|CEDAR RAPIDS MEATS INC.||Bankruptcy No. L-90-00445C|
The matter before the Court is the application of Heller Financial, Inc. (Heller Financial), pursuant to 11 U.S.C. § 506(b),(1) to have its attorney's fees and expenses included as part of its secured claim. The United States of America Internal Revenue Service (IRS) has objected to Heller Financial's application. The IRS asserts that certain elements of the attorney's fees which Heller Financial seeks to include as part of its secured claim should not be allowed as part of the secured claim or, at a minimum, should be reduced in amount. This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(A), (B) & (0). The following opinion allowing the application of Heller Financial, in full, constitutes this Court's findings of fact, conclusions of law, and order pursuant to Fed.R.Bankr.P. 7052.
The relevant facts are not in dispute. Prior to this bankruptcy, the debtor, Cedar Rapids Meats, Inc., (the debtor) and Heller Financial entered into a substantial and sophisticated lending arrangements. Under the lending arrangement, Heller Financial agreed to advance the debtor large sums of money, over $14,000,000 in total, in exchange for a broad security agreement. The security agreement provided Heller Financial with a blanket security interest in virtually all of the debtor's real and personal assets. The loan and security agreement contained standard language requiring debtor to reimburse Heller Financial for all "reasonable attorney's fees, costs, and expenses Heller Financial incurred" in connection with administering the loan. This provision includes 'attorney's fees Heller Financial incurred in connection with any potential bankruptcy proceeding.
The debtor filed for bankruptcy, under Chapter 11, on March 14, 1990. Heller Financial and the debtor entered into an agreed financing order which this Court approved on May 4, 1990. Under the agreed financing order, Heller Financial made post-petition advances to the debtor. The financing order also provided, inter alia, that the debtor would be required to reimburse Heller Financial for all reasonable attorney's fees, costs, and expenses associated with continuing to administer advances to the debtor.
Heller Financial is a large national lending institution with offices in Chicago, Illinois. Goldberg, Kohn, Bell, Black, Rosenbloom & Moritz, Ltd., (the Goldberg firm), also of Chicago, Illinois, has served as Heller Financial's primary counsel during the course of this bankruptcy proceeding. The Goldberg firm has served regularly as Heller Financial's attorneys prior to the bankruptcy proceeding and the Goldberg firm is familiar with Heller Financial's lending practices and documents. The Des Moines, Iowa, law firm of Whitfield, Musgrave & Eddy (the Whitfield firm) served as Heller Financial's local counsel.
On February 13, 1991, this Court directed Heller Financial to file an application to have its attorney's fees and expenses included as part of its secured claim or to submit a statement setting forth why it should not be required to do so. On April 15, 1991, Heller Financial filed an "Application To Have Its Attorney's Fees and Expenses Included As Part Of Its Secured Claim." The application sets forth in detail the services rendered by the Goldberg firm and the Whitfield firm on Heller Financial's behalf in connection with the debtor's bankruptcy case.
The application requests a total of approximately $186,000 in attorney's fees. Approximately $134,000 of the fees are attributed to the work of the Goldberg firm. The remainder of $52,000 is attributed to the services provided by the Whitfield firm.
On May 20, 1991, the IRS filed an objection to the inclusion of the full amount of the attorney's fees in Heller Financial's secured claim. The IRS objected only to particular elements of the attorney's fees relating to work performed by the Goldberg firm. In particular, the IRS objected to the Goldberg firm billing its attorney fees at its customary "Chicago rate" instead of the "local rate" for attorneys in the area Cedar Rapids. The IRS also objected to the Goldberg firm billing its attorney travel time at the full hourly rate.
On August 5, 1991, the Court held a hearing on Heller Financial's application to include attorney's fees and costs as part of its secured claim and the IRS objections to the application. At the hearing, Heller Financial and the IRS announced that they had entered into a stipulation regarding the fees of Heller Financial's primary counsel in this case, attorney David Heller. They stipulated that David Heller's attorney fees of approximately $220-$225 per hour were the customary rates charged by Heller Financial's counsel and reflected the "Chicago rate" for someone with similar experience and expertise. Hence, the Court understood the stipulation to be that David Heller's billings were customary and reasonable as measured by "Chicago standards." They also stipulated that the "local Cedar Rapids rate" for someone with David Heller's experience and expertise would be approximately $120 per hour.
The IRS has raised two significant objections to the amount of the Goldberg firm's fees which can be included under § 506(b) in the Heller Financial secured claim. The IRS objects to David Heller's fees being billed to the estate at the "Chicago rate" of nearly $225 per hour and argues that Heller Financial should only be allowed to bill the estate at his equivalent "local rate" which would be approximately $120 per hour. The IRS also objects to David Heller's "travel time" between Cedar Rapids and Chicago being billed at David Heller's full hourly Chicago attorney fee rate. The IRS argues that his travel time should not be billable at all or, at a minimum, should be reduced to a lower billing rate. Heller Financial resists any reduction in the amount of the attorney fees to be included under § 506(b) as part of its secured claim.
The operative provision in this dispute is § 506(b). That section states:
To the extent that an allowed secured claim is secured by property the value of which, after any recovery under subsection (c) of this section, is greater than the amount of such claim, there shall be allowed to the holder of such claim, interest on such claim, and any reasonable fees, costs, or charges provided for under the agreement under which such claim arose.
§ 506(b). As one court recently observed:
This section qualifies a secured creditor's right to fees by the following three factors: (1) the creditor must be oversecured; (2) the agreement upon which the creditor's secured claim is based must provide for the recovery of the fees; (3) the fees must be reasonable.
In re California Properties No.1 Ltd., 132 B.R. 191, 192 (Bankr. M.D. Ala. 1991). The parties agree here that Heller Financial is an oversecured creditor, and that the lending agreement and agreed financing order both provide for attorney fees. The dispute here focuses on the reasonableness of the fees.
Courts generally review fee applications very carefully under the § 506(b) reasonableness standard. As the bankruptcy court for the District of Connecticut pointed out in In re Danise, 112 B.R. 492, 494 (Bankr. D. Conn. 1990):
The burden of proving entitlement to fees and expenses (under § 506(b)) is on the applicant, and since every dollar expended on legal fees results in a dollar less that is available for distribution to the.-creditors or for use by the debtor, this burden is not to be lightly regarded.
(quoting In re Gillette-Assoc., Ltd., 101 B.R. 866, 879 (Bankr. N.D. Ohio 1989)). Other courts similarly have recognized the importance of the review of fee applications made under § 506(b). See Blackburn-Bliss Trust v. Hudson Shipbuilders, Inc. (In re Hudson Shipbuilders. Inc.), 794 F.2d 1051, 1055-56 (5th Cir. 1986) (when reviewing § 506(b) fee requests bankruptcy courts may employ their broad equity powers "to prevent an unjust enrichment of one creditor at the expense of others.") (other citation omitted); In re Kroh Bros; Development Co., 105 B.R. 515, 521 (Bankr. W.D. Mo. 1989) (noting the § 506(b) review for reasonableness tries to prevent fee clauses in security agreements from "becoming a tool for wasteful diversion of an estate at the hands of secured creditors who, knowing the estate must foot the bills, fail to exercise restraint in the enforcement of expenses.") (other citation omitted).(2)
Here, the burden is on Heller Financial to prove the reasonableness of the attorney fees it seeks to include under § 506(b) as part of its secured claim. Heller Financial must show that it is reasonable for the Goldberg firm's attorney fees to be billed and included in Heller Financial's secured claim at "Chicago rates" instead of at the local, Cedar Rapids area rate for attorneys of similar experience and expertise. Heller Financial also must show that it is reasonable for the travel time of Goldberg lawyers to be billed at the full hourly rate and charged as part of Heller Financial's secured claim.
I. Local Rates vs. Chicago Rates
There are no cases specifically addressing whether an oversecured creditor is reasonably entitled under § 506(d) to include the fees of its nonlocal attorneys as part of its secured claim at their nonlocal rate when that rate is higher than the rate for local attorneys with similar credentials. Heller Financial directs this Court's attention to cases addressing similar questions under § 330 fee applications. This Court notes that looking to § 330 cases to resolve § 506(b) disputes is an accepted practice. Kroh Bros. Development, 105 B.R. at 522. The Kroh Bros. Development court noted that reasonableness under § 506(b) essentially incorporates the more elaborate definition of reasonableness under § 330(a)(1). Id. Heller Financial contends that courts interpreting this question in the context of fee applications under § 330 "almost universally" conclude that nonlocal counsel should be allowed to bill the estate at their own nonlocal rate.
This Court's review of the case law does not reveal such unanimity of opinion on this question. The court in In re Cambern, 134 B.R. 565 (Bankr. E.D. Tex. 1991), for example, recently attempted to summarize the many differing views on this issue under § 330. The Cambern court pointed out that in addressing this question under § 330 most courts focus on the § 330(a)(1) language which equates reasonableness with "the cost of comparable services other than in a case under this title." The Cambern court went on to note:
Some courts have held that the phrase "comparable services" permits the award of attorneys fees based on comparable services performed by a non-bankruptcy attorney in the locale in which the fees are requested, i.e., the local rate. Other courts have interpreted the phrase, "comparable services" more broadly to allow a nonlocal attorney to charge a fee at a rate based on the cost of comparable services performed by a nonbankruptcy attorney in the locale in which such attorney practices. i.e., the nonlocal rate. This line of cases is sometimes referred to as advocating the use of a regional or national rate formula for the award of attorney's fees. Finally, a third line of cases functionally blends the two preceding approaches to use a local rate for comparable services as a base line for fee awards in the bankruptcy forum but vests great discretion in the trial court to allow substantial deviations from the base line fee awards based on the facts and circumstances of individual cases.
134 B.R. at 568.
The court in In re Waldoff's. Inc., 132 B.R. 329 (Bankr. S.D. Miss. 1991) also recently provided an extensive analysis of differing approaches courts have taken on this question. This Court believes that the Waldoff court captured the prevailing view in these cases by stating:
From a review of applicable cases on the issue of allowable hourly rates it can be seen that rates that are higher than those customarily changed in the community where the services are rendered or where the debtor is located may be charged and allowed where justified by the particular circumstances of the case.
132 B.R. at 335 (emphasis added).
Some courts have attempted to define specifically which particular circumstances give rise to the nonlocal fee rates. Some courts, for example, have found that the complex and regional or national scope of the case may allow for higher, nonlocal rates. In re S.T.N. Enterprises, 70 B.R. 823, 843 (Bankr. D. Vt. 1987); In re Property Co. of America Joint Venture, 110 B.R. 244, 252 (Bankr. N.D. Tex. 1990). Other courts have found that the unavailability of local counsel with sufficient expertise and resources is a circumstance justifying use of nonlocal counsel at higher rates. In re Cambern, 134 B.R at 569; In re Washington Mfg. Co., 101 B.R. 944, 951 (Bankr. M.D. Tenn. 1989). Still other courts have found that other unique characteristics of a case, like the nonlocal attorney's familiarity with the documentation and transactions in the case, or the complexity of the case, provides reason to allow nonlocal rates. In re Microwave Products of America, Inc., 104 B.R. 900, 907 (Bankr. W.D. Tenn. 1989).
This Court concludes that this is not the appropriate case to determine the issue of whether the "nonlocal rate" can be charged in all cases. This Court does conclude that, at a minimum, nonlocal fees can be charged when the unique features of the case justify the award of the higher rate.
The particular circumstances of this case satisfy this uniqueness test and warrant allowing the "Chicago rate" for Heller Financial's nonlocal counsel. Here, the debtor needed substantial financing prior to bankruptcy and, of necessity, looked to a national lender to acquire those funds. The debtor essentially brought Heller Financial,_-a.@Chicago lender, into the case. The loan documentation recognized that the loan from Heller Financial would come with all attendant "Chicago costs" of administering that loan -- including an express recognition of an obligation to pay its counsel for the costs of administering the loan.
Nowhere in the loan documentation is there any indication that the debtor expected Heller Financial to employ local counsel or that the debtor would be required to pay only the "local rate" for Heller Financial's attorney fees. Moreover, after the debtor filed for bankruptcy, David Heller negotiated the agreed financing order, including the continuing obligation of the estate to pay Heller Financial's attorney's fees. Even though the Chicago counsel obviously and outwardly negotiated the financing arrangement, no party objected to the arrangement or sought to condition its approval on payment of attorney fees at a local rate instead of a Chicago rate. The Court finds the circumstances of this case indicate that the "Chicago rate" which the Goldberg firm charged Heller Financial and which Heller Financial seeks to have included as part of its secured claim was a foreseeable expense to the estate at all stages of the debtor's dealings with Heller Financial. Hence, the Court concludes that it is reasonable for Heller Financial to include these attorney's fees at the "Chicago rate" in its secured claim.
This Court's conclusion is consistent with the reasoning of other cases addressing this question. As one court observed, local rates normally are justified by economic considerations because:
the estate arises within a local economy. The fixed cost and overhead factors, not the variable, are determined locally. Legal fees and other professional costs are generally considered as overhead. Accordingly, local rates should apply.
S.T.N. Enterprises, 70 B.R. at 843. See also Cambern, 134 B.R. at 569 (quoting S.T.N. Enterprises). Here, however, the fixed costs of the estate were transformed into a more regional or national economy when the debtor, of necessity, sought out nonlocal financing. This gave the case a national scope with regard to the lending relationship at the center of this dispute. This Court believes that the debtor voluntarily built the cost of "Chicago rate" attorney fees into the fixed costs of the estate and that the fees then became a foreseeable and reasonable expense of the estate.
The Goldberg firm is also familiar with Heller Financial, its loan document, and the type of complex transaction between the debtor and Heller Financial. The Microwave Products court found those elements as a persuasive reason to allow nonlocal counsel fees. 104 B.R. at 907. This Court believes Heller Financial persuasively pointed out that it may indeed have generated more expense to employ local counsel and pay costs of bringing them up to speed. See id.
In short, this Court believes that on the particular facts of this case, the Goldberg firm's attorney's fees (primarily those attributable to David Heller), billed at the "Chicago rate" are reasonable under § 506(b) and may be included as part of Heller Financial's secured claim. The "Chicago rates" were foreseeable from the time the parties entered the financing agreement. The post-petition financing agreement essentially re-recognized these fees. There is nothing in the record which suggests that the debtor or any other creditors could reasonably have believed Heller Financial was required to have local counsel handle the entire case. Hence, for all the above reasons, this Court finds that Heller Financial has carried its burden of demonstrating the reasonableness of its request to charge nonlocal attorney fee rates as part of its secured claim.
II. Travel Time
The other major objection of the IRS to Heller Financial's 506(b) application is that it is unreasonable to include travel time expenses of Goldberg firm attorneys, billed at the full hourly attorney fee rate, as part of Heller Financial's secured claim. This issue recently has generated a great deal of discussion and analysis under both § 506(b) and § 330(a). Again, the approaches under these two sections appear to converge into a similar inquiry of reasonableness.
One recent case has attempted to summarize the wide variety of approaches courts have taken to the travel time issue as follows:
Some courts hold that travel time cannot be billed, although special exceptions may be made. E.g., In re Grimes, 115 B.R. 639 (Bankr. D.S.D. 1990); In re Carter, 101 B.R. 170 (Bankr. D.S.D. 1989); Jungkurth
v. Eastern Financial Services, Inc., 87 B.R. 333, S.T.N Enterprises, 70 B.R. 823' 837 (Bankr. D. Vt. 1987); In re Seneca oil Co., 65 B.R. 902, 909 (Bankr. W.D. Okla. 1986); In re Pacific Express, Inc., 56 B.R. 859 (Bankr. E.D. Cal. 1985); In re Four Star Terminals Inc., 42 B.R. 419 (Bankr. D. Alaska 1984).
Others allow for one half the attorney's hourly rate. In re Environmental Waste Control, 122 B.R. 341(Bankr. N.D. Ind. 1990); In re Ginji Corp., 117 B.R. 983 (Bankr. D. Nev. 1990); In re Hogg, 1O3 B.R. 207 (Bankr. D.S.D. 1988); In re Pothoven, 84 B.R. 579, 585 (Bankr. S.D. Iowa 1988); In re Taylor, 66 B.R. 390, 397 (Bankr. W.D. Pa. 1986).
Still others consider 75% of the attorney's hourly "rate appropriate. In re C & J Oil Co., 81 B.R. 398, 404 (Bankr. W.D. Va. 1987).
In re Frontier Airlines, Inc., 74 B.R. 973, 977 (Bankr. D. Colo. 1987) held that travel time was compensable because it was reasonable and necessary. Accord In re Cano, 122 B.R. 812 (Bankr. N.D. Ga. 1991). Approved, In re Microwave Products of America, Inc., 102 B.R. 661 (Bankr. W.D. Tenn. 1989).
In re Bank of New England Corp.,134 B.R. 450, 454 (Bankr. E.D. Mass. 1991). While the citations and the categorizations the Bank of New England case provides are not exhaustive, they fairly represent the division the issue has generated. Heller Financial urges this Court to adopt the Frontier Airlines approach, and allow the fees in full.
Again, this Court believes the particular facts of this case dictate the result. The Court already has found that the "Chicago rate" and "Chicago standard" for attorney fees was a reasonable and foreseeable expense of-the estate. Heller Financial has argued, and the partied stipulation essentially acknowledges, that the Goldberg firm has prepared its application and billing in line with "Chicago standards. Heller Financial has argued that attorneys from Chicago, especially Heller Financial's counsel, customarily and normally bill their travel time to their clients at the full attorney fee rate. The Seventh Circuit, encompassing Chicago, also has recognized this practice, In re Pine, 705 F.2d 936, 938 (7th Cir. 1983) (reviewing fee request under 15 U.S.C. § 1640). In reversing the bankruptcy court's decision not to allow travel time charges, the Pine court noted that "lawyers normally charge for their travel time. That time is taken away from professional work, and thus involves an opportunity cost which is approximated by the lawyer's normal billing rate multiplied by the time spent in travel." 705 F.2d at 938.
Moreover, the same reasoning applies to this issue as applied to the local v. Chicago rate question. The Court believes that the travel time expenses were foreseeable as another cost of doing business with a Chicago based lender who expects to be billed by its counsel at the full rate for those expenses. Based on the above observations, this Court must conclude that Heller Financial has carried its burden under § 506(b) by showing the reasonableness of including the travel time of Goldberg firm attorneys in its secured claim.
IT IS THEREFORE ORDERED the objection of the IRS to the attorney fees and expenses of Heller Financial, Inc . is overruled. Heller Financial, Inc., may include the full amount of its attorney fees and expenses in its allowed secured claim.
DONE AND ORDERED this 6th day of April, 1992.
|Michael J. Melloy|
|Chief Bankruptcy Judge|
1. All statutory references are to Title 11 of the United States Code ("The Bankruptcy Code") unless otherwise specified.
2. In addressing the reasonableness of attorney fees under § 506(b), the courts have found that "reasonableness" should be determined by federal law not state law standards. Blackburn-Bliss Trust v. Hudson Shipbuilders, Inc. (In re Hudson Shipbuilders, Inc.), 794 F.2d 1051, 1056-58 (5th Cir. 1986); Danise, 112 B.R. at 494.
The court in In re Wonder Corp. of America, 72 B.R. 580, 588-89 (Bankr. D. Conn. 1987) aff'd 82 B.R. 186 (D. Conn. 1988) articulated the following guidelines for determining "reasonableness" under § 506(b):
1. The legal services must be authorized by the loan agreement;
2. They must be necessary to promote the client's interest;
3. They must be permitted under applicable law, including the Bankruptcy Code;
4. They must be compatible with bankruptcy policy as derived from relevant provisions of the Bankruptcy Code and the judicial decisions which construe it;
5. The time spent must be appropriate to the complexity of the task;
6. The hourly rate must be appropriate under applicable bankruptcy standards;
7. The task must be assigned to the fewest and least senior attorneys able to render the service in a competent and efficient manner;
8. The fee should be adjusted to reflect duplicative services rendered by attorneys representing other parties with a common interest in the case; and
9. The fee should be adjusted to reflect the court's observation of the nature of the case and the manner of its administration.
See also Hudson Shipbuilders, 794 F.2d at 1058 (providing an additional list of factors).
Other courts have adopted the factors laid out in Wonder Corp. in determining, the reasonableness of fee requests under § 506(b). See, e.g., In re PCH Associates, 122 B.R. 181, 202-03 (Bankr. S.D.N.Y. 1990); In re Kroh Bros. Development Co., 105 B.R. 515, 521 (Bankr. W.D. Mo. 1989). However, as the District Court in Connecticut pointed out in affirming the bankruptcy court decision in Wonder Corp., these factors serve as guidelines, not as a rigid rest for reasonableness. 82 B.R. at 191.
Still other courts developed their own, less directed approaches. The Ninth Circuit Bankruptcy Appellate Panel has found, for example, that the key inquiry in determining "reasonableness" of fees under § 506(d) is only to determine whether the secured creditor could reasonably believe that the services rendered were necessary to protect its interest in debtor's property. Dalegsio v. Pauchon (In re Dalessio), 74 B.R. 721, 723 (9th Cir. B.A.P. 1987) (citing In re Carey, 8 B.R. 1000, 1004 (Bankr. S.D. Cal. 1981)). This factor is at least one which should be considered in this jurisdiction. In re W.S. Sheppley & Co., 62 B.R. 279, 281 (Bankr. N.D. Iowa 1986) (Judge Yacos found fees incurred were reasonable because they were reasonably necessary to protect debtor's interest, and, conversely, disallowed fees not reasonably necessary).
The Court does not believe that the very general guidelines laid above are well-suited to this particular case, and the narrow questions it presents. While the IRS has raised objections about the necessity of some of the work the Goldberg firm seeks to bill in this case, the Court already has found those objections without merit, and the arguments of Heller Financial's counsel persuasive that the work performed was reasonably necessary.