Kitts Development LLC, a New Mexico Domestic Limit

UNITED STATES BANKRUPTCY COURT
DISTRICT OF NEW MEXICO
In re: 	KITTS DEVELOPMENT, LLC, 	No. 11-11-14054 JA
Debtor.
MEMORANDUM OPINION
THIS MATTER is before the Court on the First and Final Application by Attorneys for
Debtor-in-Possession for Allowance and Payment of Compensation as a Chapter 11
Administrative Expense for the Period September 13, 2011 through January 20, 2012 (“Fee
Application”) filed by the law firm of William F. Davis & Assoc., P.C. (“Attorneys”) as counsel
for Kitts Development, LLC (“Kitts Development,” “Kitts,” or the Debtor). 	See Docket No. 87.
The United States Trustee objected to the Fee Application (Docket No. 90), and, following a
final, evidentiary hearing on the Fee Application held June 11, 2012, the Court took the matter
under advisement.
Attorneys seek allowance as an administrative expense the sum of $21,187.83, consisting
of post-petition professional services in the amount of $19,584.00, costs and expenses in the
amount of $232.91, and applicable gross receipts taxes in the amount of $1,370.82. Of the
$30,000.00 retainer received by the Attorneys from Kitts Development, $1,534.71 currently
remains held in the Attorneys’ trust account. See Fee Application, ¶ 1.1 The Debtor’s
bankruptcy case ended in dismissal in conjunction with stay relief granted to U.S. Bank National
Association (“U.S. Bank”), the Debtor’s largest creditor. See Docket Nos. 80 and 81. The
United States Trustee challenges the reasonableness of the requested fees on grounds that the
fees were not reasonably likely to benefit the debtor’s estate, arguing that the surrounding facts
1Pre-petition fees in the amount of $14,058.34 were earned and paid in full prior to the filing of the Debtor’s
bankruptcy case. See Fee Application, ¶ 1. The United States Trustee did not object to the pre-petition fees and
costs. See United States Trustee’s Objection to First and Final Application by Attorneys for Debtor in Possession
(“Objection”), p. 5, n.3. (Docket No. 90).
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and circumstances amply suggested that the Debtor had no reasonable prospect of reorganizing
in a reasonable time. After consideration of the Fee Application, the evidence, and the testimony
presented at the final hearing, and being otherwise sufficiently informed, the Court finds that, at
the time the case was filed, and throughout the Attorneys’ representation of the Debtor in the
Chapter 11 case, there existed a reasonable possibility of success in the bankruptcy case
sufficient to meet the standard for an award and payment of compensation under 11 U.S.C. §
330.
FACTS
Kitts Development filed a voluntary petition under Chapter 11 of the Bankruptcy Code
on September 13, 2011. 	The Debtor’s Schedule A reflects the following real property: Puerto
Del Sol Project - 14 partially built 4-unit buildings; 18 improved 4-unit building lots; 1 corner
commercial lot (the “Property,” or “Puerto del Sol”). 	The Debtor scheduled a value of
$1,200,000.00 for the Property. In a motion for relief from stay, U.S. Bank asserted that the
“Property is worth no more than $1.2 million.” See Docket No. 20. The Property consists of
approximately 9.9 acres and is located off of Unser Boulevard between Southern Boulevard and
Northern Boulevard in Rio Rancho, New Mexico. The Debtor’s Schedule D reflects that U.S.
Bank holds a secured claim against the Property in the amount of $10,350,032.44. 	The Debtor’s
Schedule B reflects personal property in the aggregate total amount of $185,261.98. The
Debtor’s scheduled unsecured non-priority claims totaled over $1,000,000.00.
Pre-petition, U.S. Bank had obtained a final judgment against Kitts Development, and its
principal, Thomas G. Joseph, in the principal amount of $8,468,087.03, plus interest, late fees
and loan fees. See UST-Exhibit 3. The judgment provided for foreclosure of U.S. Bank’s
mortgage against the Property, and directed that the Property be sold by a special master. Id.
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U.S. Bank scheduled a foreclosure sale for September 14, 2011. See UST- Exhibit 4. 	Kitts
Development filed its bankruptcy case the day before the scheduled sale.
The Attorneys had several meetings with Thomas Joseph, president of Kitts
Development, prior to the filing of the bankruptcy case. 	Mr. Davis testified that Mr. Joseph led
him to believe that with sufficient time, it would be possible to reorganize Kitts Development
and make money for the estate, that Kitts had located an interested investor, and that they were
close to reaching an agreement. Mr. Davis testified that there were three possible approaches for
the Debtor in the Chapter 11 case: 1) investors would refinance Kitts’ indebtedness to U.S. Bank
and put money in Kitts to redevelop the project as originally envisioned; 2) investors would
purchase from U.S. Bank the notes made by Kitts payable to U.S. Bank; or 3) investors would
buy the Property from U.S. Bank. 	Mr. Joseph had been seeking potential investors for two
years prior to the filing of the bankruptcy case and while the foreclosure suit was moving
forward, without success. 	But by the end of July of 2011, Mr. Joseph communicated to the
Attorneys a summary of a potential agreement reached with Myriad Group and G6 Development,
LLC. 	See Exhibits C and D. An e-mail communication from Myriad Group includes the
following information about the terms of the potential agreement:
- 	that Myriad Group and its principle [sic.], Jonathan Lee, is attempting to purchase
notes and mortgages from US Bank;
- 	that Puerto Del Sol is the collateral for the notes;
- 	that the Myriad Group will foreclose the property to obtain a clear title;
- 	that the Myriad Group will enter into a management agreement with G6
Development, LLC to complete the project and finish all site work, including
infrastructure;
- 	that the Myriad Group will provide all the money necessary to finish the project and
G6 Development, LLC will manage the project;
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- 	that the corner commercial lot will be used as part of the funds needed to buy the
notes from US Bank, but if such lot is not used, the Myriad Group and G6
Development will own the lot jointly;
- 	that once the Myriad Group completes the purchase of the notes from U.S. Bank, full
compensation will be due to G6 Development, LLC; and
- 	that G6 Development, LLC will have 50% ownership in the corner commercial lot.
See Exhibit D.
As requested by Mr. Joseph, the Attorneys prepared a draft Construction Management
Agreement (the “Draft Agreement”) between Myriad Group, Inc. (“Myriad Group”), as buyer,
and G6 Development, LLC, as manager, regarding Myriad Group’s pursuit of purchasing from
U.S. Bank the mortgage on the Property and the related promissory notes. See Exhibit E. G6
Development, LLC is a limited liability company for which Thomas Joseph’s son, Gabriel
Joseph, is principal. Testimony of Mr. Joseph. The Draft Agreement reflects that Thomas
Joseph is managing member of G6 Development, LLC. See Exhibit E. 	The Draft Agreement
provides that Myriad Group would refinance the mortgage to U.S. Bank currently in the name of
Kitts Development, and forgive Kitts Development’s obligations under the notes. G6
Development, LLC would receive a construction management fee of $2,000,000. The Draft
Agreement provides further that the corner commercial lot would be sold to purchase the
promissory notes from U.S. Bank, and that Myriad Group would receive ½ of Kitts
Development’s interest in the corner commercial lot. Id. Alternatively, the corner lot would be
pledged to U.S. Bank as collateral for the purpose of refinancing the mortgage. Id. 	Kitts was
not able to complete a deal with Myriad Group.
Post-petition, Kitts Development, through Mr. Joseph, continued to seek potential
investors who might be interested in purchasing the notes and mortgage against the Property
from U.S. Bank. 	Mr. Joseph continued to send communications to the Attorneys regarding
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potential investors. See, e.g., e-mail dated October 20, 2011 from Thomas Joseph to William
Davis (Exhibit G), stating that “Lance Cone will make the offer . . . . Once his offer is in place
I’ll work on the group from Canada as well as others. . . . I would like to bring Lance in to talk
with you about his role.”; e-mail dated December 9, 2011 from Thomas Joseph to William Davis
(Exhibit J), regarding potential interest of Russell Oates at First Service Commercial Loans and
Rick O’Brien from another group in purchasing the note. 	In December of 2011, Mr. Joseph sent
Mr. Davis an e-mail with a breakdown of estimated income and costs, stating that “this plan
generates $700,000 in income for the creditors, bank and unsecured,” but that “the cost of
completing infrastructure negates income from the sale of 18 lots,” and that “the profit wouldn’t
justify the risk in this particular type of project.” Exhibit H. 	The following day, Mr. Joseph
sent Mr. Davis a revised cash flow projection for construction and revenue relating to the
Property. See Exhibit I. That scenario included U.S. Bank giving a substantial discount on its
claim and payment of $150,000.00 to unsecured creditors. Kitts Development was never able to
secure a buyer for the notes, and never obtained a signed proposal from an investor or lender.
Mr. Joseph testified at the final hearing that in order to move forward with a potential
redevelopment of the Property through investors, he believed that an appraisal was needed so
that the value of the Property could be established, and that, without an appraisal, there would be
no chance to go forward or succeed at anything. 	Kitts Development did not obtain an appraisal
of the Property during the pendency of the bankruptcy case. 	Nor did Kitts Development obtain
an appraisal before the filing of the bankruptcy case. It is possible that potential investors would
have obtained an appraisal of the Property on their own. 	Mr. Davis testified that the issue of an
appraisal did not come up prior to the filing of the bankruptcy case. 	After the bankruptcy case
was filed, Mr. Davis believed that an appraisal would be useful in conjunction with a plan of
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reorganization, not as a necessary requirement to induce investors to purchase the notes. He
believed that investors who had already been negotiating with Kitts Development prior to the
filing of the bankruptcy case probably would have already obtained an appraisal if they wanted
one.
On October 24, 2011, approximately six weeks after Kitts Development filed its
bankruptcy case, U.S. Bank filed a Motion to Dismiss, a Motion for Relief from Stay, and a
Motion for Determination that the Debtor is Subject to 11 U.S.C. § 362(d)(3) (together, the
“Motions”). See UST Exhibit 2. On January 20, 2012, the Court entered an order granting
Attorneys’ motion to withdraw as counsel for the Debtor.2 At the final hearing on the Motions
held on February 7, 2012, 3 the Court made the following findings:
a) that the Debtor has no equity in the Property and the Property is not necessary
to an effective reorganization;
b) that the Property is substantially all of the property in the Debtor’s bankruptcy
estate;
c) that it is a particular challenge for a debtor to get a plan confirmed where the
amount of the secured debt is nearly ten times the value of the collateral;
d) that where the lender is so under-collateralized, it would be difficult for a
debtor to convince the Court to grant a lien for new money with seniority over U.S.
Bank’s lien;
e) that it would be difficult for a debtor to obtain financing by granting a junior
lien where there is no equity in the collateral for the debtor;
2 After the bankruptcy case was filed, the Attorneys’ relationship with Kitts Development’s principal, Thomas
Joseph, deteriorated to the point that the Attorneys sought to withdraw as counsel of record for the Debtor. See
Docket No. 50. The Court granted the Attorneys’ motion to withdraw as counsel after notice and a hearing, and
continued the final hearing on U.S. Bank’s pending motions from January 20, 2012 to February 7, 2012 to afford the
Debtor a further opportunity to retain new counsel. See Order Vacating and Rescheduling Hearing on Pending
Motions Filed by U.S. Bank and Amending Scheduling Deadlines – Docket No. 57; and Order Granting Motion of
William F. Davis & Assoc., P.C. to Withdraw as Counsel for Debtor – Docket No. 58.
3 Kitts Development did not appear at the final hearing because it was unable to retain new counsel. By local rule, a
debtor corporation or limited liability company is required to appear before the Court through counsel. See NM-
LBR 1074-1.
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f) that there has been no suggestion that the Debtor was in a position to raise
equity capital;
g) that the exclusivity period set forth in 11 U.S.C. § 1121(b) for the Debtor to file
a plan of reorganization expired and the Debtor had not filed a plan; and
h) that the Debtor has no reasonable prospect of reorganizing this case within a
reasonable time.
See Transcript of Court’s Ruling from Hearing held February 7, 2012 - UST – Exhibit 1.
The Court granted U.S. Bank’s Motion for Relief from Stay and dismissed the Debtor’s
bankruptcy case, noting that, having granted relief from the automatic stay, “there is really
nothing productive at this point that the Debtor could potentially accomplish by remaining in
Chapter 11.” UST – Exhibit 1, p. 8, lines 17 - 19.
Jeffery Speidel, who was qualified as an expert in commercial development for loan and
investment purposes inside and outside the bankruptcy context, testified on behalf of the United
States Trustee at the final hearing on the Fee Application. He testified that the Property has
several buildings on it, but that it appears the Property has been abandoned, that many of the
buildings have been vandalized, and that it would take a lot of refurbishment to get the Property
into a saleable condition. In his opinion, he would not recommend to a bank redevelopment of
the Property unless there were some substantial paydown on the notes, and that it appeared to
him that U.S. Bank “overfunded” the loan based on the percentage completion of the project.
Based on his projected cost to complete the project, which was premised on a national average
cost per unit for apartment units, Mr. Speidel opined that there would need to be a significant
discount on the loan to make the project feasible. In making his calculations, Mr. Speidel made
no adjustments to the national average per unit sales price to account for the nature or quality of
the improvements, locality, or otherwise. Nor did Mr. Speidel’s calculations consider the corner
commercial lot on the Property. 	When posed with a hypothetical scenario whereby an investor
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would be willing to pay $5,000,000 to purchase a $10,000,000 loan from U.S. Bank secured by
Property having a market value of $1,500,000, Mr. Speidel testified that he would have to
present such a proposal to the committee at the bank. When pressed as to whether he would
recommend that type of arrangement, he ultimately agreed that if an investor actually paid
$5,000,000 for the notes, he would recommend the sale.
The billing records submitted by the Attorneys in support of the Fee Application reflect
several pre-bankruptcy client meetings; research concerning standing to enforce promissory
notes after sale by the Federal Deposit Insurance Company as receiver for an insolvent bank;
preparation of statements and schedules; attendance at meeting of creditors; preparation and
review of monthly operating reports; research relating to defense of a motion for relief from stay;
communication with counsel for U.S. Bank regarding the motion for relief from stay and motion
to dismiss; post-petition communications with the Debtor; preparation of an application to
employ appraiser; preparation of the motion to withdraw as counsel for the Debtor; and
preparation of the Fee Application. The Billing Summary reflects that a total of $8,141.50 in
attorneys’ fees was billed for work relating to Chapter 11 Administration, and $4,740.00 in
attorneys’ fees was billed for work relating to a plan and disclosure statement. The work relating
to the plan and disclosure statement from the January 2012 billing statement is described as
follows: review of e-mails sent by Mr. Joseph; telephone conferences with Mr. Joseph;
telephone conferences with Mr. Joseph and potential investors. The Debtor never filed a
disclosure statement, and never filed a plan of reorganization. At the time the Debtor’s
bankruptcy case was dismissed, the exclusivity period within which the Debtor could have filed
a plan had expired.
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DISCUSSION
The Standards for Awarding Compensation to Counsel for a Chapter 11 Debtor in
Possession
Attorney compensation is governed by 11 U.S.C. § 330, which provides that counsel for
the Debtor may be awarded “reasonable compensation for actual, necessary services” and
“reimbursement for actual, necessary expenses.” 11 U.S.C. § 330(a)(1)(A) and (B). 	The Court
has discretion to award compensation less than the amount requested. 11 U.S.C. § 330(a)(2).
The party seeking an award of compensation bears the burden of demonstrating that the services
provided were actual, necessary, and beneficial to the estate.4 Compensation cannot be awarded
in a Chapter 11 case for services that were neither “reasonably likely to benefit the debtor’s
estate” nor “necessary to the administration of the case.” 	11 U.S.C. § 330(a)(4)(A)(ii)(I) and
(II). See also, In re Lederman Enterprises, Inc., 997 F.2d 1321, 1323 (10th Cir. 1993)(stating
that “[a]n element of whether the services were ‘necessary’ is whether they benefitted the
bankruptcy estate.”)(citations omitted).
In Lederman Enterprises, the Tenth Circuit determined that in a Chapter 11 case a court’s
assessment of fees under 11 U.S.C. § 330 requires a two- step process: 1) the court must first
determine whether the post-petition services are necessary, i.e, whether the services were
reasonably likely to benefit the estate; and 2) if so, were the services reasonable. See Lederman,
997 F.2d at 1323 (stating that “the beneficial nature of legal services must be determined before
a reasonableness inquiry may be conducted . . .”). Thus, in a Chapter 11 case, whether the
services benefitted the estate and therefore were necessary is a threshold requirement; if
4In re Smith, 317 F.3d 918, 928 (9 th Cir. 2002)(“the fee applicant must demonstrate that the services for which
compensation is sought satisfy the requirements of section 330 . . . ”), abrogated on other grounds by Lamie v.
United States Trustee, 540 U.S. 526, 531-39, 124 S.Ct. 1023, 157 L.Ed.2d 1024 (2004)); In re Berg, 268 B.R. 250,
257 (Bankr.D.Mont. 2001)(“The burden of proof to show entitlement to all fees requested from the estate is on the
applicant.”)(citation omitted).
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counsel’s services conferred no likely benefit to the estate, the fees are not compensable. See In
re Universal Factoring Co., Inc., 329 B.R. 62, 78-79 (Bankr.N.D.Okla. 2005)(stating that
Lederman established a threshold requirement and explaining further that “[u]nless the court
determines that a service was reasonably likely to confer a benefit upon the estate, the inquiry
goes no further, and the fees are not compensable.”). In Lederman, the Tenth Circuit affirmed
the bankruptcy court’s decision to deny compensation to debtor’s counsel, reasoning that,
because the debtor’s inability to successfully develop and complete a reorganization plan should
have been apparent to counsel for the debtor from the outset of the case, the work debtor’s
counsel performed was not necessary. Lederman, 997 F.2d at 1323-1324.
“Benefit” to the estate is measured in part by considering “whether the services were
necessary to the administration of, or beneficial at the time which the service was rendered,
toward the completion of, a case under this title.” 11 U.S.C. § 330(a)(3)(C)(setting forth factors
for determining the reasonableness of compensation); Universal Factoring, 329 B.R. at 79.
Benefit to the estate should be measured as of the time the services are provided, not at the time
the Court ultimately reviews the fee application.5 Fees that benefit the debtor, but not the estate
in a Chapter 11 case, are not compensable.6
Benefit to the estate for services provided by counsel for a Chapter 11 debtor in
possession is not restricted to success measured by confirmation of a plan or the prospect of
5 In re Polishuk, 258 B.R. 238, 248 (Bankr.N.D.Okla. 2001)(citing In re City Mattress, Inc., 174 B.R. 23, 26
(Bankr.W.D.N.Y. 1994) stating that “‘[t]he key issue is whether the services were necessary, not whether the
debtor’s activities were, in hindsight, necessary to achieve whatever outcome eventually occurs.”). See also, Berg,
268 B.R. at 260 (same).
6 See In re Kloubec, 251 B.R. 861, 864 (Bankr.N.D.Iowa 2000(“Attorney fee applications for debtors’ attorneys in
bankruptcy will be denied to the extent the services rendered were for the benefit of the debtor and did not benefit
the bankruptcy estate.”)(citation omitted); In re Greene, 138 B.R. 403, 408 (Bankr.S.D.N.Y. 1992)(stating that “fees
awarded to an attorney for the debtor are determined in the light of the benefits those services produced for or in
connection with the estate only, because fees are not allowed for services that benefit the debtor but not the
estate.”)(citations omitted).
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confirming a plan.7 For example, a Chapter 11 debtor can benefit the estate by maximizing value
for creditors through an orderly or emergency liquidation of assets by Section 363 sales, even if
the Chapter 11 case ultimately is converted or dismissed. Nor is benefit to the estate restricted
solely to monetary benefit. In re Crown Oil, 257 B.R. 531, 540 (Bankr.D.Mont. 2000)(citing In
re Kohl, 95 F.3d 713, 715 (8th Cir. 1996)(remaining citation omitted). Nevertheless, whether a
Chapter 11 debtor confirms a Chapter 11 plan remains a relevant factor for the Court to consider
when considering whether the services provided a benefit to the estate. In re Kile, 345 B.R. 182,
190 (Bankr.D.Ariz. 2004)(citing Crown Oil, 257 B.R. at 541)). Some courts have reduced, but
not disallowed in full, an application for compensation where counsel’s services promoted the
bankruptcy process and contributed to the administration of the estate, but did not otherwise
provide a benefit to the estate and the case ultimately converted from Chapter 11 to Chapter 7.8
Here, the United States Trustee argues that it should have been patently obvious to the
Attorneys that the Debtor would not be able to achieve success through a plan of reorganization,
given the fact that the scheduled amount of U.S. Bank’s secured claim was more than ten times
greater than the Debtor’s stated value of the Property on its schedules. The United States Trustee
relies, in part, on the Court’s findings made on the record of the hearing on U.S. Bank’s Motion
to Dismiss and Motion for Relief from Stay, including the Court’s statement that, at that stage in
the bankruptcy case, there was really nothing productive that the Debtor could accomplish in
7See Berg, 268 B.R. at 261 (stating that “[t]he fact that the Chapter 11 Plan was ultimately not confirmed does not,
by itself, bar recover of compensation for services performed in the Chapter 11 case.”)(citing Crown Oil, 257 BR. at,
541). See also, City Mattress, 174 B.R. at 26 (“Confirmation of a reorganization plan has never been a precondition
for the allowance of legal fees.”).
8See, e.g., Berg, 268 B.R. at 262 (allowing compensation for services provided by debtor’s counsel to prepare and
compile the debtor’s statements and schedules, while acknowledging that the court had the discretion to deny all
requested fees and costs in a doomed Chapter 11 case that resulted in conversion to Chapter 7); In re Old South
Transp. Co., Inc., 134 B.R. 660, 663-666 (Bankr.M.D.Ala. 1991)(reducing the amount of allowed compensation to
attorneys for debtor in possession in light of limited results obtained; debtor’s Chapter 11 reorganization efforts
failed yet counsel allowed the debtor to continue in Chapter 11 when there was no longer any likelihood of a
successful reorganization).
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Chapter 11. 	These statements are not binding on the Attorneys because they did not appear at
the hearing and had no reason to believe they needed to appear to protect approval of their
compensation. The Court’s conclusions were made in an uncontested hearing on limited
evidence. Consequently, the Court will not give preclusive effect to its findings made in its
ruling on the Motion to Dismiss and the Motion for Relief from Stay for purposes of evaluating
the Attorneys’ Fee Application.9
“Benefit” Requires a Reasonable Possibility of Success in the Bankruptcy Case
Benefit to the estate does not require that the debtor actually achieve success. Giving the
debtor the opportunity to achieve something beneficial to the estate can benefit the estate even if
the attempt is not successful. In unsuccessful Chapter 11 cases, Courts have articulated similar,
but not identical, descriptions of what is required to satisfy the “benefit” requirement for
compensation from the estate. For example, in Lederman, the Tenth Circuit cited cases for the
propositions that compensation should be disallowed if “counsel knew or should have known
that reorganization was never a viable possibility,” 10 and that compensation should be
9Issue preclusion, or collateral estoppel, whereby issues of ultimate fact determined by a valid final judgment
entered in a prior proceeding are binding in a subsequent proceeding, includes the requirement that “the party
against whom the doctrine is raised had a full and fair opportunity to litigate the issue in the prior action.” United
States v. Rogers, 960 F.2d 1501, 1508 (10 th Cir. 1992)(quoting Matter of Lombard, 739 F.2d 499, 502 (10 th Cir.
1984)). Generally, “a default judgment entered in a federal court will not support the application of collateral
estoppel.” In re Sukut, 357 B.R. 840, 844 (Bankr.D.Colo. 2006)(citing Arizona v. California, 530 U.S. 392, 414,
120 S.Ct. 2304, 147 L.Ed.2d 374 (2000)(remaining citations omitted). The Court also declines to apply the law of
the case doctrine, which requires that “‘when a court decides upon a rule of law, that decision should continue to
govern the same issues in subsequent stages in the same case,’” because the rule of law decided in the Motion to
Dismiss and Motion for Relief from Stay is not the same rule of law that the Court is now asked to decide. In re
Straight, 248 B.R. 403, 414 (10th Cir. BAP 2000)(quoting Arizona v. California, 460 U.S. 605, 618, 103 S.Ct. 1382,
75 L.Ed.2d 318 (1983), quoted in Stifel, Nicolaus & Co. v. Woolsey & Co., 81 F.3d 1540, 1543 (10 th Cir. 1996)).
Moreover, the United States Trustee did not expressly raise the law of the case doctrine, and, as stated earlier,
neither the Debtor nor the Attorneys participated in the hearing. The “law of the case doctrine is not an ‘inexorable
command’ but a rule to be applied with good sense.” Mason v. Texaco, Inc., 948 F.2d 1546, 1553 (10 th Cir.
1991)(citing Major v. Benton, 647 F.2d 110, 112 (10 th Cir. 1981)).
10 Lederman, 997 F.2d at 1324 (citing Miner & Westergren, Hauptman, O’Brien, Wolfe & Hadley, P.C. (In re King),
96 B.R. 206, 208 (Bankr.W.D.Mo. 1989)(emphasis added). See also, In re MFlex Corp., 172 B.R. 854, 857
(Bankr.W.D.Tex. 1994)(same).
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disallowed if the case was filed “without any reasonable prospect of success”.11 Another
articulation of the standard is whether “there was a reasonable chance of success which
outweighed the cost of pursuing the action.” In re Jefsaba, Inc., 172 B.R. 786, 789
(Bankr.E.D.Pa. 1994)(emphasis added).12 Several courts have determined that to benefit the
estate, the services must relate to a “realistically obtainable goal,” meaning that there must be a
realistic hope of obtaining the goal.13 Still another articulation of the standard is that “the
endeavor for which the estate is expected to pay must be reasonably calculated to produce a
benefit to the estate.” In re Hunt, 124 B.R. 263, 267 (Bankr.S.D.Ohio 1990)(emphasis added).
Elsewhere in the Bankruptcy Code a similar standard exists for determining whether stay
relief should be granted with respect to an act against a single asset real estate: stay relief will be
granted unless “the debtor has filed a plan of reorganization that has a reasonable possibility of
being confirmed within a reasonable time.” 	11 U.S.C. § 362(d)(3)(A) (emphasis added). This
Court believes that “benefit” to the estate for purposes of determining whether compensation
should be awarded to debtor’s counsel in a Chapter 11 case should be measured by whether there
is a reasonable possibility of achieving success in the bankruptcy case that will benefit the estate.
This standard 1) protects creditors and other parties in interest from the delay and expense of
bankruptcy cases where nothing productive realistically can be attained consistent with the
purposes and policies underlying the Bankruptcy Code; 2) protects counsel acting reasonably
and in good faith from the draconian prospect of disallowance of all fees; and 3) protects parties
11 Lederman, 997 F.2d at 1324 (citing New York Credit Men's Adjustment Bureau, Inc. v. Ballon, Stoll & Itzler ( In
re Casco Fashions, Inc.), 490 F.2d 1197, 1204 (2d Cir.1973)(emphasis added).
12Accord, Berg, 268 B.R. at 261.
13 See Polishuk, 258 B.R. at 248-49 (“In order to benefit the estate, the services rendered must relate to a realistically
obtainable goal. Counsel for a debtor or debtor in possession will not be compensated for time spent in preparation
of a plan which has no realistic hope of confirmation.”)(citations omitted). Accord Universal Factoring Co., Inc.,
329 B.R. at 79 (“to benefit the estate, the services rendered must relate to a realistically obtainable goal.”). Cf. In re
Phillips, 291 B.R. 72, 82 (Bankr S.D. Tex. 2003)(applying “realistically obtainable goal” standard to counsel for
Chapter 13 debtor).
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in financial distress seeking bankruptcy relief from the chilling effect that application of an
overly strict standard would have on attorneys being willing to undertake representation of
debtors in possession.
The Attorneys’ Services Provided a Benefit to the Estate
There was a reasonable possibility that the Debtor could achieve a benefit to the estate
through a plan of reorganization that provided for an investor’s purchase of the notes and
mortgage from U.S. Bank at a steep discount and funding the completion of construction of the
Property, with funds also made available for distribution to unsecured creditors. This was one of
the strategies motivating the Attorney’s and Debtor’s decision to commence the Chapter 11 case.
Shortly prior to commencement of the Chapter 11 case, the Debtor engaged in
negotiations with Myriad Group toward reaching a deal for purchase of the notes and completion
of construction, which reached the stage of a draft agreement. After commencement of the
Chapter 11 case, the Debtor engaged in discussions with First Service Commercial Loans, Lance
Cone, and Rick O’Brien from another group interested in purchasing the notes and mortgage.
Mr. Joseph assured the Attorneys that the Debtor had a realistic prospect of reaching an
agreement with an investor regarding the investor’s purchase of the notes and mortgage from
U.S. Bank. Post-petition, the Debtor prepared a cost analysis for an investor purchasing the
notes and mortgage from U.S. Bank and funding completion of the construction of the Property
that yielded a return to unsecured creditors.
The evidence also suggests that U.B. Bank realistically may have been willing to sell the
notes and mortgage to an investor at a steep discount. U.S. Bank itself acknowledged, post-
petition, that its collateral was worth no more than about 10% of the amount of its claim secured
by the Property, that the Property was in various stages of development, and that improvements
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on the Property had deteriorated since construction and had been vandalized. See Motion for
Relief From Stay - Docket No. 20. It is reasonable to conclude that a bank faced with adding 14
partially built 4-unit buildings to its real estate owned having a value of 10% of the loan balance,
and with the cost of insuring and securing the vandalized units pending disposition of the loan or
collateral, would seriously entertain offers to buy the loan at a steep discount from face.
Mr. Joseph testified that the Debtor should have procured an appraisal as the first step
towards securing investors and moving through the bankruptcy process, and that he urged the
Attorneys that the Debtor should obtain such an appraisal to no avail. The Attorneys argued that
an appraisal of the Property “as is” would not have been useful in the bankruptcy case, and that
an appraisal would only have value if it could be used in conjunction with a plan of
reorganization and included an estimated value of the Property upon completion of the project.
The Court will not second guess the Attorneys’ strategy regarding an appraisal. Mr. Joseph had
been seeking investors for Kitts for some two years prior to commencement of the Chapter 11
case. If he thought Kitts obtaining an appraisal was essential to it attracting an investor, Kitts
reasonably would have ordered an appraisal during that 2-year period. Further, it is likely that
U.S. Bank would want to order its own appraisal to give it a basis to evaluate offers to purchase
the loan.
The Debtor’s bankruptcy case was pending from September 2011 through February 2012,
a period of approximately five months. During that time, no plan or disclosure statement was
filed. However, the billing statements reflect that certain steps were taken toward formulating a
plan and hiring an appraiser. Ultimately, none of these efforts were fruitful. “Buying time,” in
and of itself, is not a sufficient benefit to the estate. See Greene, 138 B.R. at 409 (finding that
the continuation of the Chapter 11 case “was simply a delaying action intended to stall [the
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debtors’ largest creditor] from foreclosing on [the debtors’] home”; consequently, counsel’s
efforts in resisting conversion benefitted the debtors only, not the estate, and could not be
compensated from the estate); Crown Oil, 257 B.R. at 543 (debtor’s counsel “should not be
rewarded for stringing a bad case out for a lengthy period of time.”)(citing In re Central Florida
Metal Fabrication, Inc., 207 B.R. 742, 751 (Bankr.N.D.Fla. 1997)). Nevertheless, the Court
finds that the Attorneys’ services were necessary, because, at the time such services were
rendered, there was a reasonable possibility of achieving success in the Chapter 11 case during
the period of delay resulting from the bankruptcy filing.
This finding of “benefit” is a close call. The Debtor faced an extremely difficult
challenge. Absent a realistic possibility of procuring a prospective investor to buy the notes and
mortgage from U.S. Bank and fund completion of construction, the Court agrees that there would
be no reasonable possibility for success in the bankruptcy case, and the Attorneys would not be
entitled to compensation. When debtor’s counsel realizes, or should have realized, that a
bankruptcy case has no reasonable possibility of success, counsel must also recognize that he has
placed his own fees at risk. See Kile, 345 B.R. at 190 (stating that “‘Chapter 11 cases which
lack viable chances of reorganization may place the fees of counsel at risk.’”)(citing Crown Oil,
257 B.R. at 541, quoting In re Offield, 128 B.R. 548, 550 (Bankr.W.D.Mo. 1991)). But here, the
surrounding facts and circumstances support a finding that the Debtor had a reasonable
possibility of success.
The Debtor was in active discussions with at least three potential investors, and the
circumstances suggest that U.S Bank likely would have seriously entertained third party investor
offers to purchase its loan at a steep discount. In addition, unlike the debtor in Lederman, this
bankruptcy filing was the Debtor’s first attempt (albeit, ultimately unsuccessful) at
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rehabilitation.14 Moreover, because the Debtor’s bankruptcy case was dismissed, not converted,
there no longer is a bankruptcy estate. See 11 U.S.C. § 349(b)(3)(“dismissal . . . revests the
property of the estate in the entity in which such property was vested immediately before the
commencement of the case under this title.”). Thus the underlying rationale for disallowing fees
that do not provide a benefit to the estate because of the “‘unfairness of allowing the debtor to
deplete the estate by pursuing its interests to the detriment of creditors’” is not unduly frustrated.
Crown Oil, 257 B.R. at 540 (quoting Kohl, 95 F.3d at 714)(quoting In re Hanson, 172 B.R. 67,
74 (9th Cir. BAP 1994)). Payment of the Attorneys’ fees will not deplete the bankruptcy estate to
the detriment of the Debtor’s creditors, though, admittedly, the commencement of the
bankruptcy did result in delay and expense to U.S. Bank. Finally, the Court notes that, if
compensation were routinely disallowed when a debtor’s reorganization efforts are unsuccessful,
it “would create a chilling effect on the willingness of counsel to undertake the representation of
debtors in financial distress and would likely deny access to the court to many deserving
debtors.” In re Coastal Nursing Center, Inc., 162 B.R. 918, 919 (Bankr.S.D.Ga. 1993).
Based on the foregoing, the Court concludes that the Fee Application should be allowed.
An order granting the Fee Application and allowing compensation and payment will be entered
separately.
_____________________________________________
ROBERT H. JACOBVITZ
United States Bankruptcy Judge
Date entered on docket: June 26, 2012
14 In Lederman, the same attorneys who represented the debtor in a prior bankruptcy case filed a second bankruptcy
case for the debtor the day after the debtor’s major creditor became entitled to immediate possession of its collateral
under the terms of the confirmed plan in the original bankruptcy case. Lederman, 997 F.2d at 1322.
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COPY TO:
William F. Davis
Fee Applicant
6709 Academy NE, Suite A
Albuquerque, NM 87109
Alice Nystel Page
Office of the United States Trustee
PO Box 608
Albuquerque, NM 87103-0608
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