In re: Victor Lopez Mendez and Imaria Del C. Portela Roman

• Court: United States Bankruptcy Court, D. Puerto Rico
• Decided: August 9, 2012
• Docket: 05-06196
• Status: Unknown

Opinion

1 IN THE UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF PUERTO RICO IN RE: : 3 : CASE NO. 05-06196 (ESL) VICTOR LOPEZ MENDEZ : 4 |IMARIA DEL C. PORTELA ROMAN : : CHAPTER 7 5 Debtor : _-7/7$7>S—<—

7 OPINION AND ORDER 8 This case is before the court upon Special Counsel Eldia M. Diaz-Olmo’s (“Attorney Diaz”) 9 ||\Application for Compensation (Docket No. 232) in the amount of $22,328.27 for the legal services 10 rendered to the Chapter 7 Trustee to recover from Attorney Jorge R. De Jesus Diaz (“Attorney 11 ||De Jesus”) certain monies of the bankruptcy estate he had turned over to the Debtors. Also before 12 court is Attorney De Jesus’ Objection thereto (Docket No. 234) and Attorney Diaz’s Motion To 13 |\Strike Objection to Application for Compensation ... for Lack of Sanding (“Motion to Strike”, Docket 14 |INo. 236), to which Attorney De Jesus opposed (Docket Nos. 238 & 239). For the reasons stated 15 the court partially grants Attorney Diaz’s Motion to Strike to declare that Attorney De Jesus 16 no standing to oppose her Application for Compensation but schedules a hearing to consider the 17 thereof. 18 Procedural Background 19 The court incorporates herein the procedural background set in the Opinion & Order issued 20 on August 9", 2012 (Docket No. 247 ) and proceeds to add the relevant events related to the instant 21 |Icontested matter. 22 On March 2, 2011, Wilfredo Segarra Miranda, the Chapter 7 Trustee, filed an Application for 23 |\Leave to Employ [Attorney Diaz as] Special Counsel Pursuant to Rule 2014 of the Federal Rules of 24 ||Bankruptcy Procedure (the “Application for Employment”, Docket No. 135) “to recover monies of 25 |Ithe estate” from Attorney De Jesus. He informed that her attorney fees would be 33% of all monies 26 properties recovered plus costs and expenses incurred. Her employment was authorized on May 27 |3, 2011 “with compensation to be paid in such amounts as may be allowed by the court upon proper 28 |lapplication or applications thereof”, although the court noted that the Application did not include the statements required in LBR 2014(a)(6) and (7) (Docket No. 141). Consequently, on May 23, 2011,

1 Attorney Diaz field a Motion Submitting Amended Certificate of Proposed Special Counsel for 2 Trustee to comply with LBR 2014 (Docket No. 148). 3 On June 9, 2011, the Chapter 7 Trustee and Attorney De Jesus reached a Settlement 4 Agreement (Docket No. 150-2), which was filed with a Motion Requesting Approval of Compromise 5 with Attorney Jorge R. De Jesus Diaz (Docket No. 150). The Motion was filed by Attorney Diaz. 6 In essence, Attorney De Jesus acknowledged that he “failed to notify the [Chapter 7] Trustee about 7 the payment of the [Judgment Check] and of the withdrawal of the funds” (Docket No. 150-2, p. 2). 8 To avoid the expenses of litigating the controversy, the Chapter 7 Trustee and Attorney De Jesus 9 agreed that the latter would pay the bankruptcy estate in 60 days the amount of $67,287.69 –two 10 thirds of the net proceeds to the bankruptcy estate from the Judgment Check– in exchange for mutual 11 releases between them (Docket No. 150-2, p. 3, ¶ 1(a)). After such payment, Attorney De Jesus was 12 to file an application for compensation to request the amount of $33,141.69 for his attorney’s fees 13 in the Complaint filed before the PR Court of First Instance. The Chapter 7 Trustee agreed not to 14 oppose it, though he advised Attorney De Jesus that the court could deny or modify it at its discretion 15 (Docket No. 150-2, p. 3, ¶ 1(b)). Attorney De Jesus was also advised that the Settlement Agreement 16 with the Chapter 7 Trustee “in no way, prevents the office of the US Trustee from doing so” (Docket 17 No. 150-2, p. 4, ¶ 1(c)). On June 17, 2011, the court approved the Settlement Agreement (Docket No. 18 154). 19 On March 9, 2012, this court held a settlement conference regarding Attorney De Jesus’ 20 Application for Compensation and the US Trustee’s Motion for Summary Judgment opposing it. The 21 Chapter 7 Trustee appeared by himself, without Attorney Diaz, where he argued his position 22 regarding the Settlement Agreement. See Docket Nos. 226 & 227. 23 On April 10, 2012, Attorney Diaz filed her Application for Compensation (Docket No. 232) 24 arguing that during the course of this case, she performed various services that were necessary for 25 the administration and completion of this case and beneficial to the estate. She claims that although 26 pursuant to the terms of the contingency agreement with the Chapter 7 Trustee she would technically 27 be entitled to file an application for payment for the amount of $33,141.69 (in light of the fact that 28 the Chapter 7 Trustee is entitled to recover $100,429.39 and her contingency fee is 33% of the total 2 1 amount recovered), she agreed with the Chapter 7 Trustee to reduce her Application for 2 Compensation to 33% of $67,287.69, for a total of $22,204.93. To her Application for 3 Compensation, Attorney Diaz attached as Exhibit B an Invoice of her hourly work in the instant case 4 from January 19, 2011 through April 10, 2012, which total 21.90 hours, and the expenses she 5 incurred in parking, photocopies and postage, which total $123.34 (Docket No. 232-2, pp. 1-7). 6 On April 24, 2012, Attorney De Jesus filed an Objection to [Attorney Diaz]’s Fee Application 7 (Docket No. 234) alleging that the retention of Attorney Diaz in this case was unnecessary because 8 it did not require discovery pleadings, adversary proceedings or extensive litigation and it was 9 promptly settled. He also contends that most of her work, as detailed in the Invoice attached to her 10 Application for Compensation, is minimal and duplicative because Attorney Monsita Lecaroz 11 Arribas, counsel for the US Trustee, carried the brunt of the proceedings before and during the case. 12 He further avers that Attorney Diaz did not proffer any written contingency agreement to the court, 13 which is a requirement under the Puerto Rico Code of Professional Ethics, and that her fees are 14 unreasonable under Section 328 of the Bankruptcy Code and its case law considering that for only 15 21.90 hours she is claiming fees in the amount of $22,204.93, which average $1,013.92 per hour. He 16 therefore requests a hearing on Attorney Diaz’s Application for Compensation under Section 17 330(a)(1) of the Bankruptcy Code. 18 The next day, on April 25, 2012, Attorney Diaz filed the Motion to Strike (Docket No. 239) 19 arguing that Attorney De Jesus is not a creditor in this case or an “aggrieved party” and thus has no 20 standing to oppose her Application for Compensation. On May 2, 2012, Attorney De Jesus filed an 21 Opposition to Motion to Strike (Docket No. 238) disputing the applicability of the case law cited by 22 Attorney Diaz and arguing that irrespective of the issue of standing, a special counsel’s fee 23 application must be independently addressed by the court. He therefore reiterates a hearing to that 24 effect under Section 330(a)(1). 25 Applicable Law & Analysis 26 (A) Attorney De Jesus’s Lack of Standing to Oppose Attorney Diaz’s Application for Compensation 27 28 “Standing requires a case or controversy in which the litigant asserts [his/her/its] own rights 3 1 interests, not those of some third party.” Woods v. Wells Fargo Bank, N.A., 2012 U.S. Dist. 2 }LEXIS 91878 at *6, 2012 WL 2577580 *2, --- F.Supp.2d --- (D.Mass. 2012) (citing Benjamin v. 3 Aroostook Med. Ctr., Inc., 57 F.3d 101, 104 (1* Cir. 1995)). Also see In re Correia, 452 B.R. 319, 4 1324 (B.A.P. 1* Cir. 2011). To have standing, a movant must establish: “(1) [he/she/it] has suffered 5 |jan injury in fact that is (a) concrete and particularized and (b) actual or imminent, not conjectural or 6 ||hypothetical; (2) the injury is fairly traceable to the challenged action of the [opposing party]; and 7 it is likely, as opposed to merely speculative, that the injury will be redressed by a favorable 8 |ldecision.” Friends of the Earth, Inc. v. Laidlaw Envtl. Servs., 528 U.S. 167, 180-181 (2000) 9 |\(citations omitted). Also see Katz v. Pershing, LLC, 672 F.3d 64, 71 (1* Cir. 2012) (standing 10 |Irequires “such a personal stake in the outcome of the controversy as to assure that concrete 11 jladverseness which sharpens the presentation of issues upon which the court so largely depends”). 12 Standing “cannot be inferred argumentatively from averments in the pleadings, but rather 13 affirmatively appear in the record. And it is the burden of the party who seeks the exercise of 14 |\jurisdiction in his favor, clearly to allege facts demonstrating that he is a proper party to invoke 15 |\judicial resolution of the dispute.” FW/PBS, Inc. v. City of Dallas, 493 U.S. 215, 230 (1990) 16 |\(citations omitted). Also see Sullivan v. City of Augusta, 511 F.3d 16, 29 (1* Cir. 2007), cert. denied 17 Ct. 112, 172 L. Ed. 2d 35 (2008). 18 In the instant case, Attorney De Jesus, as a special counsel for the bankruptcy estate, has not 19 met his burden to demonstrate how or in what way he has standing to dispute Attorney Diaz’s 20 |icompensation or how or why, if at all, he is affected by Attorney Diaz’s Application for 21 ||\Compensation. Hence, the court finds he has no standing to oppose it. 22 Notwithstanding, in all circumstances involving fee applications, the bankruptcy court has 23 independent judicial responsibility to review the fees of professionals, even in the absence of 24 llobjections. See In re Claudio, 459 B.R. 500, 512 (Bankr. D. Mass. 2011), citing In re First Software 25 ||Corp., 79 B.R. 108, 111 (Bankr. D. Mass. 1987); In re LaFrance, 311 B.R. 1, 20-21 (Bankr. D.Ma. 26 (“The Court has an independent judicial responsibility to review the fees of professionals, even 27 the absence of an objection by a party in interest.”) Accordingly, this court will review Attorney 28 ||Diaz’s Application for Compensation (Docket No. 232) under its independent judicial responsibility.

1 (B) Contingency fees for legal services under the scope of Sections 327, 328 & 330 of the 2 Bankruptcy Code 3 Fees for legal services may be either “certain” or “contingent” or some hybrid of the two. “A 4 fee is certain if it is payable without regard to the outcome of the suit; it is contingent if the obligation 5 to pay depends on a particular result’s being obtained. Under the most common contingent-fee 6 contract for litigation, the attorney receives no payment for his services if his client loses. Under this 7 arrangement, the attorney bears a contingent risk of nonpayment that is the inverse of the case’s 8 prospects of success: if his client has an 80% chance of winning, the attorney’s contingent risk is 9 20%.” City of Burlington v. Dague, 505 U.S. 557, 560-561 (1992). The contingency fee is awarded 10 to a professional upon the successful outcome of a sated objective and is generally based upon a 11 percentage of a recovery. See Alan N. Resnick & Henry J. Sommer, 5 Collier on Bankruptcy ¶ 12 328.02[8] (16th ed. 2012). 13 Section 327(a) of the Bankruptcy Code authorizes bankruptcy trustees to “employ [with court 14 approval] one or more attorneys, accountants, appraisers, auctioneers, or other professional persons 15 ... to represent or assist the trustee in carrying out the trustee’s duties.” 11 U.S.C. § 327(a). Sections 16 328 and 330 in turn establish a two-tiered system for judicial review and approval of the terms of the 17 professional’s retention. Section 330 authorizes the bankruptcy court to award the retained 18 professional “reasonable compensation” based on an after-the-fact consideration of “the nature, the 19 extent, and the value of such services, taking into account all relevant factors.” 11 U.S.C. § 330(a). 20 Section 328(a), on the other hand, permits a bankruptcy court to forgo a full post-hoc reasonableness 21 inquiry if it pre-approves the “employment of a professional person under Section 327 ... on any 22 reasonable terms and conditions of employment, including on a retainer, on an hourly basis, on a 23 fixed or percentage fee basis, or on a contingent fee basis.” 11 U.S.C. § 328(a). “Where the court 24 pre-approves the terms and conditions of the retention under Section 328(a), its power to amend those 25 terms is severely constrained.” Riker, Danzig, Scherer, Hyland & Perretti v. Official Comm. of 26 Unsecured Creditors (In re Smart World Techs., LLC), 552 F.3d 228, 232 (2nd Cir. 2009). In such 27 cases, the bankruptcy court may only “allow compensation different from the compensation provided 28 under such terms and conditions after the conclusion of such employment, if such terms and 5 1 conditions prove to have been improvident in light of developments not capable of being anticipated 2 at the time of the fixing of such terms and conditions.” 11 U.S.C. § 328(a). “These two inquiries are 3 mutually exclusive, as ‘there is no question that a bankruptcy court may not conduct a Section 330 4 inquiry into the reasonableness of the fees and their benefit to the estate if the court already has 5 approved the professional’s employment under 11 U.S.C. § 328.’” In re Smart World Techs., LLC, 6 552 F.3d at 233, quoting In re B.U.M. Int’l, Inc., 229 F.3d 824, 829 (9th Cir. 2000). The standard to 7 determine if a court has pre-approved a professional’s fee under Section 328 of the Bankruptcy Code 8 is the “totality of the circumstances” test taking into account, inter alia, the application and the 9 bankruptcy court’s order” and “whether the ... motion for appointment specifically requested fee pre- 10 approval, whether the court’s order assessed the reasonableness of the fee and whether either the 11 order or the motion expressly invoked Section 328”. Nischwitz v. Miskovic (In re Airspect Air, Inc.), 12 385 F.3d 915, 922 (6th Cir. 2004). This is important because “[a] court may conditionally approve 13 an application while reserving judgment upon the reasonableness of certain proposed terms and 14 conditions until later in the case or may modify terms of compensation originally approved at 15 commencement or during pendency of the case.” See Alan N. Resnick & Henry J. Sommer, 3 Collier 16 on Bankruptcy ¶ 328.02 (16th ed. 2012). 17 In the case at bar, the Chapter 7 Trustee’s Motion for Leave to Employ [Attorney Diaz as] 18 Special Counsel only expresses that the “terms of the representation are 33% of all moneys and 19 properties recovered, plus costs and expenses incurred” (Docket No. 135, p.1, ¶ 2). It did not, 20 however, seek pre-approval of the contingency fee nor invoke Section 328 of the Bankruptcy Code. 21 Therefore, this court’s Order authorizing Attorney Diaz’s employment as special counsel did not pre- 22 approve the contingency fee, but rather ruled that her compensation would be paid “in such amounts 23 as may be allowed by the Court upon proper application or applications thereof” (Docket No. 141). 24 As a result, the court will entertain her Application for Compensation under Section 330 of the 25 Bankruptcy Code. 26 (C) Section 330 of the Bankruptcy Code and the loadstar method 27 Section 330 of the Bankruptcy Code governs the allowance of compensation to all 28 professionals for the services they render the bankruptcy estate. Generally, the court may award 6 1 |[professionals reasonable compensation for actual and necessary services and reimbursement for 2 and necessary expenses. 11 U.S.C. §§ 330(a)(1)(A) & (B). Moreover, 11 U.S.C. § 330 further 3 |\provides that: 4 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 5 relevant factors, including— 6 (A) the time spent on such services; 7 (B) the rates charged for such services; 8 (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 9 under this title; 10 (D) whether the services were performed within a reasonable amount of time commensurate with the complexity, importance, and nature of the problem, issue, 11 or task addressed; and 12 (E) whether the compensation is reasonable based on the customary compensation charged by comparably skilled practitioners in cases other than 13 cases under this title. 14 “Section 330 factors mirror those encapsulated in the traditional lodestar approach to 15 |calculating attorneys’ fees.” Berliner v. Pappalardo (In re Sullivan), 674 F.3d 65, 69 (1* Cir. 2012), 16 In re Spillane, 884 F.2d 642, 647 (1* Cir. 1989). The lodestar method is designed to “provide[] 17 ‘flexible paradigm’ not meant to bind the nisi prius court to any single way of calculating the 18 |inumber of hours reasonably expended.” Weinberger v. Great N. Nekoosa Corp., 925 F.2d 518, 19 526-527 (1* Cir. 1991), quoting United States v. Metro. Dist. Comm’n, 847 F.2d 12, 16 (1* Cir. 20 11988). The Court of Appeals for the First Circuit (the “First Circuit”) has adopted the lodestar 21 |lapproach as an appropriate measuring device for attorneys’ fees in bankruptcy cases. In re Sullivan, 22 F.3d at 69. Also see Torres-Lopez v. Consejo de Titulares (In re Torres-Lopez), 405 B.R. 24, 23 30-31 (B.A.P. 1* Cir. 2009). Pursuant to the lodestar method, the court must first determine the fee 24 by “multiplying the number of hours productively spent by a reasonable hourly rate to 25 |\calculate a base figure.” In re Sullivan, 674 F.3d at 69, citing Torres-Rivera v. O’ Neill-Cancel, 524 26 ||F.3d 331, 336 (1* Cir. 2008). Also see In re Spillane, 884 F.2d at 647; Lipsett v. Blanco, 975 F.2d 27 934, 937 (1* Cir. 1992). When computing the number of hours productively spent, the court should 28 |Itake the party’s submitted time and then subtract from that figure all hours which are duplicative,

1 unproductive, excessive, unnecessary or spent on overworked tasks. In re Sullivan, 674 F.3d at 69, 2 Gay Officers Action League v. Puerto Rico, 247 F.3d 288, 295-296 (1* Cir. 2001); Lipsett v. 3 Blanco, 975 F.2d at 937. Also see 11 U.S.C. § 330(a)(4)(A). The court then applies hourly rates to 4 billed task “taking into account the prevailing rates in the community for comparably qualified 5 llattorneys” (Lipsett, 975 F.2d at 937, quoting Metro. Dist. Comm’n, 847 F.2d at 190), although it is 6 |Inot bound by it (Gay Officers Action League, 247 F.3d at 296, citing Brewster v. Dukakis, 3 F.3d 7 492-493 (1* Cir. 1993)). The bankruptcy court need not march mechanically through a checklist 8 the Section 330 factors when fashioning a fee award. Metro. Dist. Comm’n, 847 F.2d at 15. Also 9 In re Thirteen Appeals Arising Out of San Juan Dupont Plaza Hotel Fire Litig., 56 F.3d 295, 308 10 Cir. 1995) (the lodestar method should not “be applied in a formulaic or mechanical fashion”). 11 |\Rather, “it suffices if the court makes a fee calculation that takes the Section 330 factors fairly into 12 flaccount.” In re Sullivan, 674 F.3d at 69. Once calculated, the lodestar fee is “adjusted upward or 13 |ldownward to reflect the contingent nature of any fee, if such is not reflected in the hourly rate, delay 14 payment, quality of representation, exceptional results obtained”, and any other relevant 15 ||circumstance. Furtado v. Bishop, 635 F.2d 915, 920 (1* Cir. 1980). 16 Attorney De Jesus brings to the attention of the court the case of In re Humbert, 21 B.R. 489 17 |\(Bankr. N.D.Oh. 1982) aff'd 39 B.R. 643 (N.D.Oh. 1984), where the trustee’s attorney had agreed 18 jlon a contingent fee to recover $111,905.00 to the bankruptcy estate. Although the Humbert court 19 the twelve-factor test established in Johnson v. Georgia Highway Express, Inc., 488 F.2d 714 20 |\(5" Cir. 1974), which is inapplicable in the First Circuit pursuant to Furtado v. Bishop, 635 F.2d at 21 its ultimate result is comparable to the instant case. In Humbert, the bankruptcy court 22 ||determined that a one-third contingent fee on $111,905.00 for 36 hours of work was unreasonable 23 llunder Section 330 and reduced the compensation to “ta premium over and above a $100.00 hourly 24 |lrate” for a total of $7,500. 21 B.R. at 495. 25 In Hernandez v. Morales, 810 F. Supp. 25, 28 (D.P.R. 1992), the court applied the lodestar 26 |Imethod and proceeded to divide the tasks performed by the applicant attorney into three categories 27 depending on which category the task fell, the applicant would be awarded a fraction or full 28 rate. The three categories are:

1 (a) Low: includes notifications, visits and interviews; conferences with co-counsel and 2 adversaries; drafting of letters; drafting and reading of intra-counsel memoranda; 3 proofreading and copyreading; notification and preparation for depositions; review 4 of documents; telephone conversations; and travel time. Hours falling under this 5 category shall be compensated at 60 percent of the attorney’s rate. 6 (b) Medium: includes general research; taking and attendance to depositions; 7 preparations for court hearings or conferences; preparation of subpoenas, class 8 notices, interrogatories and answers to them, questionnaires and affidavits; 9 preparation of fee applications; and preparation of informative motions. Hours falling 10 under this category shall be compensated at 80 percent of the attorney’s rate. 11 (c) High: includes court appearances, in-chambers conferences, and the preparation and 12 drafting/dictation of motions and briefs. Hours falling under this category shall be 13 compensated at 100 percent of the attorney’s rate. 14 (D) Burden of Proof 15 The burden of proof as to the entitlement of a fee, as well as the reasonableness of the amount 16 sought, is upon the applicant. In re Claudio, 459 B.R. at 512, citing In re Narragansett Clothing Co., 17 210 B.R. 493, 498 (B.A.P. 1stCir. 1997); In re Navis Realty, Inc., 126 B.R. 137, 145 (Bankr. E.D.N.Y. 18 1991). It is the applicant’s burden to establish the value of his/her services. In re U.S. Golf Corp., 19 639 F.2d 1197, 1207 (5th Cir. 1981). In order to enable the court properly to evaluate the “cost of 20 comparable services”, the applicant must provide the court with sufficient information for it to make 21 an informed, well-reasoned determination. In re Navis Realty, Inc., 126 B.R. at 145. In this case, 22 the burden of proof as to the reasonableness of her fees relies on Attorney Diaz. 23 (E) Factors to Consider 24 Based on the foregoing, a hearing is scheduled for Attorney Diaz to establish to the 25 satisfaction of the court the following factors in light of the parameters previously discussed: 26 (a) the reasonableness of her fees in light of the lodestar method, especially in light of the 27 fact that out of the 69 entries included in her Application for Compensation (Docket 28 No. 232-2, Exhibit B, pp. 1-7), 53 were just devoted to reviewing documents from the 9 1 docket, and that $22,204.93 (the total amount requested for her attorney fee 2 compensation’) divided by the 21.90 of worked hours she reports equals $1,013.92 3 per hour; 4 (b) reasonableness of the claimed expense of $90.75 in photocopy charges (Docket No. 5 232-2, Exhibit B, p. 7); and 6 (c) why $200.00 an hour would not be an appropriate lodestar hourly rate for her fees. 7 Conclusion 8 For the reasons stated herein, Attorney Diaz’s Motion to Strike is partially granted to declare 9 Attorney De Jesus has no standing to object her Application for Compensation. Notwithstanding, 10 |Ithe court schedules a hearing for October 16, 2012 at 2:00 p.m. to consider the merits of the 11 Application for Compensation in light of the parameters established herein. 12 In San Juan, Puerto Rico, this 9" day of August, 2012. 13 SO ORDERED. 14 15 '6 Afri 18 19 20 21 22 23 24 25 26

' This amount was calculated by subtracting the amount of $123.34 that Attorney Diaz claims as expenses 28 || (Docket No. 232-2, Exhibit B, p. 7) from the total amount she requests of $22,328.27 (Docket No. 232, p. 4). 10