Coyote Construction, Inc.

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UNITED STATES BANKRUPTCY COURT
NORTHERN DISTRICT OF CALIFORNIA
In re No. 04-45081 T
Chapter 7
COYOTE CONSTRUCTION,
Debtor.
_____________________________/
MEMORANDUM OF DECISION RE FINAL FEE APPLICATION
Sharon Ceasar (“Ceasar”) sought allowance of a chapter 11
administrative claim for legal services provided to the above-
captioned debtor (the “Debtor”), as a chapter 11 debtor-in-
possession, prior to conversion of the case to chapter 7. She
requested allowance of a claim for fees and costs totaling
$32,734.16. Sara Kistler (the “UST”), the United States Trustee
for this Region, objected to her application. For the reasons
stated below, the Court will allow Ceasar a chapter 11
administrative claim in the amount of $16,391.66.
BACKGROUND
The above-captioned case was filed as a chapter 11 case on
September 16, 2004. Through approximately February 2005, the
Signed: October 06, 2005
________________________________________
LESLIE TCHAIKOVSKY
U.S. Bankruptcy Judge
________________________________________
Entered on Docket
October 06, 2005
GLORIA L. FRANKLIN, CLERK
U.S BANKRUPTCY COURT
NORTHERN DISTRICT OF CALIFORNIA
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1This did not end the controversy over Phillips’ role in
the case. The UST complained that Phillips had attempted to
represent the Debtor at the Trust Funds’ Rule 2004 examination
of the Debtor’s responsible person, Wanda Langley (“Langley”).
Later, the Court was required to admonish Phillips at a Court
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Debtor operated its business as an underground contractor. The
underground contracting business apparently suffers when it rains.
The Debtor represented that its business encountered financial
problems due to a lengthy rainy season in the winter of 2004. The
Debtor is a party to a collective bargaining agreement. A s a
result of the weather, the Debtor represented, it fell behind in
making its employer contributions to the union trust funds (the
“Trust Funds”). At the time the Debtor filed its petition, its
scheduled claims totaled approximately $132,000 of which the Trust
Funds’ claims comprised approximately $60,000.
The chapter 11 case was contentious and nonproductive. Much
time was wasted due to the Debtor’s attempt to employ Willie
Phillips (“Phillips”) as Ceasar’s co-counsel. Phillips had
previously been banned by the Court from representing chapter 11
debtors-in-possesion due to misconduct. Phillips had represented
the Debtor for years in nonbankruptcy matters. Ceasar had never
represented a chapter 11 debtor-in-possession before. The Office
of the United States Trustee objected to both employment
applications on the ground that they were simply a device for
circumventing the Court’s ban on Phillips’ representation of the
Debtor. The Court denied Phillips’ application but, after notice
and hearing, granted Ceasar’s application.1
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26 hearing that he was not permitted to advocate for the Debtor at
the hearing.
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A second area of controversy concerned the Debtor’s monthly
operating reports. Initially, the Debtor failed to file monthly
operating reports at all. Later, when a few reports were filed,
the UST found them deficient and inconsistent. The UST also had
concerns about certain expenditures they revealed. At the time of
the conversion, the Debtor only filed monthly operating reports
for September, October, and November 2004. The Debtor filed no
reports for any of the following months. At the time the case was
converted to chapter 7, reports were due for December 2004 and for
January through March 2005.
The final area of controversy concerned the Debtor’s failure
to provide timely reports to the Trust Funds of hours worked by
the Debtor’s employees and to make the required employee
contributions. The Debtor attempted to blame the Trust Funds for
this failure. It contended that the Trust Funds had refused to
sign the necessary releases to free up the funds due from the
general contractors. The Trust Funds represented that it had
never been asked to sign any releases. When the Trust Funds
learned that the Debtor claimed they had refused to sign releases,
they sent blank releases forms to the Debtor to complete.
However, the Debtor failed to complete and return them.
On February 3, 2005, the UST filed a motion to convert the
case to chapter 7 or to appoint a chapter 11 trustee. The Trust
Funds filed a declaration in support of the motion. The Debtor
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opposed the motion. The Court set an evidentiary hearing on the
motion.
On the day set for the hearing on the motion, the Debtor filed
a motion to dismiss the case. As a result, the Court vacated the
evidentiary hearing and continued the motion to convert to the
date scheduled for the hearing on the motion to dismiss. At the
conclusion of the hearing on both motions, based on the Trust
Funds’ continued support for conversion, the Court ordered the
case converted to chapter 7.
DISCUSSION
A. FEE APPLICATION
In her fee application (the “Fee Application”), Ceasar
represented that she had performed 116.5 hours of legal services
for the Debtor. She stated that her normal hourly rate was $300
per hour. Thus, she requested fees for these services totaling
$34,950. She represented that she had incurred $1,084.16 in costs
so that the total of her fees and costs was $36,034.16. Ceasar
represented that she received a pre-petition retainer of $3,300.
She apparently applied this retainer to reimburse her costs in
full and a portion of her fees. Thus, she sought allowance of a
chapter 11 administrative claim in the amount of $32,734.16.
Ceasar provided a project breakdown in both the narrative and
for the time entries. She divided her work into six categories as
follows: (1) Prepare chapter 11 schedules & prepare for & attend
341 meeting, (2) Application for employment of attorneys, (3)
Responses to U.S. Trustee’s motions to convert and reconsideration
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2The UST also contended that the Fee Application was
premature because it was not yet clear whether there would be
sufficient funds in the estate to pay chapter 11 administrative
expense claims. Normally, the Court would not determine whether
to allow a chapter 11 administrative expense claim until it was
established that some payment could be made to chapter 11
administrative claimants. However, since the Fee Application
had been fully briefed and Ceasar urged the Court to rule on it,
the Court agreed to do so.
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of retention Order, (4) Responses to discovery request & review
and analysis of Operating Reports, (5) Request for voluntary
dismissal, and (6)Case administration. The bulk of her $1,084.16
in costs were represented by the $839 filing fee. In addition,
she represented that she had incurred $14.16 in Pacer costs, $75
in mailing costs, and $156 in copying charges calculated at the
rate of twenty cents per page.
B. UST’S OBJECTION
The UST filed an objection to the Fee Application. First, she
argued that the Court should disallow all of the requested fees.
She argued that the services provided by Ceasar were unnecessary
because it was clear from its inception that the chapter 11 case
had no chance of succeeding.2 As was later disclosed to the Court,
the Debtor’s responsible person, Langley, “disassociated” herself
from the Debtor and “associated” herself with another construction
company one week after the filing. According to the UST, Ceasar
should have seen this departure as a “red flag” that the Debtor’s
chapter 11 case was not likely to succeed.
The UST contended that Ceasar’s inexperience caused her to
incur excessive and unnecessary fees. The UST argued that the
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estate should not have to pay for this inexperience. The UST
cited In re Coones Ranch, Inc., 7 F.3d 740, 744 (8th Cir. 1993) for
the proposition that attorneys’ fees may be denied to an attorney
who assists the debtor in filing a futile chapter 11 case.
Alternatively, the UST asserted that the fees requested were
excessive and, if allowed at all, should be allowed in a much
lesser amount. The UST’s specific objections were as follows:
1. The UST contended that all of Ceasar’s fees for services
performed prior to issuance of her retention order should be
disallowed. The UST noted that Ceasar did not obtain a retention
order until five months after the case was filed. While the UST
acknowledged that this delay was largely due to the controversy
over Phillips’ role in the case, she observed that Ceasar should
not have let herself become embroiled in Phillips’ problems.
2. The UST also contended that all of Ceasar’s fees in
connection with Phillips’ employment applications should be
denied. She asserted that this application was hopeless from the
start and that Ceasar should have realized it.
3. The UST next contended that all of Ceasar’s fees for
drafting the motion to dismiss should be denied. She asserted
that the motion was unnecessary and that Ceasar’s work on the
motion was not reasonably likely to benefit the estate. She noted
that Ceasar did not work on this task until after the UST’s motion
to convert the case was filed. The UST asserted that the motion
failed to identify any benefit to creditors from dismissing the
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case rather than converting it to chapter 7. The Debtor merely
blamed others for the failure of the case.
4. Finally, the UST contended that all of Ceasar’s fees for
services performed after the case was converted to chapter 7
should be denied. She cited Lamie v. United States Trustee, 540
U.S. 526 (2004) for the proposition that a debtor’s attorney may
not be paid by the bankruptcy estate for work done during a
chapter 7 case. T h e U S T a l s o made two non-work related
objections. First, she noted that the Fee Application contained
the following ambiguous statement on page 2, line 2 “Costs to be
applied toward fees.” The UST asked that this statement be
explained, particularly in light of the fact that the Fee
Application did not seek reimbursement of any costs. Second, the
UST noted that Ceasar had not certified that the Fee Application
complied with the Court’s Fee Guidelines. She asked that all fees
be disallowed until a certification was filed.
C. REPLY
Ceasar filed a reply to the UST’s objection to the Fee
Application. Her reply reiterated accusations made against the
UST during the case: i.e., that the Trial Attorney for the UST had
a personal vendetta against her and Phillips which was motivated
by racial bias. She contended that she could not have known that
the chapter 11 bankruptcy case was not viable when it was filed.
To the contrary, she argued that the Debtor wanted to reorganize
and pay creditors. However, the harassment the Debtor received
from the UST made the process too costly.
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3This comment reflects Ceasar’s inexperience in chapter 11.
A chapter 11 debtor-in-possession is a fiduciary for its
creditors and is not entitled to an unfettered choice of
counsel. The Bankruptcy Code requires the Court, in approving
the employment of a debtor-in-possession’s counsel, to conclude
that the employment of the counsel in question will be in the
best interests of the estate and its creditors, not just in the
best interests of the debtor.
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Ceasar characterized as ridiculous the UST’s objection to her
being employed to represent the Debtor based on lack of experience
with chapter 11 work. She insisted that she had the right to
practice law in any area despite any prior experience. She stated
that she has been practicing law since 1992 and had never had her
right to represent a client challenged based on lack of
experience.3 She contended that her fees would have been less had
this ridiculous challenge not been raised by the UST. She blamed
the Court’s lack of clarity in directing her to submit the
proposed form of order for her delay in obtaining the retention
order. She also blamed her lack of familiarity with the Court’s
electronic filing system, which had recently been made mandatory.
Finally, she asserted that the application should be deemed
granted on the date the Court granted it orally.
With respect to the work done with respect to the employment
applications, she argued that these fees were incurred because of
the attorney for the UST, not by Phillips. She objected to any
reduction of these fees. Finally, she stated that she was unaware
of any requirement that an attorney file a certification of
compliance with the Court’s Fee Guidelines.
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D. DECISION
1. Request That Fees Be Disallowed in Their Entirety
The Court will not deny the Fee Application in its entirety
on the ground that Ceasar should have known that the chapter 11
bankruptcy case had no chance of success. The Court agrees with
the UST that fees may be denied on this basis if the attorney knew
or should have known that this was so. However, the record
concerning the attorney’s knowledge must be clear. The record is
insufficient to permit the Court to conclude that Ceasar knew or
should have known from the inception of the chapter 11 case that
the Debtor would be unable to reorganize.
While at some point the Court learned that Langley, the
Debtor’s responsible person, “disassociated” herself with the
Debtor and “associated” herself with another construction company
shortly after the case was filed, it is not clear when Ceasar
learned this fact. The Court is under the impression that the
Debtor still had employees and was still performing work for
several months after the chapter 11 was filed. The Debtor
apparently bounced eighteen checks during the fall of 2004.
However, it has not been established that Ceasar knew this nor
does the Court have a clear picture of the Debtor’s overall
financial condition when it filed the chapter 11 case.
The case cited by the UST--Coones Ranch–-is distinguishable.
First, it is a classic “new debtor syndrome” case. There, after
a secured creditor had obtained relief from the automatic stay in
an individual’s personal bankruptcy case, the individual formed a
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4The Court may make adjustments to the product of these two
numbers, taking into account unusual factors in the case. The
Fee Application appears to argue for an increase in the
calculation due to the complexity of the issues and the
preclusion from accepting other representation. The Court finds
neither of these arguments persuasive.
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corporation, transferred the encumbered real property to it, and,
with the assistance of an attorney, filed a chapter 11 petition on
its behalf. The debtor had no employees and no business
operations. Coones Ranch, 7 F.3d at 741-43. Moreover, in Coones
Ranch, the bankruptcy court conducted an evidentiary hearing
before concluding that the sanctions in question were appropriate.
2. Request That Fees Be Allowed in Reduced Amount
Before addressing the UST’s objections to specific categories
of Ceasar’s fees, the Court must discuss the methodology to be
used in calculating the fees allowed. In determining reasonable
fees to be awarded to a court approved professional in a
bankruptcy case, the Court is generally required to use a
“lodestar” analysis. This requires the Court first to determine
the reasonable hourly rate. Then, the Court must determine the
reasonable time spent on necessary and beneficial tasks. The fee
award is generally a multiple of those two determinations.4 In
re Dawson, 390 F.3d 1139, 1152 (9th Cir. 2004)(affirming award
calculated at rate of $200 per hour).
Ceasar represented that her normal billing rate is $300 per
hour. Ceasar’s legal services may warrant this hourly rate in an
area of the law where she has experience. However, Ceasar
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5As noted above, the Court did not consider ridiculous the
UST’s objections to Ceasar’s employment by the Debtor based on
lack of experience. However, Ceasar represented herself to the
Court as willing to educate herself so as to represent the
Debtor properly. She seemed competent and sincere, and the
Court was willing to give her a chance.
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admitted that she had never represented a chapter 11 debtor
before. The quality of her performance reflected this
inexperience.5 However, the hourly rate used for the Court’s
“lodestar” calculation should reflect Ceasar’s lack of experience.
The Court concludes that the reasonable hourly rate for Ceasar’s
services in this case is $225.
The Court will now evaluate the time reasonably spent on
necessary and beneficial tasks.
(1) Service Performed Prior to Retention Order
The Court does not believe that prevailing law requires the
Court to disallow a chapter 11 attorney’s fee request for work
performed before a retention order is obtained. The Court
believes that prevailing law requires the Court to disallow an
attorney’s fee request for work performed before the attorney has
applied for approval of her employment. See In re Downtown
Investment Club III, 89 B.R. 59, 63 (Bankr. 9th Cir.
1988)(employment application not filed until nearly five years
after case filed).
Moreover, counsel for a chapter 11 debtor-in-possesion counsel
is generally allowed fees for services performed during the first
few weeks of the case as long as the employment application is
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filed promptly. This case was filed on September 16, 2004.
Ceasar’s employment application was filed on October 6, 2004. The
Court sees no ground for disallowing any fees incurred as a result
of the this brief delay in filing the employment application.
However, the Court will disallow the fees requested for the
time spent in connection with the motion for reconsideration of
Ceasar’s employment application and objecting to the UST’s form of
order on the ground that it did not include a provision permitting
her to be employed. The Court agrees with the UST that Ceasar
should not have permitted herself to become embroiled in Phillips’
problems. Had the Debtor simply sought to employ Ceasar alone,
very likely, the application would have been granted without a
hearing. The Court also believes that its oral direction in
court, requiring Ceasar to submit a proposed retention order was
clear and that her objection to the form of the UST’s order was
neither necessary nor beneficial. The Court calculates the time
spent on these two tasks as 5.6 hours. Thus, these hours will be
subtracted from the total used in calculating the fee award.
(2) Work Performed in Connection with Phillips’ Employment
Application
The Court agrees with the UST that all of the time spent by
Ceasar in connection with Phillips’ employment application should
be disallowed. Given the prior ban on Phillips’ employment by
debtors-in-possession, Ceasar should have anticipated that this
application would be denied. Her services in this respect did not
benefit the estate and were not reasonably likely to do so. The
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UST has calculated the fees for this task to be $2,752 or
approximately 9.2 hours in time spent. Ceasar has not challenged
this calculation. Thus, the Court will disallow 9.2 hours of time
spent with respect to this objection.
(3) Preparation of Motion to Dismiss Case
The UST contended that Ceasar’s fees for drafting the motion
to dismiss should be denied. She noted that the motion identified
no way in which the creditors would be benefitted by the
dismissal. She observed that the motion blamed everyone but the
Debtor for the Debtor’s problems. The Court agrees that no fees
should be allowed for this task and that the motion was not
reasonably likely to benefit creditors.
The Court also agrees that the Debtor inappropriately blamed
others for its problems. In fact, the Debtor caused its own
problems by failing to file timely and proper monthly operating
reports and by failing to submit reports and pay employee
contributions to the Trust Funds. As a result, the Trust Funds
“pulled” its employees from the Debtor’s jobs. Dismissing the
case would not have benefitted anyone and could have harmed
creditors. There was no business left to save, but there may have
been assets to preserve. These assets were more likely to be
preserved for creditors in a chapter 7 than if the case were
dismissed.
The UST has calculated the fees for this task to be $3,450
or approximately 11.5 hours in time spent. Ceasar has not
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26 6The Court’s Fee Guidelines are posted on the Court’s
website.
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challenged this calculation. Thus, the Court will disallow 11.5
hours of time spent with respect to this objection.
(4) Post-Conversion Services
The UST is correct that the United States Supreme Court has
held that a debtor’s attorney may not receive any payment for work
performed while the case is in chapter 7. See Lamie v. United
States Trustee, 540 U.S. 526 (2004). Therefore, all of Ceasar’s
fees for work performed after conversion will be disallowed. The
UST calculated these fees to be $2,250 or approximately 7.5 hours
in hours spent. Ceasar has not challenged this calculation.
Thus, the Court will disallow 7.5 hours of time spent with respect
to this objection.
(5) Miscellaneous Objections
In response to the UST’s objection that Ceasar had not filed
a certification of compliance with the Court’s Fee Guidelines,
Ceasar responded that she was not aware of the requirement.6
However, she did nothing to cure this deficiency. Nevertheless,
in this case only, due to the uncertainty at this time concerning
the availability of funds to pay any chapter 11 administrative
expenses, the Court will not require Ceasar to file the
certification. The Fee Application is sufficiently clear to
permit the Court to evaluate the reasonableness of Ceasar’s fee
request.
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Ceasar did not attempt to clarify the ambiguous statement
regarding costs noted by the UST. The Court speculates that
Ceasar meant to say that the Debtor had agreed that the $3,300
pre-petition retainer could be applied to either fees or costs.
The Court bases this conclusion on a review of the various
representations concerning the pre-petition retainer during the
course of the case.
The Debtor’s answer to question 9 in the Statement of
Financial Affairs stated that Ceasar received a pre-petition
retainer of $2,500 for fees and $800 for costs. Ceasar’s Rule
2016(a) statement and employment application both stated that she
had received a pre-petition retainer of $2,400 for fees and $900
for costs. The Fee Application represented that Ceasar had
incurred $1,084.16 in costs. Since this amount was in excess of
either of the two amounts previously designated for costs, without
an agreement that the retainer could be applied to either fees of
costs, the Fee Application would be seeking reimbursement of a
small amount of costs. It does not. If the Court has
misunderstood the meaning of this ambiguous statement, Ceasar
should enlighten both the UST and the Court.
CONCLUSION
Ceasar represented that she performed 116.5 hours of legal
services. The Court has concluded that 33.8 hours of these
services were not necessary or reasonably likely to benefit the
estate. As a result, the Court will allow fees for only 82.7
hours. The Court has concluded that a reasonable hourly rate for
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the services provided is $225. Thus, fees in the amount of
$18,607.50 will be allowed. Ceasar received a pre-petition
retainer of $3,300 which she applied to reimburse costs of $1,084
and fees of $2,215.84. Thus, her unpaid fees total $16,391.66.
Ceasar is directed to submit a proposed form of order allowing
fees in this amount as a chapter 11 expense of administration.
END OF DOCUMENT
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COURT SERVICE LIST
Sharon L. Ceasar
Law Offices of Sharon L. Ceasar
125 University Ave.
Berkeley, CA 94170
Minnie Loo
U.S. Department of Justice
Office of the United States Trustee
1301 Clay St., Ste. 690-N
Oakland, CA 94612-5217
Lois I. Brady
Chapter 7 Trustee
350 Frank H. Ogawa Plaza
Suite 702
Oakland, CA 94612
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