EXPENSE
REIMBURSEMENT
I NTRODUCTION
Howard Rice Nemerovski Canady Falk & Rabkin, counsel to the chapter 11 trustee, has
requested approval of fees totaling $2,400,046 and expense reimbursement of $107,135.23 for its
services rendered during the chapter 11 portion of this case. After reviewing the firm’s second interim
application for compensation and expense reimbursement, its final application, the objections thereto,
the firm’s responses to the objections, the audit report on the second interim application, and the
responses thereto, the court awards total fees of $1,365,309.29 and expense reimbursement of
$95,428.80, including those amounts previously awarded and paid.
The following constitutes
the order of the court. Signed September 26, 2008
Marilyn Morgan
U.S. Bankruptcy Judge
________________________________________
Entered on Docket
September 29, 2008
GLORIA L. FRANKLIN, CLERK
U.S BANKRUPTCY COURT
NORTHERN DISTRICT OF CALIFORNIA
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MEMO. DECISION & ORDER ON 2ND INTERIM FEE AND FINAL APPLICATIONS OF HOWARD RICE
FACTUAL BACKGROUND
The debtor, Michael Schneider, was the principal and sole shareholder of California Plan, Inc.,
a mortgage brokerage company that solicited private investors to make secured real estate loans at
above-market rates. Schneider, who was then an account executive for California Plan, purchased the
business from its founder in 1993. California Plan earned revenues by charging interest rates above the
return promised to investors and by servicing the loans. More recently, it modified its business model
to earn revenues through loan origination fees, points, foreclosure fees, late fees and prepayment fees.
However, its revenues were insufficient to fund operating expenses and make interest payments to
investors. By the late 1990s, when borrowers repaid their loans in full, California Plan did not always
forward the proceeds to the investors. It sometimes reconveyed deeds of trust to borrowers without
informing investors. 	Instead, it continued to make monthly interest payments to the investors but
retained or diverted the proceeds of the payoffs. This misappropriation was not susceptible to easy
detection because California Plan serviced the loans through its own account, so lenders were unaware
when borrowers ceased making payments.
California Plan also operated as a Ponzi scheme. It accepted funds from multiple investors but
retained or advanced to a borrower only some of the funds. The balance was diverted to service existing
loans. Schneider also represented to investors that their loans were secured by specific real estate when,
in fact, many times a single property secured multiple loans. California Plan provided some investors
with unrecorded deeds of trust that had been falsified to appear as if they had been recorded. As a
consequence, not all investors were secured.
This fraudulent scheme was revealed when California Plan stopped making payments to some
of its investors in early 2006. A group of those investors conducted an investigation and then filed
involuntary chapter 7 petitions against both Schneider and California Plan on March 24, 2006. While
the estate of California Plan had relatively limited assets, the Schneider estate included approximately
twenty-five parcels of real property held either directly or through limited liability companies, an
interest in a U.S. Virgin Islands airline, and notes payable by the airline in the face amount of
approximately $2 million.
Schneider and California Plan consented to orders for relief under chapter 11, which were issued
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MEMO. DECISION & ORDER ON 2ND INTERIM FEE AND FINAL APPLICATIONS OF HOWARD RICE
on April 12, 2006. On motion by the petitioning creditors, I ordered the appointment of chapter 11
trustees in both cases. The United States Trustee selected Kyle Everett to serve as trustee in this case
and Andrea Wirum to serve as trustee in the California Plan case.
Everett’s firm, Development Specialists, Inc. (“DSI”), possesses forensic accounting skills,
perhaps useful in tracing misappropriated funds, and diverse management, financial, and accounting
skills. The trustee requested the appointment of Howard Rice as legal counsel to represent him in the
case. He selected the firm on the basis of its depth of experience in a wide variety of practice areas,
including bankruptcy, real estate and land use, and tax strategies and planning, as well as its reputation
for responsiveness and performance in complex cases. I appointed the firm as counsel for the trustee
by order issued April 26, 2006. The trustee also sought authority to employ his own firm, DSI, on an
hourly basis as a consultant to assist in forensic accounting and developing an analysis of the debtor’s
assets and liabilities. However, when multiple creditors raised objections to the application to the extent
that DSI would receive compensation in excess of the statutory limit imposed on trustees’ fees, the
trustee withdrew this request.
Schneider was indicted by local authorities and incarcerated shortly after the petitions were filed
and the fraud scheme was revealed. He pled no contest to one hundred seventy-three felony counts and
was sentenced to twenty-eight years in state prison.
The claims of defrauded investors constitute the vast majority of claims in the case. Many of
California Plan’s investors are elderly people with fixed incomes who had invested a substantial part
or all of their retirement savings in California Plan. They have written letters or appeared at hearings
to highlight the hardship imposed by the debtor’s fraud.
The United States Trustee appointed a committee of unsecured creditors on August 22, 2006,
but when the only trade creditor resigned, the committee was made up solely of defrauded investors.
From early in the case, these investors expressed their concern that the administrative expenses of the
estate, and professional fees in particular, would consume what remained of their life savings.
The trustee conducted an expansive investigation of the debtor’s assets and liabilities. 	In
addition to $22,062.50 that was paid to a private investigator, Howard Rice incurred $171,082 in fees
over the course of the case to investigate the estate’s assets and liabilities. 	Notwithstanding these
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MEMO. DECISION & ORDER ON 2ND INTERIM FEE AND FINAL APPLICATIONS OF HOWARD RICE
efforts, the trustee did not discover any additional assets.
Because there was insufficient cash to service the debt on the estates’s real properties, the trustee
promptly began liquidating the properties in October 2006. He first requested court approval of the sales
of a condominium and a property owned by one of Schneider’s limited liability companies. Individual
defrauded investors objected, asserting that the sales prices were below market value. The committee
asserted that the estate had no legitimate interest in assets acquired through fraud and that the properties
were subject to a constructive trust for the benefit of the defrauded investors. It also feared that the sales
would generate priority tax liabilities from capital gains. On behalf of the trustee, the firm responded
with an omnibus reply, incurring fees of $46,200.50. I overruled the objections and approved the sales
because a constructive trust may not be imposed without tracing the commingled funds, and the
committee had failed to meet its burden of proof. Moreover, the trustee had articulated a sound business
justification for the sales, shown that the properties had been adequately marketed, and established that
the terms were fair and reasonable.
In November, the trustee presented another sale. The committee objected based on the same
arguments, and the trustee replied, incorporating by reference his prior reply. 	This sale was also
approved.
In December, the trustee noticed a real property sale, to which the committee objected based on
the same substantive arguments. Although I had twice previously rejected the committee’s arguments
unequivocally, the firm prepared and filed a lengthy reply. At that time, I expressed serious concerns
about the propriety of the committee’s pursuit of the imposition of a constructive trust on estate assets
and whether it was acting within the scope of its fiduciary duties. This sale was also approved.
Citing the same arguments, the committee again objected when the trustee sought approval of
sales in January 2007. The trustee replied, substantially incorporating his prior points. At this hearing,
I stated in no uncertain terms that the committee was in breach of its fiduciary duties by pursuing a
constructive trust theory since it appeared that the remedy would benefit the defrauded investors solely
to the derogation of the interests of other unsecured creditors of the estate. As before, the committee’s
objection was overruled and the sales approved.
Although the committee parroted substantially the same arguments over the course of six asset
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sales, Howard Rice incurred an additional $72,360.75 in fees defending each of the subsequent sales
after having already incurred $46,200.50 in fees in connection with the first sale. 	The trustee’s
arguments in reply to each of the committee’s objections were substantially the same. At least four
attorneys collaborated to prepare the replies.
The United States Trustee dissolved the committee on January 9, 2007. Notwithstanding its
dissolution, the committee appealed the January sales order. The trustee opposed the committee’s ex
parte motion for a stay pending appeal, and I promptly denied the motion. Although the committee did
not file a motion in the district court for a stay pending appeal, the firm expended resources to prepare
a draft objection to that non-existent request. Following its dissolution, the committee did not prosecute
the appeal in the district court. 	Nevertheless, Howard Rice incurred $60,244 in fees defending the
appeal through dismissal on July 11, 2007.
Through the first half of 2007, the trustee continued to liquidate properties. 	He sought and
obtained court approval of the sales of several other real properties. The asset sales generated net sales
proceeds of approximately $4.2 million for the estate. Many of the properties sold by the trustee were
residential properties, which rarely require input from counsel. Notwithstanding, the firm incurred a
substantial amount in fees in connection with the real property sales. While the firm showed $454,138
in the “Asset Sales” project category and another $55,576.50 in the “Kings Beach” project category, the
firm actually had billed $588,342.50 to the sales achieved by the trustee, which fees are reflected in the
table below.
Property
Description Date Sale
Approved Sales Price 	Net Sales
Proceeds Attorneys’ Fees
Incurred
1300 Plaza de
Sonadores
Santa Barbara, CA
November 2, 2006 	$1,450,000 	unknown 	$45,298.50
Safari Mobile Home
Park
4482 Moran Rd.
Avery, CA
November 7, 2006 	$1,125,000 	unknown 	$22,278.50
Commodore Hotel
825 Sutter St.
San Francisco, CA
November 8, 2006 	$15,726,000 	$468,998 	$18,070.50
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15 parcels on N.
Lake Blvd., Salmon
Ave., and Trout
Ave.
Kings Beach, CA
January 5, 2007 	$5,000,000 	$1,100,000 	$231,788.25
46 Alameda de las
Pulgas
Atherton, CA
January 16, 2007 	$2,405,000 	unknown 	$51,500.00
644 Glen Canyon
Ct.
Santa Cruz, CA
January 16, 2007 	$1,050,000 	unknown 	included in total
above
10140 Springmill
Rd.
Carmel, Indiana
February 23, 2007 	$405,000 	$163,000 	$23,458.50
3801 Watt Ave.
Sacramento, CA February 23, 2007 	$256,000 	$66,000 	$19,210.75
Agate Bay Property
4793 N. Lake Blvd.
Tahoe Vista, CA
May 17, 2007 	$702,500 	$76,000 	$155,369.50
433 El Centro Rd.
Hillsborough, CA August 17, 2007 	$2,804,000 	$349,000 	$21,368.00
TOTAL 	$588,342.50
Before the bankruptcy, Schneider lived an affluent lifestyle. He and his non-debtor spouse,
Deborah Schneider, have four children, the youngest of whom was born while this case was pending.
Shortly before the involuntary petitions were filed in March 2006, Mrs. Schneider petitioned for legal
separation from the debtor. During the case, she received unauthorized post-petition transfers, which
the trustee sought to recover. She also filed claims in the amount of $2,875,000 for future domestic
support obligations and for certain exemptions, including a homestead exemption of $150,000, a vehicle,
household goods, clothing, personal effects, and a retirement account containing $75,000. Upon the
trustee’s application, Presser & Robin LLP was appointed as special counsel to handle family law
matters on behalf of the estate.
Howard Rice adopted a litigious posture with Mrs. Schneider. 	First, around the time that
Michael Schneider was first incarcerated and during the last trimester preceding the birth of Mrs.
Schneider’s fourth child, she inadvertently missed by six weeks the deadline for filing a claim of
exemptions. 	The trustee objected to and asked the court to summarily disallow all her claimed
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exemptions, including clothing and personal effects. Here, the firm filed an extensive brief on a not very
controversial issue, laden with personal attacks and supplemented with evidentiary objections, escalating
the litigation. I allowed the late-filed exemptions as a matter of law.
Second, after Mrs. Schneider’s initial Rule 2004 examination, the trustee sought a supplemental
examination to determine the disposition of a washer and dryer and other household goods removed
from a condominium in Santa Barbara. Although Mrs. Schneider was in her ninth month of pregnancy
and ordered by her physician to bedrest, the firm insisted on an immediate deposition and sent two
senior level attorneys to oppose Mrs. Schneider’s motion to quash. 	Predictably, I ordered that the
supplemental examination take place two weeks after the birth.
Third, in March 2007, the firm presented the trustee’s proposed compromise with Mrs. Schneider
of her claims of exemptions and for child and spousal support. The estate agreed to pay Mrs. Schneider
$675,000 to avoid the claim for future support since Michael Schneider would be incarcerated for an
indefinite period. No portion of the settlement amount was allocated to her exemptions. Although the
bulk of Mrs. Schneider’s claim was based on future support, surprisingly, neither the motion nor the
notice of the hearing to approve the compromise mentioned § 502(b)(5), which disallows claims for non-
dischargeable domestic support obligations that are unmatured as of the petition date. While the firm
asserted that it considered this Code provision, it could not have given it due weight and still have
concluded that the compromise was in the best interest of the estate. 	Because the compromise
represented a substantial recovery on a claim on which Mrs. Schneider was unlikely to prevail, I denied
approval of the compromise as not fair and equitable. Four months later, the trustee proposed a new
compromise in the amount of $296,000, this time based primarily on Mrs. Schneider’s state law
exemptions and not primarily on the claims for spousal and child support. I approved the modified
compromise.
Finally, in connection with the sale of the Schneiders’ residence in Hillsborough in August 2007,
the trustee filed a turnover motion to compel Mrs. Schneider to vacate the property because she had
insufficient resources to relocate. She responded that she was in her predicament because the trustee
had not paid to her even the undisputed portion of her exemption claim. The trustee replied with an
exhaustive brief addressing the substantive merits of her underlying claims. 	Since Mrs. Schneider
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indicated that she intended to timely vacate the property, the trustee’s turnover motion was taken off
calendar as unnecessary. All told, Howard Rice incurred $410,830.50 in fees to litigate against Mrs.
Schneider and another $50,317 to conduct discovery against Mrs. Schneider. These fees are in addition
to the $38,705 in fees sought by and paid to the estate’s special family law counsel.
One aspect of the claims resolution process that was efficiently concluded related to the
corporate entity’s claims. The California Plan trustee asserted that Schneider diverted the assets of
California Plan to his personal use, giving rise to a claim for, inter alia, the imposition of a constructive
trust. The trustee and the California Plan trustee settled the claims between the estates, allocating 55%
of the net proceeds of this estate to California Plan while retaining 45% of the proceeds of liquidation
net of administrative expenses and priority claims. The compromise would eliminate a portion of the
expenses for dual administration of the two estates.
Upon the motion of the United States Trustee, the court converted this case to one under chapter
7 effective December 31, 2007. The United States Trustee selected Andrea Wirum, the trustee in the
California Plan case, to serve as the chapter 7 trustee in this case. The claims of two significant parties,
the California Plan estate and Mrs. Schneider, have been settled. 	Very limited assets remain to be
liquidated. The chapter 7 trustee is currently conducting a review of the claims filed in the cases.
In its several applications, Howard Rice requested fees totaling $2,400,046 and expense
reimbursement of $107,135.23. 	The California Plan trustee, the United States Trustee, and the
committee objected to the firm’s first interim application for compensation. Former committee members
and defrauded investors Bill Aspromonte, Saeed Fazeli, Mel Nashban, Anthony Poch, and Ann Poch
have objected to the remaining applications, as have the United States Trustee and the California Plan
trustee. The first and the second interim applications were referred for review and analysis by a fee
auditor, Stuart, Maue, Mitchell & James. In all, Howard Rice incurred $357,782 in fees to prepare its
own employment application, supplemental disclosures, and fee applications, to respond to objections
and the fee auditor’s reports, and to prepare the employment and fee applications of the trustee and his
other professionals. The time records of the firm show only the hours spent but not a dollar value for
each time entry, rendering it difficult to adjust the fees by the time entries.
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LEGAL DISCUSSION
Section 330(a) of the Bankruptcy Code authorizes an award of reasonable compensation for
actual, necessary services rendered and reimbursement of actual, necessary expenses to a professional
employed under §§ 327 or 1103. 11 U.S.C. § 330(a)(1). Compensation is expressly prohibited for
services that were not reasonably likely to benefit the estate or were not necessary to its administration.
Id. at § 330(a)(4)(A). In determining what compensation is reasonable, the considerations are the nature,
extent, and value of the professional’s services, taking into account all relevant factors, including
whether the services were necessary to the administration of the case, whether they were beneficial
toward the completion of the case at the time rendered, and 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. 11 U.S.C. § 330(a)(3). Another critical factor is the extent of success in the
case. Hensley v. Eckerhart, 461 U.S. 424, 436 (1983).
Counsel should exercise billing judgment to include in his or her request only those fees that are
reasonable. Id. at 437. Howard Rice is well aware that a firm must strategically consider the reasonably
anticipated recovery to the estate. Unsecured Creditors’ Committee v. Puget Sound Plywood, Inc., 924
F.2d 955, 961 (9th Cir. 1991). 	This requires a consideration of whether the probable cost of legal
services is disproportionately large in relation to the size of the estate and the maximum possible
recovery. Id. at 959. In fact, counsel has a duty to analyze and make a careful judgment which claims
to pursue and the degree of vigilance to devote, with the key objective being to maximize the net value
of the estate. See In re Taxman, 49 F.3d 310, 315 (7th Cir. 1995). When the fees are disproportionate
to the potential benefit generated by the services, counsel must balance his or her efforts accordingly.
See id. at 314-16. 	Howard Rice bears the burden of establishing its entitlement to an award and
demonstrating that its fees are reasonable. Hensley v. Eckerhart, 461 U.S. at 437.
This case does not involve a dispute concerning the quality of Howard Rice’s services. The
issue is whether the amount of fees incurred is reasonable in view of the services that were necessary
to the case. As a guardian of the estate’s funds, a court must review the applications to ensure that the
requested fees conform to the parameters set forth above. In re Park-Helena Corp., 63 F.3d 877, 880
(9 th Cir. 1995), cert. denied, 516 U.S. 1049 (1996); Taxman, 49 F.3d at 314-16; In re Riverside-Linden
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Inv. Co., 925 F.2d 320, 324 (9th Cir. 1991); In re Mednet, 251 B.R. 103, 108 (B.A.P. 9th Cir. 2000); In
re Auto Parts Club, Inc., 211 B.R. 29, 33 (B.A.P. 9th Cir. 1997); § 330(a)(2). 	In making this
determination, courts must adequately explain the reasons behind substantial reductions in fees. Moreno
v. City of Sacramento, 534 F.3d 1106, 1116 (9th Cir. 2008).
In this case, Howard Rice failed to observe the principle that its services and fees must be scaled
to the size of the estate and the maximum probable recovery. Regrettably, I conclude that Howard
Rice’s fees in this case are not reasonable and, therefore, I must determine what would be reasonable
compensation for the services rendered.
Although Howard Rice has portrayed this case as a complex reorganization, in reality, it is
primarily a real estate liquidation case that includes claims against an individual debtor by his estranged
wife, defrauded creditors, and the debtor’s corporation. The liquidation of properties has generated net
proceeds of approximately $4.2 million. Nonetheless, during the course of its representation, the firm
staffed the case with twenty-five attorneys who charged hourly billing rates ranging from $215 to $695.
In addition, twenty-two paralegals and other staff with hourly billing rates ranging from $90 to $250
were assigned to perform tasks in the case. Administrative claims against the estate, including Howard
Rice’s fees, have totaled approximately $3.5 million. Other claims in the case total approximately $57
million. Obviously, the defrauded investors and other creditors will receive only minimal distributions
on their claims.
I cautioned Howard Rice early in its representation and as the case progressed to maintain
control over the accrual of attorneys’ fees. On at least four occasions between summer 2006 and the end
of that year, I warned that I would be scrutinizing professional fees closely. The transcript of a hearing
held on October 13, 2006 on the exemptions claimed by the debtor’s spouse reveals this statement to
counsel:
I’ve had numerous discussions with [lead counsel] on the record about my concerns over
runaway professional fees in this case. I had hoped he would pass them on to you and
to the other members of the firm who are involved in this case. There has been a great
deal of creditor interest, and I expect that I will be reviewing fees very closely to insure
that the resources available in the estate are devoted in a measure commensurate with the
importance of the issues.
These concerns were repeated on November 9, 2006 in a chapter 11 status conference:
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I’m going to urge you all to pick and choose your issues very carefully . . . . I am so
concerned about trying to keep . . . fees in check in this case, so that’s just one of my
overriding concerns, and I just mention that to you probably at every occasion that I have
the opportunity to.
Similarly, 	numerous 	creditors 	frequently 	voiced 	their 	fears 	about 	the 	unchecked 	accrual 	of
administrative expenses during the course of this case through letters, at hearings, and in objections to
motions. 	In fact, lead counsel from Howard Rice acknowledged these concerns on July 7, 2006,
repeating the adage that, “You can’t let the perfect be the enemy of the good.” Notwithstanding these
admonitions, the accrual of professional fees was rampant.
A. 	Howard Rice Incurred Excessive Fees on Matters Involving Spouse Deborah Schneider.
Overall, Howard Rice adopted a misguided strategy in matters involving Mrs. Schneider that
resulted in unnecessary litigation and legal fees. It needlessly expended estate resources in an attempt
to summarily disallow all of Mrs. Schneider’s claimed exemptions when she inadvertently missed a
deadline around the time her husband was incarcerated during her last trimester of a pregnancy. The
firm should have known that this strategy was not cost effective for the estate because binding case law
establishes a flexible standard for determining excusable neglect, and there is a strong policy to interpret
exemptions liberally in favor of the debtor. 	Predictably, the estate did not prevail on its timeliness
objection to Mrs. Schneider’s claimed exemptions.
In another antagonistic move, the firm pushed for a second Rule 2004 examination of Mrs.
Schneider at a time when common sense dictated that Mrs. Schneider’s fragile medical condition
precluded the examination. 	The firm’s vehement opposition to Mrs. Schneider’s motion to quash
provided no benefit to the estate because, as warranted by the circumstances, I directed that the
deposition take place after Mrs. Schneider gave birth to her fourth child.
Later, Howard Rice proposed an overly generous settlement of Mrs. Schneider’s claim for
unmatured future support even though there was little likelihood that her claim was allowable under
§ 502(b)(5). In the same compromise, the firm allocated no portion of the settlement amount to her
claims for a $75,000 homestead exemption or a $75,000 retirement account, which were not reasonably
susceptible to challenge. When I declined to approve that proposed settlement, the firm continued its
aggressive litigation against Mrs. Schneider. It later presented a modified compromise at less than one-
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MEMO. DECISION & ORDER ON 2ND INTERIM FEE AND FINAL APPLICATIONS OF HOWARD RICE
half of the original settlement amount. 	Further, the firm commenced proceedings against Mrs.
Schneider to evict her from her residence under circumstances in which it stood little to no chance of
prevailing.
The firm billed the estate $410,830.50 in fees for litigation against Mrs. Schneider. 	When
combined with the $50,317.50 in fees to depose Mrs. Schneider and the $38,705 previously paid to
special family law counsel, it appears the estate incurred fees approaching $500,000 to litigate against
Mrs. Schneider. This amount is grossly disproportionate to the benefit derived from the services. Many
of the services in this category were neither necessary nor cost effective. Although Mrs. Schneider
asserted a claim for future support in the amount of $2,875,000, there was never any likelihood that she
would prevail on that claim. After reducing the requested fees based on all of these factors, a reasonable
fee for the litigation against Mrs. Schneider could not possibly exceed $225,000. 	A substantial
reduction in fees is warranted, and $274,853 in fees is disallowed in this category.
B. 	Howard Rice Incurred Excessive Fees on the Real Property Sales.
Over the course of its representation, Howard Rice obtained on behalf of the trustee approval
of the sale of twenty-four real properties. The firm billed over 1,000 hours at hourly rates of up to $695,
incurring $588,342.50 in fees to prepare the real property sales to present to the court. However, it did
not segregate its time records by real property sales. Instead, it consolidated all the real property sales
in one project category, “Asset Sales,” which totaled $454,138 in its applications. 	It also billed
$55,576.50 to the sales of the Kings Beach properties. Howard Rice noted in its response to the fee
auditor’s report on the second interim application that the fee auditor mistakenly attributed certain time
entries to the wrong asset sales. However, that error has no bearing for purposes of this analysis.
The sales generated net proceeds of $4.2 million for the estate. Nevertheless, the majority of the
sales presented for court approval were routine sales of residential real properties, which should not have
necessitated substantial input from counsel. The cost of the legal services in this area is disproportionate
in relation to both the size of the estate and the net proceeds potentially realized by the estate. 	A
reasonable amount for conducting the real property sales should not have exceeded $325,000.
The firm billed an additional $118,561.25 in fees to respond to the committee’s repeated
objections to several of the sales. The sales that drew objections all took place within a three to four
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MEMO. DECISION & ORDER ON 2ND INTERIM FEE AND FINAL APPLICATIONS OF HOWARD RICE
month period, and each time, the committee raised the same arguments. The bulk of the fees to defend
the sales were incurred after the court had already rejected the committee’s arguments unequivocally.
Because the law did not change during the brief period at issue, the firm should have known that after
its first response, any further responses could simply reiterate the first response. 	Instead, the firm
expended great effort on each of several responses, which largely repeated the same arguments. A
reasonable fee for responding to the committee’s objections should have included only those fees
incurred to respond to the first objection, plus an hour or two to prepare each subsequent response. As
a result, the fees for responding to objections should not have exceeded $50,000. For these reasons, fees
in the amount of $331,903.75 are disallowed in the category of asset sales.
C. 	Howard Rice Incurred Excessive Fees on Asset Investigation.
The firm expended 453.60 hours, incurring $171,082.50 in fees, to conduct an expansive
investigation of the debtor’s assets and liabilities, including searching public records databases. It also
reviewed the debtor’s bank statements, credit card statements, telephone records, tax returns, and
business records, obtained turnover of Schneider’s bank accounts, and maintained a spreadsheet of the
assets discovered. 	I previously authorized the payment of a substantial portion of these fees on an
interim basis. However, viewed in context, it appears that the time expended and the fees incurred are
excessive based on a number of factors. 	First, the firm’s efforts did not discover any additional
significant assets. Additionally, this type of investigative work is typically performed by the trustee,
not its legal advisor, and would be compensated within the trustee’s statutory fee. Indeed, the trustee
was selected specifically because of his firm’s forensic accounting expertise. Finally, the trustee also
retained an independent private investigator who charged $22,062.50 for its investigative work. The
firm’s request for $171,082.50 in fees over and above the amount already paid to a private investigator
is excessive because much of the work appears to have been unnecessary and produced no true benefit
to the estate. While I understand the firm’s need to review and assimilate the information uncovered
by others, a reasonable fee for this more modest task certainly should not have exceeded $90,000, based
on approximately half of the hours actually incurred. Fees in the amount of $81,082.50 are disallowed
in this category.
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MEMO. DECISION & ORDER ON 2ND INTERIM FEE AND FINAL APPLICATIONS OF HOWARD RICE
D. 	Howard Rice Incurred Excessive Fees on Compensation and Employment Matters.
In addition to the preparation of its own employment application, Howard Rice prepared the
employment applications of ten other professionals retained by the trustee. It also prepared its own fee
applications seeking $2,400,046, as well as fifteen fee applications for the trustee and his other
professionals, for which the compensation sought totaled $730,745.40. In addition, it responded to the
objections to its fee applications and to the reports by the fee auditor. While a professional is entitled
to reasonable compensation for time spent preparing fee applications, In re Nucorp Energy, Inc., 764
F.2d 655, 662 (9th Cir. 1985), it is not automatically entitled to all its fees incurred in unsuccessfully
defending its fee application. 	In re Riverside-Linden Inv. Co., 945 F.2d 320, 323 (9th Cir. 1991).
Further, this district has established Guidelines for Compensation and Expense Reimbursement of
Professionals and Trustees that provide:
Fees for preparation of a fee application may not exceed five percent of the total
amount of fees and costs requested in the application. This five percent guideline is a
ceiling rather than a floor; preparation expenses equaling five percent are not
presumptively reasonable. [emphasis in original]
There does not appear to be any good reason not to observe the guideline in this case. 	While five
percent of the total fees requested on behalf of all professionals is $156,539.57, here Howard Rice seeks
$357,782 in legal fees, representing 1,000 hours expended, in connection with the employment and
compensation of professionals in this case. More than $115,000 in fees is attributable to the firm’s
responses to the fee audits. Under the circumstances, it is evident that the fees requested in this category
are excessive in view of both the benefit to the estate and the total amount of fees sought and awarded
to the trustee’s professionals. I will allow Howard Rice fees in the amount of $225,000 for the time
devoted to compensation and employment matters and disallow fees in the amount of $132,782 in this
category.
E. 	Howard Rice Incurred Excessive Fees to Defend the Appeal of the Kings Beach Sale Order.
Although committee counsel attended the hearing on dismissal, the committee did not otherwise
prosecute the appeal of the Kings Beach sale order following its dissolution. Nevertheless, Howard Rice
incurred $60,244 in fees to defend the committee’s appeal. 	Once the committee was dissolved,
however, the firm should have moderated its services so that the work was more perfunctory. Moreover,
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it undertook unnecessary services by preparing an opposition to a non-existent motion for stay pending
appeal in the district court. 	After disallowing time entries associated with this unnecessary time,
reasonable compensation for defending the appeal should not have exceeded $25,000. 	Fees in the
amount of $35,244 are disallowed in this category.
F. 	Compensation for Clerical Time is Disallowed.
Services that are purely clerical, ministerial, or administrative in nature are not compensable
from the estate. Missouri v. Jenkins, 491 U.S. 274, 288 fn.10 (1989); Sousa v. Miguel, 32 F.3d 1370,
1374 (9th Cir. 1994). Howard Rice has billed for services that include: monitoring and reviewing the
docket; organizing and coding documents for filing; locating, retrieving, gathering, assembling and
distributing documents; electronically distributing documents; ordering transcripts; preparing services
packages, serving pleadings, updating service lists, and preparing proofs of service; editing time entries;
e-filing and uploading pleadings; and coordinating the foregoing activities. Tasks of this nature are not
professional services, and their costs must be absorbed by the firm as an overhead expense.
I previously disallowed $41,787.75 in fees for such clerical services included in the firm’s first
interim application. The time entries for these services are set forth in Exhibits G-1 through G-9 of the
audit report on the firm’s first interim application.
The audit report on the firm’s second interim application has identified at Exhibits H-1 through
H-8 time entries totaling $44,713.25 that are attributable to clerical services. My review of the time
records in the firm’s third and final application reveals that this problem has remained consistent.
Disallowance of the time entries attributable to clerical services in the firm’s final application warrants
a reduction of $25,000. 	Consequently, I will disallow an additional $69,713.25 in fees for clerical
services.
G. 	Estimated Expenses Are Disallowed.
In its final application, Howard Rice requested estimated fees and expenses of $26,774.50 and
$6,250, respectively. It set forth in supplements to the final application that it subsequently incurred
actual fees of $42,908 and expenses of $2,451.85 after the application was filed. Although the fees
actually incurred after the application was filed exceeds the estimated amount, I will allow those fees.
Because the excess is less than the amount of the reductions in this application, the notice of the request
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For The Northern District Of California
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for those fees is deemed adequate. However, estimated expenses in the amount of $3,798.15 that were
not actually incurred and are not supported by explanation are disallowed.
CONCLUSION
I previously disallowed fees of $93,377.98 and costs of $758.98 in connection with the first
interim application. In response to the audit reports and the objections to its applications, Howard Rice
voluntarily reduced its fees by $31,913.73, including $1,995 for fees attributable to supervising
document review, and it reduced its expenses by $7,149.30. For the reasons discussed above, additional
fees totaling $925,587.50 and expenses of $3,798.15 are disallowed.
Compensation in the total amount of $1,365,309.29 in fees and $95,428.80 in expense
reimbursement is hereby approved on a final basis, including those amounts that were previously
awarded and paid. All remaining objections are overruled. As the Seventh Circuit observed in Taxman,
this result may seem harsh, “[b]ut being a creditor and seeing your claim get eaten by a lawyer is a harsh
fate as well.” Taxman, 49 F.3d at 316.
IT IS SO ORDERED.
* 	* 	* 	END OF ORDER * * *
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MEMO. DECISION & ORDER ON 2ND INTERIM FEE AND FINAL APPLICATIONS OF HOWARD RICE
Case No. 06-50441-MM
COURT SERVICE LIST
WILLIAM J LAFFERTY
HOWARD RICE NEMEROVSKI CANADY
FALK & RABKIN
3 EMBARCADERO CENTER 7TH FLOOR
SAN FRANCISCO CA 94111
MICHAEL A ISAACS
CHARLES P MAHER
LUCE FORWARD HAMILTON &SCRIPPS
RINCON CENTER II
121 SPEAR STREET SUITE 200
SAN FRANCISCO CA 94105-1582
EDWINA E DOWELL
JOHN WESOLOWSKI
OFFICE OF THE US TRUSTEE
280 SOUTH FIRST ST ROOM 268
SAN JOSE CA 95113
CHARLES B GREENE
LAW OFFICES OF CHARLES B GREENE
84 WEST SANTA CLARA ST SUITE 770
SAN JOSE CA 95113
BILL J ASPROMONTE
690 OSCEOLA AVE #307
WINTER PARK FLA 32789
SAEED FAZELI
PO BOX 9202
SAN JOSE CA 95157
MEL NASHBAN
525 MCLEAN LANE
SANTA BARBARA CA 93108
ANTHONY POCH
ANN POCH
3235 JENKINS AVE
SAN JOSE CA 95118
JOHN LUCENA
PO BOX 10207
SAN JOSE CA 95157
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