Payless Cashways, Inc.

IN THE UNITED STATES BANKRUPTCY COURT FOR THE
WESTERN DISTRICT OF MISSOURI
IN RE: )
)
PAYLESS CASHWAYS, INC., ) Case No. 01-42643
)
Debtor. )
MEMORANDUM OPINION
KPMG L.L.P. (KPMG) has filed its First and Final Application for Allowance of
Compensation and Reimbursement of Expenses (the Application) in this Chapter 11
bankruptcy case. Various parties objected to the Application. This is a core proceeding
under 28 U.S.C. § 157(b)(2)(A) over which the Court has jurisdiction pursuant to 28 U.S.C.
§ 1334(b), 157(a), and 157(b)(1). The following constitutes my Findings of Fact and
Conclusions of Law in accordance with Rule 52 of the Federal Rules of Civil Procedure as
made applicable to this proceeding by Rule 7052 of the Federal Rules of Bankruptcy
Procedure. For the reasons set forth below, I grant the Application in part, sustain the
objections in part, and allow KPMG fees in the amount of $525,798.50, and expenses in the
amount of $68,011.20.
FACTUAL BACKGROUND
The relevant facts are as follows. On June 4, 2001, debtor Payless Cashways, Inc.
(Payless) filed a Chapter 11 bankruptcy petition, and on June 29, 2001, this Court entered
an Order authorizing Payless to retain KPMG as its accountants, auditors, and tax and
compensation advisors. On August 28, 2001, Payless informed the Court that its
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111 U.S.C. §§ 330(a)(5) and 331.
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reorganization efforts had failed and that it would begin liquidating all of its assets. On
September 10, 2001, the Court approved the appointment of Silverman Consulting, Inc. as
the Chapter 11 trustee. On November 2, 2001, KMPG filed the Application seeking
$554,798.50 in compensation and $68,936.20 in expenses for the services it provided to
Payless between June 4, 2001, and August 31, 2001. Congress Financial Corporation
(Congress), the Official Committee of Unsecured Creditors (the Committee), and the UST
objected to the Application. On December 18, 2001, this Court held a hearing. The only
disputed issues in this case are whether the fees and expenses contained in the Application
are reasonable and whether the efforts of KMPG benefitted the estate. No one disputes that
KMPG actually performed the work and that it was necessary.
DISCUSSION
One of the Committee’s objections is related to the fact that KMPG styled its
Application a “Final Application,” when in fact it is for services only through August 31,
2001. In its response, KMPG clarified that the Application only covers compensation and
expenses through August 31, 2001, and that it is not a final application for all of the
services that have been or will be performed in this case. I will, therefore, treat KPMG’s
Application as being one for interim allowance. As with all interim applications, it is subject
to review at such time as the Final Application is submitted.1 Any such review, however,
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211 U.S.C. § 327(a).
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must be pursuant to the standards set out in this Memorandum Opinion.
The Bankruptcy Code (the Code) authorizes the employment of professional persons
to assist the trustee, or, as in this case at its inception, the debtor-in-possession, in
performing its duties:
(a) Except as otherwise provided in this section, the trustee, with the court’s
approval, may employ one or more attorneys, accountants, appraisers,
auctioneers, or other professional persons, that do not hold or represent an
interest adverse to the estate, and that are disinterested persons, to represent
or assist the trustee in carrying out the trustee’s duties under this title.2
The Code also both authorizes compensation for these professionals and establishes the
standards for awarding that compensation:
(a) (1) After notice to the parties in interest and the United States
trustee and a hearing, and subject to sections 326, 328, and 329, the court
may award to a trustee, an examiner, a professional person employed under
section 327 or 1103—
(A) reasonable compensation for actual, necessary services
rendered by the trustee, examiner, professional person, or
attorney and by any paraprofessional person employed by any
such person; and
(B) reimbursement for actual, necessary expenses.
(2) The court may, on its own motion or on the motion of the United States
Trustee, the United States Trustee for the District or Region, the trustee for
the estate, or any other party in interest, award compensation that is less than
the amount of compensation that is requested.
(3) (A) In determining the amount of reasonable compensation to be
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awarded, the court shall 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; and
(E) whether the compensation is reasonable based on the
customary compensation charged by comparably skilled
practitioners in cases other than cases under this title.
(4) (A) Except as provided in subparagraph (B), 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) n e c e s s a r y t o t h e
administration of the case.
. . .
(6) Any compensation awarded for the preparation of a fee application
shall be based on the level and skill reasonably required to prepare the
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311 U.S.C. § 330(a).
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application.3
I note at the outset that KPMG is a national accounting firm. Thomas D. Bibby, the
Partner in KPMG’s Southwest Region Financial Advisory Services Practice, testified that
the rates charged by KPMG are national rates. In other words, his firm charges the same rate
for the same services, regardless of the location of the client.
KMPG divided its request for compensation into project categories, listing the total
hours and the total fees requested for each category. According to its Application, KMPG
performed the following services for Payless: (1) the annual audit: 332.2 hours: $87,872.00;
(2) assumption of lease contracts: 16.9 hours: $5,577.00; (3) preference avoidance analysis;
43.5 hours: $17,349.00; (4) bankruptcy accounting and reporting: 35.8 hours: $14,121.00;
(5) bankruptcy motions: 209.7 hours: $48,000.00; (6) bankruptcy schedules and statement
of financial affairs: 906 hours: $238,160.00; (7) employee retention and severance: 87.2
hours: $33,500.00; (8) tax issues: 179.7 hours: $62,640.00; and travel: 203.1 hours:
$24,164.50. No one objected to the compensation requested for the annual audit, the
assumption of lease contracts, the employee retention and severance, tax issues, or travel.
Those services total $294,042.20, and I will approve the Application as to those services.
The UST argues that KPMG must prove that its services were reasonable and that
the work benefitted the estate. KMPG argues, on the other hand that section 330(a)(4)(A)
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411 U.S.C. § 330(a)(4)(A).
511 U.S.C. § 330(a)(3)(C).
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of the Code is in the disjunctive. KPMG, therefore, need only prove that its services were
necessary: “[T]he court shall not allow compensation for . . . services that were not
reasonably likely to benefit the debtor's estate; or necessary to the administration of the
case.”4 Since the parties agree that the services provided were necessary to the estate, I find
the UST’s argument that KPMG must also prove the services benefitted the estate to be
without merit. Even were I to find that KPMG needed to prove both, I find that section
330(a)(3)(C) requires the applicant to prove that the services were necessary to the
administration of the case, or beneficial at the time rendered toward the completion of the
case.5 It is undisputed that Payless needed the services of a large and experienced
accounting firm. No one denies that KPMG provided quality services to Payless, or that
those services contributed toward the orderly administration of the estate. For these reasons,
I find that the services were necessary and beneficial.
The UST objects to certain expenses for meals. KPMG seeks reimbursement for 18
meals for a total expense of $1,681.00. The UST points out that the United States
government’s per diem rate for meals in Kansas City is $42.00. KMPG agreed at the
hearing that a reimbursement of $42.00 per day is acceptable, resulting in an allowable
expense for meals of $756.00. I, therefore, find that the meal expense of $1,681.00 should
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be reduced by the amount of $925.00 ($1,681 minus $756.00 equals $925.00).
The UST also questions the reimbursement claimed for lodging expenses. KPMG
seeks reimbursement for 37 nights lodging for a total of $5,381.00. The UST’s objection
is related to the inconsistency of the amounts sought for various night’s lodging for various
professionals. Rather than deal with each individual request, however, I look to the
Application for an average cost for lodging. I find the average reimbursement sought is
$145.43 per night. Given that KPMG’s staff traveled midweek, stayed in downtown hotels,
and did not have access to government or week-end rates, that cost is reasonable. I will,
therefore, overrule the UST’s objection to reimbursement for lodging.
The main thrust of all of the objections is that KPMG did not exercise its discretion
to delegate work in the most cost-effective manner in order to minimize cost. As a result,
the parties contend the fees are not reasonable. KPMG used one Principal, three Partners,
a Director, Managers, Senior Associates, Associates, and one intern to provide all the
services for which it now seeks reimbursement. The hourly billing rates for these
professionals ranged from $550.00 per hour to $100.00 per hour. Based upon the total
number of hours billed, 2084.89, the blended hourly rate is $265.64. Given the range of fees
charged by this national accounting firm, I find that KPMG did, in fact, delegate a great
many tasks to lower echelon employees. KPMG does, however, seek compensation in the
amount of $48,000 for 209.7 hours spent preparing the amended mailing matrix. The UST
argues that preparing a mailing matrix, while time consuming, is not a difficult task. The
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619 F.3d 833 (3rd Cir. 1994).
7Id. at 847.
8Id. at 848.
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UST claims that KPMG should have used clerical employees, or an independent contractor,
to perform this service.
KPMG argues that Payless presented it with a list of creditors that was woefully
inadequate, and that time was of the essence in getting an Amended Matrix on file so that
all creditors could be made aware of the bankruptcy. Payless had in its possession seven
crates of returned notices because either the names or addresses on the original matrix
prepared by Payless were incorrect. Clearly, having an accurate list of creditors prepared
in a timely manner is a necessary task to perform in any bankruptcy case, especially one
of the size and complexity of Payless. KPMG also convincingly testified that Payless did
not have adequate staff to perform these services in-house at the time the amended matrix
was being prepared. KPMG also argued that there is no distinction in the Code between
clerical and non-clerical services. It relies on In re Busy Beaver Building Centers, Inc.6 for
the premise that section 330 was amended to allow bankruptcy professionals to be
compensated at the same level as non-bankruptcy professionals.7 Moreover, KMPG claims
that as long as the services provided were actual and necessary, it is not relevant whether
a professional or paraprofessional performed them.8 I agree. But I do find that KPMG could
have used paraprofessionals, who bill at a substantially lower rate, to prepare a great deal
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9Missouri v. Jenkins, 491 U.S. 274, 285, 109 S. Ct. 2463, 2470, 105 L. Ed. 2d
299 (1989); Casey v. City of Cabool, Mo., 12 F.3d 799, 805 (8th Cir. 1993), Cert.
Denied,
City of Cabool v. Casey, 513 U.S. 932, 115 S. Ct. 325, 130 L. Ed. 2d 285 (1994)
(stating that the relevant market may include the national market); Gusman v. Unisys
Corp., 986 F.2d 1146, 1148 7th Cir. 1993) (stating that a reasonable professional fee
should approximate the prevailing market rate in the relevant community). See also
Hendrickson v. Branstad, 740 F. Supp. 636, 642 (N.D. Iowa 1990), reversed in part on
grounds not relevant here, 934 F.2d 158 (8th Cir. 1991) (stating that a “national market
or a market for a particular legal specialization may provide the appropriate market”).
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of the mailing matrix, or it could have suggested that the work be hired out to a firm with
experience in preparing matrixes. I, therefore, find that $20,000 is a reasonable request for
compensation for preparing an accurate mailing matrix, and I will reduce the amount sought,
$48,000, by $28,000.
The UST claims that KPMG did not need to spend 906 hours preparing the
bankruptcy schedules, and that it did not need to use a Partner, a Director, and two
Managers for these tasks. Given the overall blended rate of $265.00, I find that KPMG
appropriately delegated these tasks. Courts have consistently looked to the marketplace to
guide their determination as to what is reasonable.9 It is undisputed that KPMG is a national
accounting firm. Payless determined, prior to filing this petition, that it needed the expertise
of a national accounting firm. It appropriately filed an application to employ KPMG, as
required by the Code, and accurately disclosed the fees charged by the KPMG
professionals. This Court approved that application, albeit over the reserved objection of
the UST. Moreover, the UST stated that he does not dispute that all of the services for
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which KPMG seeks reimbursement were, in fact, performed and that they were necessary.
I, therefore, find that the fees charged in preparing the schedules, with the exception of the
fees for preparing the amended mailing matrix, are reasonable.
The UST also objects to the amount of reimbursement KPMG seeks for performing
preference analysis, for advising Payless on filing the monthly operating statements, and for
preparing the fee application. According to the Application, KPMG seeks fees of $17,349
for 43.5 hours work in performing an analysis of preferential payments and $14,121 for 35.8
hours work preparing the monthly operating reports. The UST argues that less skilled
professionals could have performed these two tasks at a substantial savings to the estate.
I disagree. Preference analysis is a complicated task. If done correctly, it can minimize
future litigation and provide a substantial benefit to the estate. Likewise, properly prepared
monthly operating reports serve to keep all parties-in-interest, including the Court, advised
of a debtor’s activities while in Chapter 11. I find that the fees for these services are
reasonable.
As to the cost to prepare the fee application, KPMG points out that the cost of
$22,415.00 to prepare a fee application in the total amount of $553,798.50 is four percent
and is justified by the efforts required. While there is no clear guidance in this area, Courts
have approved reimbursement for time spent preparing fee application in excess of nine
percent. As one court stated:
[T]he court feels compelled to award a reasonable amount for time spent
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10North Carolina v. American Freight System, Inc. (In re American Freight
System, Inc.), 1997 WL 309123 (D. Kan. May 6, 1997).
1187 B.R. 905, (Bankr. E.D. Mich. 1988).
12Id. at 917.
13Id.
14Doc. #1019, filed November 16, 2001.
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preparing the applications. . . .Winthrop could reasonably have been expected
to spend no more than ten percent of its total time on the case preparing and
defending its portions of the applications.10
In In re By-Rite Oil Company,11 the court set a five percent limitation on reimbursement for
preparation of a fee application.12 In setting such a limitation the Court stated, “this five
percent limitation does not approach the amount that would constitute a reasonable fee for
such time if full compensation were allowed.”13 Given these parameters, I will approve the
request for $22,415.00 for preparation of the fee application.
In its objection, Congress argues that “[i]n light of the short-lived reorganization
phase of this proceeding, it is questionable what benefit debtor derived from KPMG’s
services.”14 This argument misses the mark. Unlike the investment bankers, who were hired
for the express purpose of helping Payless devise a strategy to come out of Chapter 11,
KPMG was hired to provide accounting services, which were necessary whether Payless
emerged from Chapter 11 or, as is the case, dies there. There is no real dispute that the
various categories of services provided by KPMG were necessary to the processing of the
case, and were, therefore, a benefit to the estate and its creditors. Payless needed to file
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accurate schedules, to receive accurate tax advice, and to pursue preferences whether the
case resulted in confirmation of a Chapter 11 Plan or not. At the hearing, Congress argued
that KPMG should have realized early on that the case was going to crater, and should have
used less people and lower level people to do the tasks it was called upon to do. In all
cases, however, professionals, are expected to do only such work as is necessary, and to
do that work in the most efficient manner possible. Doing the work efficiently means
pushing the work down to the cheapest professional with the skills to do the work. But that
also means utilizing more experienced professionals to perform tasks which require their
expertise. Sometimes it is more efficient to utilize a higher paid person who has dealt with
the problem before than to use a cheaper person to reinvent the wheel. As I have found,
preparation of the amended matrix, could have been performed by employees with less
experience. But other tasks, such as preparation of a template for preference analysis, the
editing of bills, and consultation regarding pension issues, were more efficiently performed
by professionals who charge higher hourly rates.
In sum, I find that the estate and its creditors did derive substantial benefit from the
services provided by KPMG, and that those services were necessary to the prompt
administration of the estate. I further find that, with the exception of preparing the amended
mailing matrix and the food charges, KPMG provided those services in as efficient a manner
as could be reasonably expected under the circumstances. As such, I will approve the
Application on an interim basis, and will allow fees in the amount of $525,798.50 and
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expenses in the amount of $68,011.20.
An Order in accordance with this Memorandum Opinion will be entered this date.
/s/ Arthur B. Federman
Chief Bankruptcy Judge
Date: January 24, 2002
KATHRYN BUSSING TO SERVE PARTIES NOT RECEIVING ELECTRONIC NOTICE
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