In re Hosp. Partners of Am., Inc., Case No. 08-12180 (BLS)

597 B.R. 763

IN RE: HOSPITAL PARTNERS OF AMERICA, INC. et al., Debtors.

Case No. 08-12180 (BLS)

United States Bankruptcy Court, D. Delaware.

Signed March 7, 2019

Jeremy M. Dunn, Moore & Van Allen PLLC, Charlotte, NC, Curtis A. Hehn, Laura Davis Jones, Michael Seidl, Pachulski Stang Ziehl & Jones LLP, Wilmington, DE, for Debtors.

John T. Carroll, III, Cozen O'Connor, Randal Cowles, Subranni Zauber LLC, Seth A. Niederman, Fox Rothschild LLP, Eric Michael Sutty, Elliott Greenleaf, Wilmington, DE, Joshua T. Klein, Michael G. Menkowitz, Magdalena Schardt, Fox Rothschild LLP, Philadelphia, PA, for Trustee.

OPINION¹

BRENDAN LINEHAN SHANNON, UNITED STATES BANKRUPTCY JUDGE

Before the Court are final fee applications (hereinafter, the "Fee Applications") of Fox Rothschild LLP and Giuliano Miller & Company, LLC for services rendered to the Chapter 7 Trustee in this case. The United States Trustee (the "UST") has objected to compensation for these professionals for services related to avoidance actions on the ground that these fees exceed the recoveries realized on account of those avoidance actions. After an evidentiary hearing, for the reasons stated below, the U.S. Trustee's objection is overruled and the Fee Applications are approved.

BACKGROUND

On September 24, 2008, Hospital Partners of America and its affiliates filed Chapter 11 petitions [Docket No. 1]. On November 20, 2008, the Court converted the cases from Chapter 11 to Chapter 7 and appointed Alfred Giuliano (hereinafter the "Chapter 7 Trustee") as the trustee responsible for the administration of these cases. The Chapter 7 Trustee retained several professionals to assist him with the liquidation process, including the two firms whose fees are at issue here: Fox Rothschild LLP, his bankruptcy counsel, and Giuliano Miller & Company, LLC, his accountant (collectively the "Professionals"). The Chapter 7 Trustee is a principal in Giuliano Miller & Company.

On November 19, 2018, after the liquidation process was complete, the Chapter 7 Trustee filed his final report and application for compensation [Docket No. 957]. The record reflects that the expected distribution to creditors realized by the liquidation process was unusually high: the case ultimately has provided an almost 50% recovery for unsecured creditors. December 19, 2018 Hearing Transcript at 26-29 [Docket No. 974] ("Dec. 19 Transcript"). On December 6, 2018, the UST filed an Omnibus Objection to Professional Fees (the "Objection") [Docket No. 960] by which he requested that the Court reduce the fees sought by the Professionals for services they rendered in pursuit of preferences and fraudulent conveyance actions. The Professionals timely filed a response on December 16, 2018 ("Response") [Docket No. 963], and an evidentiary hearing on the Fee Applications and the UST's Objection was held on December 19, 2018, at which time the Court heard testimony and admitted documentary evidence into the record. Following that hearing, the Court took the matter under advisement.

The UST has forwarded two main arguments to support its contention that the Court should disallow some of the Professionals' fees. First, the UST argues that the fees should be reduced because they are substantially disproportionate to the cash recovery produced by the relevant services. Objection at ¶ 17 ("The fees that GMCO and Fox are seeking for liquidating avoidance actions are not reasonable because they consume 163% of the proceeds realized from those actions."). To support this argument, the UST notes that the cash recovery for all avoidance actions totals approximately $ 273,625, and that the fees identified in the Fee Applications associated with this recovery were $ 445,477, or approximately $ 171,852 more than the cash recovery. Id. at ¶¶ 12-13.

Second, the UST contends that the fees should be reduced because the Chapter 7 Trustee and his Professionals failed to "analyze...avoidance actions as they proceeded, and [ ] abandon them at any point that they appeared likely to be a net drain on the estate." Id. at ¶ 32. In other words, the UST argues that the fees should be reduced because the Chapter 7 Trustee had a duty to perform a reasonable cost-benefit analysis of avoidance actions and, instead "apparently failed to perform that diligence or to discern flaws in the estate's causes of action..." Id.

The Professionals respond that their fees are reasonable, given both the objective recovery obtained as a result of the avoidance actions, Response at ¶ 35, and because the Professionals exercised reasonable judgment at the time regarding which actions to pursue, and to what extent to pursue those actions. See, e.g. , Response at ¶ 28. This matter has been fully briefed and argued, and is ripe for decision.

JURISDICTION AND VENUE

Venue in this District and Court is proper pursuant to 28 U.S.C. §§ 1408 and 1409. Jurisdiction over this matter is proper pursuant to 28 U.S.C. § 1334(b). This is a core proceeding under 28 U.S.C. § 157(b)(2)(A).

DISCUSSION

A. Legal Standard

Under Bankruptcy Code § 330, the Court is authorized to award compensation to trustees and the professionals hired to assist them in the administration of the estate:

...the court may award to a trustee...or a professional person employed under section 327 or 1103—

(A) reasonable compensation for actual, necessary services rendered by the trustee... professional person, or attorney and by any paraprofessional person employed by any such person....

11 U.S.C. § 330(a)(1). The Court is not required to award all of the compensation requested. Instead, the Court may "award compensation that is less than the amount of compensation that is requested." 11 U.S.C. § 330(a)(2). That section also provides that:

[i]n determining the amount of reasonable compensation to be awarded ... the court shall consider the nature, the extent, and the value of such services, taking into account all relevant factors, including ...(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...

11 U.S.C. § 330(a)(3).

In addition to this mandate for the Court to consider "all relevant factors," the Code also specifically directs the Court not to award compensation for certain services:

(4)(A)[T]he 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) necessary to the administration of the case.

11 U.S.C. § 330(a)(4)(A). It is significant that the Code requires courts to take into account "all relevant factors, including" the factors listed in the statute. 11 U.S.C. § 330(a)(3). This language contemplates the Court's exercise of broad discretion to determine which factors are relevant to the compensation of professionals for services rendered in a particular case. See In re Haimil Realty Corp. , 579 B.R. 19, 27 (Bankr. S.D.N.Y. 2017).

As noted above, § 330(a)(4)(A) limits that discretion: the Court "shall not" allow certain types of compensation. 11 U.S.C. § 330(a)(4)(A). The Third Circuit has made it clear that § 330(a)(4)(A) does not go so far as to require the Court to disallow fees simply because the estate ultimately does not profit from the services of the professionals in question. In re Top Grade Sausage, Inc. , 227 F.3d 123, 132 (3d Cir. 2000) (abrogated on other grounds by Lamie v. U.S. Trustee , 540 U.S. 526, 124 S.Ct. 1023, 157 L.Ed.2d 1024 (2004) (cited with approval by In re Woerner , 783 F.3d 266, 275 (5th Cir. 2015) ). Instead, for services to be compensable under § 330(a)(4)(A), they must only have been "reasonably likely to benefit the debtor's estate" at the time they were rendered , not in "hindsight."

In re Top Grade Sausage, Inc. , 227 F.3d at 132 ; see also 3 Collier on Bankruptcy P 330.03 (16th 2018) ("Rejecting an actual-material-benefit standard, a number of courts, including the Courts of Appeals for the Second, Third, Fifth and Ninth Circuits, have determined that section 330 permits a court to compensate a professional...for services that were objectively reasonable at the time they were rendered."). As a practical matter, bankruptcy professionals are not guarantors of the success of a particular theory, proceeding, or strategy.

The standards set forth in § 330 reflect the realities of legal practice, where trustees or professionals often act without complete information about what the ultimate results of those actions might be. The pursuit of preference actions, specifically, is an arena in which professionals do not have perfect information. Rather the contrary: professionals must conduct both a preliminary review and an ongoing analysis in order to determine which actions to reasonably pursue, and which to abandon. Experience teaches that the potential value of pursuing those preference actions depends on many factors. Just one of those many factors—one which is important in this situation—is the response of a given preference counterparty to a demand letter or complaint. For example, a preference counterparty may have a defense to a given preference action that is not immediately apparent to the professionals pursuing that preference action. Alternatively, some defendants may be particularly eager to settle in order to steer clear of a potentially burdensome preference litigation. And perhaps most important, the Trustee and his Professionals must make and revisit assessments regarding the ultimate collectability of any judgment or settlement.

It is important to hold professionals responsible for the fees that they incur and ensure that trustees work for the benefit of the estate, instead of pursuing actions that "primarily benefit the trustee or the professionals." The Handbook for Chapter 7 Trustees (Effective Oct. 1, 2012) Section 4.A. However, when considering whether those fees are reasonable, they must be "evaluated pursuant to the standards set forth...