Dick Bruhn, Inc.

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For The Northern District Of California
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UNITED STATES BANKRUPTCY COURT
NORTHERN DISTRICT OF CALIFORNIA
SAN JOSE DIVISION
In re 	Case No. 07-51338-RLE
DICK BRUHN, INC.,
Debtor. 	Chapter 	11
__________________________________/
MEMORANDUM DECISION RE PRE-EMPLOYMENT FEES OF
UNSECURED CREDITORS’ COMMITTEE COUNSEL, MURRAY & MURRAY
I. 	INTRODUCTION
On December 5, 2007, the Court held a hearing on the 1st Interim Application for
Compensation and Reimbursement of Expenses for Attorneys for the Unsecured Creditors’
Committee, Murray & Murray (“M&M”). At the hearing, the Court indicated its intent to deny
$18,337.50 in fees billed between May 4, 2007 and May 18, 2007, on the grounds that they were for
services provided prior to the Court’s approval of M&M’s employment in this case and prior to
M&M being chosen as counsel for the Unsecured Creditors’ Committee. In response, M&M
provided the Court with a citation to In re Service Merchandise Co., 256 B.R. 738 (M.D. Tenn.
1999), which M&M believed supported its entitlement to these fees. The Court advised M&M that
it would review the case and issue an order.
The following constitutes
the order of the court. Signed December 12, 2007
________________________________________
Roger L. Efremsky
U.S. Bankruptcy Judge	________________________________________
Entered on Docket
December 12, 2007
GLORIA L. FRANKLIN, CLERK
U.S BANKRUPTCY COURT
NORTHERN DISTRICT OF CALIFORNIA
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II. 	FACTUAL BACKGROUND
This bankruptcy case was filed on May 4, 2007. An official committee of unsecured
creditors was appointed by the United States Trustee on May 17, 2007 (the “Committee”). Review
of the billing records and narrative provided by M&M in connection with its First Interim Fee
Application reveals that M&M was retained by unnamed creditors on or about May 4, 2007.
Review of the billing records also reveals that M&M was chosen as counsel for the Committee on
May 18, 2007, one day after the Committee was appointed.
M&M filed its Employment Application on June 1, 2007 (the “Employment Application”).
The Order employing M&M as counsel for the Committee was entered on June 6, 2007 (the
“Employment Order”). The Employment Application did not request, and the Employment Order
did not make M&M’s employment nunc pro tunc to a specified date, nor did either document state
an effective date.
M&M’s First Interim Fee Application was filed on or about November 15, 2007 (the “Fee
Application”). The Fee Application contains $18,337.50 in fees for services rendered by M&M
prior to the date that it was chosen to represent the Committee (“Pre-Employment Entries”). The
narrative portion of the Fee Application states that the Pre-Employment Entries include “fees
relative to [M&M’s] efforts to assist in the formation and organization of an ad hoc creditors’
committee which was active in the case prior to the appointment of the [Committee], and then
relative to the formation and organization of the [Committee]. . . . An ad hoc committee was formed
on May 9, 2007, and the [Committee] was appointed on May 17, 2007.” The narrative provides
very little detail as to the services provided, and whether those services benefitted the estate or
simply served to solidify M&M’s chances to be named counsel for the Committee.
III. 	DISCUSSION
It is well known that in a bankruptcy proceeding, professionals cannot recover fees for
services rendered to the estate unless those services have previously been authorized by court order.
In re Atkins, 69 F.3d 970, 973 (9th Cir. 1995) (citations omitted). In exceptional circumstances, the
Bankruptcy Court possesses the equitable powers to retroactively approve a professional’s services.
Id. at 973-74 (citations omitted). The necessity for strict compliance with the requirement for Court
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authorization was articulated by the Bankruptcy Court in In re Garland Corp., which stated,
There is one absolute basic condition precedent to any fee application. There must be Court
authorization prior to the services being rendered for both the person and the services. That
counsel cannot be paid for unauthorized services rendered is a hard and fast, albeit somewhat
harsh to the ignorant volunteer, rule of bankruptcy law, made necessary if the Court is to
maintain control of costs.
In re Garland Corp., 8 B.R. 826, 828-29 (Bankr. Mass. 1981). Here, M&M did not seek Court
approval prior to commencing services. In addition, M&M did not request that the Court employ its
equitable powers to approve M&M’s employment nunc pro tunc. Thus, without more, the Court
sees no basis to award M&M its pre-employment fees.
In re Service Merchandise Co. does not lead to an alternate conclusion. In In re Service
Merchandise Co., debtor filed a voluntary petition. Prior to the filing, counsel represented a group
of creditors. Following the filing, counsel was chosen to represent the unsecured creditor’s
committee. Approximately two weeks after the bankruptcy filing, committee counsel sought
approval of its employment. No party objected and the Court entered an order employing counsel
nunc pro tunc to the date of the bankruptcy filing.
Subsequently, counsel filed a fee application. The United States Trustee objected to the
compensation sought for the period from the date of the bankruptcy filing to the date of the order
approving counsel’s appointment. The Court overruled the United States Trustee’s objection,
finding that the nunc pro tunc employment order provided a sufficient basis to award fees from the
filing date under § 330. In re Service Merchandise Co., 256 B.R. at 741. The Court also found that
even if it could not award fees and expenses under § 330, counsel demonstrated that it was entitled
to those fees under a § 503(b) substantial contribution analysis. Id. The Court eventually granted
fees under §§ 503(b)(3) and (b) (4). Id. at 743.
The relevant facts of In re Service Merchandise Co. differ from the facts of this case. These
differences are crucial to the outcome. First, in In re Service Merchandise Co., the employment
order was nunc pro tunc to the filing date. Here, however, the Employment Application did not
request that M&M’s employment be approved nunc pro tunc. In fact, there is no effective date on
the Employment Application or the Employment Order. Thus, there is nothing on the docket that
supports M&M’s entitlement to pre-employment fees.
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Second, in In re Service Merchandise Co., counsel sought fees only from the effective date of
its employment pursuant to the employment order. Here, however, M&M seeks fees for a period
well before the date of the Employment Order. A strict interpretation of In re Service Merchandise
Co. would result not only in a disallowance of $18,337.50 in fees for the time period from May 4
(date of initial services) through May 18 (date M&M was chosen as counsel for the Committee), but
in an additional disallowance of $16,917 in fees billed between May 18 and June 6 (the date that the
Employment Order was actually entered). In lieu of such strict interpretation, however, the Court
has used its discretion to disallow only the $18,337.50 in fees billed prior to the date that M&M was
chosen to act as committee counsel.
This case is substantially different from In re Service Merchandise Co. in one other
important respect. There, the Court found that counsel had demonstrated that its pre-employment
services provided a substantial benefit to the estate, thus the fees were awardable under § 503(b).
Here, there has been no showing of substantial contribution.
Section 503 “represents an accommodation between the twin objectives of encouraging
‘meaningful creditor participation in the reorganization process [and] keeping fees and
administrative expenses at a minimum so as to preserve as much of the estate as possible for the
creditors.’” Lebron v. Mechem Financial, Inc., 27 F.3d 937, 944 (3rd Cir. 1994) (internal citations
omitted). The principal test of a substantial contribution claim under § 503 is the “extent of benefit
to the estate.” In re Cellular 101, Inc., 377 F.3d 1092, 1096 (9th Cir. 2004) (citations omitted). The
inquiry is fact-specific and the relevant question is whether the services resulted in a direct, material
and demonstrable benefit to the estate. In re Celotex Corp., 227 F.3d 1336, 1339 (11 th Cir. 2000); In
re Pow Wow River Campground, 296 B.R. 81, 86 (Bankr. D. N.H. 2003); In re D.W.G.K.
Restaurants, Inc., 84 B.R. 684, 690 (Bankr. S.D. Cal. 1988). “Inherent in the term ‘substantial’ is
the concept that the benefit received by the estate must be more than an incidental one arising from
activities the applicant has pursued in protecting his or her own interests. Creditors are presumed to
be acting in their own interests until they satisfy the court that their efforts have transcended self-
protection.” 	Lebron v. Mechem Financial, Inc., 27 F.3d at 944 (citing In re Solar Mfg. Corp., 206
F.2d 780, 781 (3rd Cir. 1953)). An applicant under § 503(b) has the burden of establishing its
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entitlement to an award by a preponderance of the evidence. In re Crazy Eddie, Inc., 120 B.R. 273,
278 (Bankr. S.D. N.Y. 1990).
The only evidence currently in front of the Court is M&M’s Fee Application; specifically,
the one paragraph narrative that corresponds to many of the Pre-Employment Entries. This
paragraph states that the ad hoc committee was “active” prior to the formation of the Committee.
However, it fails to state how the ad hoc committee was active, and how its activities provided an
actual, demonstrable benefit to the estate. Further, the paragraph states that M&M was active
relative to the formation and organization of the Committee. However, pursuant to § 1102,
Committee formation is solely the responsibility of the United States Trustee. Thus it is unclear
what benefit, if any, these services provided to the estate. The narrative is devoid of any other
substantive information. As a result, the Court finds that the Fee Application contains insufficient
information to support a § 503(b) claim. The Court does not take a position as to whether M&M can
support a claim; but only finds that M&M has not done so at this juncture. Any future attempts to
seek a § 503(b) claim would require M&M to address how its services benefitted this estate, as
opposed to solidifying M&M’s chances of being chosen as Committee counsel.
For the reasons stated at the hearing on this matter and in this Memorandum, the Court
disallows $18,337.50 in Pre-Employment Entries on the ground that they were for services provided
prior to M&M being chosen as counsel for the Unsecured Creditor Committee. A breakdown of the
disallowed fees is attached hereto as Exhibit A. Disallowance of the fees is without prejudice to
M&M filing a motion seeking the fees under § 503(b)(3). A separate order to that effect is being
issued concurrent with this Memorandum Decision.
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6	Memorandum Decision re Pre-Employment Fees of UCC Murray & Murray
Exhibit A
The “Exhibits” below refer to the Exhibits attached to the Murray & Murray fee application. The
$18,337.50 in disallowed Pre-Employment Entries are made up of the following:
Exhibit B: Fifteen entries totaling $12,384, dated between 5/4 and the entry on 5/18 where
Murray & Murray spoke with Attorney Hart regarding counsel selection.
Exhibit C: Two entries totaling $792, dated 5/11 and 5/16.
Exhibit D: Four entries totaling $495, dated 5/9, 5/10, 5/11 and 5/15.
Exhibit E: Two entries totaling $855, dated 5/5 and 5/8.
Exhibit F: Four entries totaling $2,475, dated 5/9 and 5/10.
Exhibit H: One entry totaling $99, dated 5/16.
Exhibit I: Five entries totaling $643.50, dated 5/7, 5/10, 5/11 and 5/14.
Exhibit L: Two entries totaling $198, dated 5/10 and 5/14.
Exhibit V: One entry totaling $396, dated 5/9.
* * * * * * * * 	END OF MEMORANDUM DECISION 	* * * * * * *
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7	Memorandum Decision re Pre-Employment Fees of UCC Murray & Murray
Court Service List
William C. Lewis
Law Offices of William C. Lewis
510 Waverly St.
Palo Alto, CA 94301
Christine H. Long
Law Offices of Berliner and Cohen
10 Almaden Blvd. 11th Fl.
San Jose, CA 95113-2233
John Walshe Murray
Murray & Murray
A Professional Corporation
19400 Stevens Creek Blvd., Suite 200
Cupertino, CA 95014-2548
John S. Wesolowski, Esq.
Office of the U. S. Trustee
280 So. First Street, Rm. 268
San Jose, CA 95113-3099
Susan L. Uecker
Uecker and Associates Inc.
100 Pine St. #475
San Francisco, CA 94111
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