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 :

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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.

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'6 Afri

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' 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