This month's Straight & Narrow explores the basic but critical question of what factors must be considered in determining reasonable hours and reasonable professional rates under the Lodestar Standard.² While the reasonable-hours-times-reasonable-rates formula under Lodestar is well-known and has been extensively analyzed, the more difficult questions of what constitutes reasonable rates and hours has not received extensive judicial review.³ As a determination of reasonableness in a given case is a factual, rather than legal, inquiry,⁴ I will not attempt to provide an exact answer to this great philosophical question but instead will describe certain factors that generally should be considered in "reasoning" what are appropriate professional fees.

Let's Go to the Statute

11 U.S.C. §330(3)(A) provides that:

In 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 (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.

While this provision of the Bankruptcy Code sets forth a few key factors for courts to consider, the factors set forth in §330(3) are by no means exhaustive. See, generally, Johnson v. Georgia Highway Express Inc., 488 F.2d 714 (5th Cir.1974) (setting forth 12 factors to be considered in determining reasonable hourly rates and reasonable hours for an award of professional fees). However, the U.S. Bankruptcy Court for the Western District of Kentucky in In re Atwell⁵ attempted to devise a framework for resolving these questions by formulating a set of factors to be used in determining (1) reasonable hourly rates, (2) reasonable hours expended on the tasks in question and (3) whether there should be global modifications to the requested professional fees.

Let's See, the Moon Is in the Seventh House, so This Year's Hourly Rate Is...

Atwell lists six factors to be considered in determining what constitutes a reasonable rate of compensation. The first and most important of these factors is the customary hourly rate charged by the professional in question.⁶ In litigating any objection to fees, this is the starting point of determining reasonable hourly rates. Professionals seeking to defend their fee requests should consider providing general billing records for the professionals or fee applications in other bankruptcy cases to establish their hourly rates.

The second factor that should be established in litigation involving the reasonableness of a professional's rates is whether the rate charged by the professional is commensurate with rates charged by other similar professionals. The principal issues that will arise under this factor are: (1) do you compare the professional's rates to other bankruptcy professionals only or to all similar professionals regardless of their specialty?⁷ and (2) do you compare the professional's rates to the rates charged where the bankruptcy is pending or where the professionals generally practice?⁸ In situations such as this, parties should consider using expert witnesses or fee studies to support their positions.⁹

A third factor to be used in determining the reasonableness of fees is the skill of the attorney and quality of legal services provided. This is one of the most subjective elements of the consideration concerning the reasonableness of rates, as it goes not to an attorney's general billing rate or a comparable rate of compensation in an appropriate market, but to how well the attorney performed his tasks in the case. This issue will generally be resolved by a review by the court of the professional's performance in the case.

The fourth factor in determining the reasonableness of hourly rates is the difficulty and novelty of the issues present in a case. More complex issues will probably require more senior levels of attorneys to work on those issues. This consideration primarily addresses the issue of the level of staffing of specific issues in a case. Counsel should work to ensure that the staffing levels used and the rates charged for a particular matter addressed in a case are appropriate for the importance and complexity of that matter.¹⁰

A fifth issue controlling reasonable hourly rates concerns whether the tasks performed by a professional would be considered "clerical" duties that would either be considered part of a professional's overhead (and not compensated) or compensated at much lower rates. While there has been a recent trend both in bankruptcy and non-bankruptcy settings to compensate paraprofessional work as professional fees rather than a form of expense, there is still a great deal of discussion as to the appropriate rate for such billings.¹¹

The sixth and final factor that should be reviewed by courts in determining the reasonableness of hourly rates is the billing agreement between the debtor or committee and the professional and the use of reasonable billing judgment by the professional in charging its clients under that contract. A billing agreement, approved by the court as part of the professional's retention, will govern how the debtor should be billed, unless the court agrees to this modification of the billing agreement. Further, as noted by the Supreme Court,¹² attorneys should exercise billing judgment in reducing the hourly rates charged on a matter where appropriate. However, at all times professionals should disclose in their fee applications how they exercised their billing judgment and should be able to provide evidence of the care with which they reviewed their bills in any disputed hearings over fees.

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[I]n this era of increasingly complex fee litigation it is sometimes important to take time to view the forest instead of carefully examining the specific branches of the various trees.

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It's About Time...Uh, Yeah It Is

The second component of the Lodestar calculation of an appropriate professional fee is the determination of the reasonable hours expended in a bankruptcy case. This portion of the Lodestar analysis is generally given stricter scrutiny than the reasonable-rate component as courts seek to ensure that professionals are not compensated for inefficiency or for spending time on projects that are not beneficial to the estate.¹³

The initial factor in determining what constitutes reasonable hours expended in a case concerns the nature of the issues involved in the proceeding. The more difficult, unusual or complicated issues present in a case, the more time that will be spent by the professional. Further, the size and magnitude of a particular issue will also be important in determining the reasonableness of the hours expended in a matter. Unfortunately, as noted by the Atwell court, the size, importance and difficulty of the issues in dispute in a bankruptcy case is a purely factual question that must be made on a case-by-case determination.¹⁴

The second factor important to determining what constitutes a reasonable amount of time spent on matters in a case is the amount of time spent on comparable matters in similar cases by comparable counsel. This factor is more often applied in an analysis of chapter 13 fees, where numerous routine pleadings often make up the bulk of a professional's fees. However, such a review can also be applied in chapter 11 cases.¹⁵

The third element to be used in evaluating the reasonable hours expended by a professional in a bankruptcy case is the nature and characteristics of the debtor in a particular case. A debtor with a simple debt structure that is in the process of selling its assets or has terminated its operations will generally have fewer legal and factual issues in dispute than an operating chapter 11 debtor with several viable but different potential business models, a complex debt structure and significant pending litigation.

The fourth factor that must be considered in determining whether the hours claimed by the professional are reasonable is the amount and degree to which matters are litigated. While professionals should not be compensated for causing needless litigation,¹⁶ professionals should not be penalized by having the actual time spent on a matter reduced solely because they were faced with zealous or perhaps overly zealous opposition that led to what would otherwise be an excessive amount of time spent on a matter. See Stalnaker v. DLC Ltd., 376 F.3d 819 (8th Cir. 2004) (court awarded trustee's counsel its requested fees even though defendant settled case and paid all creditors in full after four years of litigation on a fraudulent-conveyance suit that became moot upon the defendant's payment to creditors).

A fifth factor to be considered in determining reasonable time expended in a case is the amount of time spent in preparing attorney fees applications. While most courts¹⁷ permit reimbursement of at least same professional fees for fee application in Lodestar cases, the amount of time is generally limited. Further, it is an open question as to whether any professional fees will be awarded for the defense of, as opposed to the preparation of, a fee application.

The final factor generally used in determining the amount of reasonable hours in a case is an analysis of the billing judgment used by the professional requesting its fees. In order to prove that a bill has been properly reviewed by a professional, "counsel in their fee request should set forth what time has been written off" in order to demonstrate the proper use of billing judgment. In re Automobile Warranty Corp., 138 B.R. 72 (Bankr. D. Colo. 1991).

Judicial Eye for the Fee...Persons: Global Modifications of Professional Fees under Lodestar

Finally, the Atwell court lists five additional factors that should be considered in whether a fee should be modified either up or down, taking the fee request as a whole rather than by adjusting specific rates or hours charged. These factors are: (1) compliance with employment and fee application requirements, (2) opportunity costs in the time the engagement has taken away from other potential matter, (3) the undesirability of the case, (4) the potential contingent nature of the compensation and (5) the results obtained by the professionals. In re Atwell, 148 B.R. at 492-493.

In briefly discussing these factors, the Atwell court stressed that factors 2, 3 and 4 of the global modifications would only be used to modify fees in the rarest and most unusual cases. The Atwell court also noted that factor 1 would generally be used to globally reduce fees¹⁸ while factor 5 would generally be considered in cases where a fee enhancement was requested,¹⁹ although in extreme cases it could also be used to reduce fees.²⁰

Conclusion

While the thrust of this column has been primarily to restate the obvious in the area of fee litigation, in this era of increasingly complex fee litigation it is sometimes important to take time to view the forest instead of carefully examining the specific branches of the various trees.

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Footnotes

¹ Board Certified in Business Bankruptcy Law by the American Board of Certification. Return to article

² "The Lodestar method calculated as the number of hours reasonable expended multiplied by a reasonable hourly rate is the appropriate calculation of fees [under 11 U.S.C. §330]." Stalnaker v. DLC Ltd., 376 F.3d 819, 825 (8th Cir. 2004). Return to article

³ See In re Atwell, 148 B.R. 483, 488 (Bankr. W.D. Ky. 1993) ("While the Lodestar Standard is easy to articulate, defining its two key terms is not so simple."). Return to article

⁴ See, generally, Stalnaker v. DLC Ltd, 376 F.3d at 825; Matter of Taxman, 49 F.3d 310 (7th Cir. 1995). Return to article

⁵ 148 BR at 483. In support of full disclosure, the author had the honor of serving as the law clerk for Hon. Henry H. Dickinson when he authored the Atwell opinion. Return to article

⁶ For a discussion of customary hourly rates, see Bowles, C.R., "Are All Attorneys Created Equal?" 23 Am Bankr L.J. 32 (Mar. 2004); see, also, In re Busy Beaver Building Centers, 19 F.3d 833 (3rd Cir. 1994) (professional fees should be awarded in bankruptcy cases on the same economic basis as fees are paid by non-bankruptcy clients); Matter of Taxman Clothing Co., 49 F.3d 310, 315-316 (7th Cir. 1995); In re Atwell, 148 B.R. 483, 488-89 (Bankr. W.D. Ky. 1993). Return to article

⁷ See In re Fleming Cos. Inc., 304 B.R. 85 (Bankr. D. Del. 2003). Return to article

⁸ See, generally, In re Farly Inc., 156 B.R. 203 (Bankr. N.D. Ill. 1993) (counsel location of general practice governs fees); In re Grimes, 115 B.R. 639 (Bankr. D. S.D. 1990) (local rates may prevail if matter could be handled by local counsel). Return to article

⁹ See Matter of River Landings Inc., 180 B.R. 701 (Bankr. S.D. Ga. 1995) (discussing use of expert testimony on fees). Return to article

¹⁰ See In re McClanahan, 137 B.R. 73, 75 (Bankr. M.D. Fla. 1992) (hourly rates requested by counsel in a routine consumer chapter 13 case exceeded rates charged at that time by attorneys in complex chapter 11 cases). Return to article

¹¹ See, generally, In re Busy Beaver Bldg. Centers Inc., 19 F.3d at 833. Return to article

¹² In Hensley v. Eckerhort, 461 U.S. 424, 103 S.Ct. 1933, 76 L.Ed.2d 40 (1983), the Supreme Court noted: "[attorneys] should make a good-faith effort to exclude from a fee request hours that are excessive, redundant or otherwise unnecessary; just as a lawyer in private practice ethically is obligated to exclude such hours from his fee submission. In the private sector, 'billing judgment' is an important component in fee setting. It is no less important here." Return to article

¹³ See Matter of Taxman Clothing Co., 49 F.3d 310, 313 (7th Cir. 1995); In re Atwell, 148 B.R. at 491. Return to article

¹⁴ 148 B.R. at 491. Return to article

¹⁵ See Matter of Taxman Clothing Co., 49 F.3d 310, 314-315 (discussing comparison of typical preference litigation with similar litigation). Return to article

¹⁶ Id. at 316 (denying $78,000 of an $85,000 fee awarded for engaging in a preference lawsuit that could only have resulted in a $33,000 judgment for the bankruptcy estate). Return to article

¹⁷ See, generally, Coulter v. Tennessee, 805 F.2d 146 (6th Cir. 1986). Return to article

¹⁸ See, generally, Freeman, "Current Issues in Bankruptcy Ethics," 091803 ABI-CLE 265 (Sept. 18-21, 2003), for a discussion of the problems in failing to comply with the provisions of the Bankruptcy Code, Bankruptcy Rules and applicable local rules in seeking employment or requesting awards of fees. Return to article

¹⁹ See Protapopas, Lydia T., "Fee Enhancements: How Do You Get One, Parts I and II," 20 Am. Bankr. Inst. J. 1 and 20 Am. Bank. Inst. J. 12 (2001). Return to article

²⁰ See, generally, Matter of Taxman Clothing Co., 49 F.3d at 310. Return to article