F I L E D
United States Court of Appeals
Tenth Circuit
PUBLISH
OCT 31 2002
UNITED STATES COURT OF APPEALS
PATRICK FISHER
Clerk
TENTH CIRCUIT
In re: MINISCRIBE CORPORATION,
Debtor.
No. 01-1263
THOMAS H. CONNOLLY, Trustee,
Appellant,
v.
HARRIS TRUST COMPANY OF
CALIFORNIA, as Indenture Trustee
for the MiniScribe Corporation 7 1/2%
Convertible Subordinated Debentures
Due 2012,
Appellee.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLORADO
(D.C. No. 00-M-2328)
Submitted on the briefs: *
*
After examining the briefs and appellate record, this panel has determined
unanimously that oral argument would not materially assist the determination of
this appeal. See Fed. R. App. P. 34(a)(2); 10th Cir. R. 34.1(G). The case is
therefore ordered submitted without oral argument.
Gregory L. Williams and Donald J. Quigley, Block Markus Williams, Denver,
Colorado, for Appellant.
David P. Hutchinson, Otten, Johnson, Robinson, Neff & Ragonetti, Denver,
Colorado, and James M. Breen, Chapman and Cutler, Chicago, Illinois, for
Appellee.
Before MURPHY, ANDERSON, and HARTZ, Circuit Judges.
ANDERSON , Circuit Judge.
Thomas H. Connolly, Chapter 7 trustee for the debtor, MiniScribe
Corporation, appeals from orders of the district court (1) reversing an order of the
bankruptcy court awarding him a trustee’s fee of $3,044,953.69, and (2) ordering
that he be allowed a fee of $1,828,812. We affirm.
FACTS
On January 1, 1990, the debtor filed a voluntary petition in bankruptcy
under Chapter 11. It converted the case to a Chapter 7 liquidation on April 16,
1991. Ten days later, Connolly was appointed Chapter 7 trustee.
At the time Connolly assumed his duties as trustee, the MiniScribe estate
was insolvent. The estate had only $150,000 cash on hand, and faced Chapter 11
administrative expenses exceeding $3.0 million, a superpriority claim against it by
Standard Chartered Bank (SCB) in the amount of $17 million, and total claims of
approximately $900 million. The only opportunities to develop a bankruptcy
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estate lay in recoveries on avoidance claims and in a fraud action against former
MiniScribe officers and outside accountants and consultants.
The bankruptcy court found that Connolly performed admirably in
obtaining funds for the estate. He not only convinced SCB to reduce its claim
from $17 million to $1 million, but also further persuaded it to loan the estate $1
million to defray the cost of prosecuting its fraud action. This action was
eventually settled on terms highly favorable to the bankruptcy estate and its
creditors, yielding over $80 million for the payment of claims. Connolly also
conducted 45 adversary proceedings that realized over $17 million for the estate
and that resulted in the reduction of claims against the estate from approximately
$900 million to approximately $168 million. Finally, Connolly settled a recovery
action against one of MiniScribe’s creditors by taking an equity interest in the
creditor which Connolly ultimately sold for over five times the value of the
settlement.
The bankruptcy court made a number of interim fee payments to Connolly
as trustee. In his final fee application, he sought additional compensation that
would have resulted in a total fee of $3,044,953. This was the maximum fee
permitted at that time under the percentage fee scheme (the “cap”) outlined in
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11 U.S.C. § 326(a) (1986). 1 Appellee Harris Trust Company, representing
MiniScribe’s debenture holders, opposed the request, as did the United States
trustee.
1. First bankruptcy court decision
The bankruptcy court carefully analyzed Connolly’s fee request and issued
an extensive order and opinion approving the statutory maximum payment.
Connolly v. Harris Trust Co. (In re MiniScribe Corp.), 241 B.R. 729 (Bankr.
D. Colo. 1999). The court determined that during his administration, Connolly
had disbursed $101,492,332 through his accounts. This amount, which included
settlements of fraud actions that the trustee and other litigants had brought against
third party defendants, would be used in calculating the statutory maximum under
the “cap” set out in § 326(a).
The bankruptcy court next applied a lodestar analysis, focusing on a
reasonable number of hours spent by the trustee on his duties multiplied by a
reasonable hourly rate. It noted that Connolly’s time records reflected 1,779
hours spent on the case, along with an additional 1,347 hours spent by his
paralegals. The bankruptcy court concluded that this amount of time, however,
1
Both sections 326 and 330 were amended in 1994 as part of the Bankruptcy
Reform Act of 1994, Pub. L. No. 103-394, 108 Stat. 4106; however, the
amendment does not apply to this Chapter 7 case, filed prior to the amendment.
Pritchard v. United States Trustee (In re England) , 153 F.3d 232, 234 n.2
(5th Cir. 1998).
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was misleadingly low because Connolly had performed more efficiently than
expected. It rejected the objectors’ position that the hourly rate should be
differentiated, with a rate of $1,000 to $1,500 awarded for time spent on the fraud
litigation and a more modest rate of $250 awarded for time spent on other
activities. The court determined that a uniform, reasonable hourly rate of $500
should be applied to the 1,779 hours reasonably expended by Connolly, resulting
in a lodestar fee of $889,500.
The court next adjusted the lodestar fee by considering the factors outlined
in Johnson v. Georgia Highway Express, Inc., 488 F.2d 714 (5th Cir. 1974). It
determined that these factors (novelty and difficulty of the issues; requisite skill;
preclusion of other employment; contingent nature of the fee; time limitations;
amount involved and results obtained; and the experience, reputation, and ability
of the trustee) justified a lodestar multiplier of 3.5, resulting in a total fee of
$3,113,250.
Alternatively, the court applied a “common fund”or “percentage of the
fund” analysis to arrive at an appropriate fee. If the trustee were allowed his
claimed fee of $3,044,954, the total adjusted costs for raising and administering
the “common fund” of the bankruptcy estate would be $10,864,402,
approximately 10.7 percent of the total funds ($101,492,456) that had been
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administered by the trustee. This percentage, the bankruptcy court determined,
was well within the range of permissible costs on a percentage basis.
2. First district court decision
Harris Trust appealed from the bankruptcy court’s award. In an
unpublished order and judgment, the district court rejected application of the
common fund analysis under the circumstances of this case. Under a common
fund theory, the court reasoned, the entire cost of recovery of the amount
disbursed by Connolly would be borne by the only remaining creditors, the
subordinated debenture holders. Moreover, Connolly was not solely responsible
for creation of the fund; the plaintiffs whose fraud claims had been consolidated
with his own had also been represented by able counsel and the bankruptcy court
had not factored in the fees, costs and expenses paid to them.
The district court also rejected the $500 per hour unified lodestar rate as
lacking in evidentiary support. It found the 3.5 multiplier unjustified because it
overstated the risk of non-payment to Connolly, ignored the routine nature of
much of the work he had performed, and overlooked the contribution of the
trustee’s counsel and counsel for the other fraud plaintiffs to the recovery of the
fund. The bankruptcy court would have to recalculate the adjusted lodestar
amount on remand.
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Finally, the district court addressed the statutory cap. It found that
MiniScribe’s bankruptcy estate had been unusual because of the amount of money
passing through the trustee’s accounts and because of the circumstances
surrounding those disbursements. It noted that $70 million of the approximately
$101 million that had passed through the trustee’s accounts had been paid to other
parties who had consolidated their fraud actions with the trustee’s fraud action for
purposes of trial. The correct measure of the results achieved for purposes of
computing the statutory cap lay somewhere between the $31.5 million contended
for by Harris Trust, and the $101.5 million figure adopted by the bankruptcy
court. The precise figure was left to be calculated by the bankruptcy court
on remand.
3. Second bankruptcy court decision
The bankruptcy court held further hearings on remand and took up the fee
issues in a second published decision, Connolly v. Harris Trust Co. (In re
MiniScribe Corp.), 257 B.R. 56 (Bankr. D. Colo. 2000). It recalculated the size
of the estate, leaving a figure of $67.4 million attributable to Connolly’s efforts.
The bankruptcy court did not read the district court’s order to preclude
application of a common fund analysis; it believed the district court had only
rejected its application based on the bankruptcy court’s prior findings. Therefore,
having adjusted these findings, the bankruptcy court once again applied a
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common fund percentage analysis to the $67.4 million estate realized by
Connolly’s efforts. Assuming Connolly were awarded the $3.04 million he sought,
the $10.86 million total administrative burden would still be within a reasonable
range under a common fund analysis.
The bankruptcy court next turned to the lodestar analysis. Addressing the
district court’s criticism of its previous effort, it conceded that there was no direct
support for the $500 per hour figure in the record. Upon consideration of
Connolly’s highly responsible role and the fees charged by other professionals,
however, the bankruptcy court determined that while a fee of $500 per hour
would not be unreasonable, a rate of $400 per hour would also be reasonable.
Applied to the 1,779 hours accounted for by Connolly, the base lodestar amount
would be $711,600.
The bankruptcy court next turned to the district court’s criticism of its use
of a 3.5 lodestar multiplier. After again analyzing the trustee’s contribution to
and success achieved in the case, it concluded that a multiplier of 2.57 would be
appropriate. Thus, the adjusted lodestar fee would be $1,828,812. Once again,
however, the bankruptcy court concluded that the lodestar fee was not the
appropriate measure of reasonable compensation; instead, it allowed a larger
amount of $3,044,953.69, calculated under a common fund approach.
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4. Second district court decision
Harris Trust again appealed from the bankruptcy court’s award. The
district court again concluded that a common fund analysis was inappropriate in
this case. It found that there was no way to quantify Connolly’s contribution to
the bankruptcy estate that would be comparable to the fund creation theory
supporting application of the common fund method. The district court opined that
the lodestar method, rather than the common fund method, was the appropriate
measure of compensation for this case. It concluded that the adjusted lodestar fee
of $1,828,812 arrived at by the bankruptcy court in its second decision constituted
a reasonable fee within its sound discretion.
ANALYSIS
1. Standard of review
The district court’s first order was not a final, appealable decision under
28 U.S.C. § 158(d), because it remanded the case to the bankruptcy court for
“significant further proceedings” of a discretionary nature. Office of Thrift
Supervision v. Overland Park Fin. Corp. (In re Overland Park Fin. Corp.),
236 F.3d 1246, 1251 (10th Cir. 2001). Connolly’s appeal from the district court’s
second, final order, however, permits us to address issues pertaining to both
orders, as he requests. See Masunaga v. Stoltenberg (In re Rex Montis Silver
Co.), 87 F.3d 435, 437-38 (10th Cir. 1996).
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Our review of the bankruptcy court’s decision is governed by the
same standards of review that govern the district court’s review of
the bankruptcy court. Accordingly we review the bankruptcy court’s
legal determinations de novo and its factual findings under the
clearly erroneous standard. A finding of fact is clearly erroneous if it
is without factual support in the record or if, after reviewing all of
the evidence, we are left with the definite and firm conviction that a
mistake has been made.
Conoco, Inc. v. Styler (In re Peterson Distrib., Inc.), 82 F.3d 956, 959 (10th Cir.
1996) (citations omitted).
Seeking to reap the deferential standard of review accorded to the
bankruptcy court’s factual findings favorable to his position, Connolly paints all
the underlying issues here as factual. He contends that the district court
improperly supplanted the bankruptcy court’s factual findings concerning the
comparable non-bankruptcy cost of his services, a reasonable hourly rate for his
services, and the contingent nature of his fee. Harris Trust, by contrast, argues
that this case also presents an important legal issue requiring our de novo review.
It asks whether a bankruptcy trustee who does not act as his own litigation
counsel may ever be compensated based on a percentage-of-the-fund (common
fund) methodology. We will exercise de novo review to conclude that under the
applicable statutes common fund methodology is not an appropriate form of
compensation for a Chapter 7 trustee.
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2. Statutory authority
Authority for payment of a reasonable fee to a Chapter 7 trustee is found in
11 U.S.C. §§ 326 and 330. Section 330(a) provides that a bankruptcy court may
award a trustee
(1) reasonable compensation for actual, necessary services rendered
by such trustee . . . and by any paraprofessional persons employed by
such trustee . . . based on the nature, the extent, and the value of such
services, the time spent on such services, and the cost of comparable
services other than in a case under this title; and
(2) reimbursement for actual, necessary expenses.
Section 326(a) provides a formula that limits the compensation of a
Chapter 7 trustee arrived at under § 330:
In a case under chapter 7 . . . the court may allow reasonable
compensation under section 330 of this title of the trustee for the
trustee’s services, payable after the trustee renders such services, not
to exceed fifteen percent on the first $1,000 or less, six percent on
any amount in excess of $1,000 but not in excess of $3,000, and three
percent on any amount in excess of $3,000, upon all moneys
disbursed or turned over in the case by the trustee to parties in
interest, excluding the debtor, but including holders of secured
claims.
Under this standard, § 326(a) sets the maximum compensation payable to
the trustee; it does not establish a presumptive or minimum compensation.
The computation in [§ 326(a)] is a limitation on compensation, not a
mandate for minimum commissions. The section states that the court
may allow only “reasonable compensation under section 330.” Thus,
the cap of section 326(a) is implicated only when the compensation is
reasonable, and reasonableness is a determination that must begin
with 11 U.S.C. § 330.
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In re Butts, 281 B.R. 176, 178 (Bankr. W.D.N.Y. 2002).
Accordingly, a court awarding trustee fees must begin by assessing
reasonableness under § 330(a) before applying the percentage-based cap under
§ 326(a).
3. Common fund theory
The common fund doctrine was first recognized by the
Supreme Court in Trustees v. Greenough, 105 U.S. 527, 26 L.Ed.
1157 (1881), and most recently discussed in Boeing Co. v. Van
Gemert, 444 U.S. 472, 100 S.Ct. 745, 62 L.Ed.2d 676 (1980).
Essentially, the doctrine holds that “a litigant or lawyer who recovers
a common fund for the benefit of persons other than himself or his
client is entitled to a reasonable attorney’s fee from the fund as a
whole.” Boeing, 444 U.S. at 478, 100 S.Ct. at 749. It is most
appropriate when (1) the class of persons benefitted by the lawsuit is
small and easily identifiable, (2) the benefits can be traced with some
accuracy, and (3) the costs of the litigation can be shifted accurately
to those who profit by it. This is an equitable doctrine, and is usually
justified on the ground that it prevents unjust enrichment of the
non-litigants, who have taken a free ride on the trailblazer’s efforts.
Jurisdiction over the fund enables a court to prevent such inequity by
assessing fees out of the entire fund, spreading the burden
proportionately among those benefitted.
Matter of Fesco Plastics Corp., 996 F.2d 152, 157 (7th Cir. 1993) (further
citations omitted).
As Connolly notes, we have approved the use of common fund
methodology to award attorneys whose efforts created a fund benefitting persons
other than themselves or their clients. See, e.g., Gottlieb v. Barry, 43 F.3d 474,
487-88 (10th Cir. 1994). This case, however, presents a different issue: whether
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a percentage-based approach analogous to the equitable doctrine of common fund
has a place in establishing “reasonable” statutory compensation for a Chapter 7
trustee.
The available authority on this question is quite limited. What authority
there is divides sharply on the question. Recognizing this fact, a national report
on professional compensation in bankruptcy cases takes an agnostic approach to
the question:
[I]t appears that a majority [of courts] employ the lodestar approach
to trustees’ fee determinations. Some courts, however, reject that
approach as inappropriate in light of the significant difference
between the functions performed by trustees and those performed by
the professionals employed by trustees. In these courts especially,
the results obtained in the case play a far greater role in determining
reasonable compensation for trustees than they do with respect to the
compensation of professionals.
Am. Bankr. Inst., American Bankruptcy Institute National Report on Professional
Compensation in Bankruptcy Cases (G.R. Warner rep. 1991), at 206.
We have found no cases in this circuit that discuss whether a common fund
or other percentage-based rationale may be used in setting trustee compensation
under § 330. Connolly cites a case specifically endorsing a common fund or
percentage-based approach for trustee compensation, In re Guyana Development
Corp., 201 B.R. 462 (Bankr. S.D. Tex. 1996). Harris Trust responds with a case
in which a trustee’s common fund argument was rebuffed, In re Marvel
Entertainment Group, 234 B.R. 21 (Bankr. D. Del. 1999).
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In Guyana Development, the bankruptcy court rejected a lodestar approach
and awarded the trustee a percentage based fee analogous to a common fund
recovery, measured by the maximum permitted under 11 U.S.C. § 326. The
methodology employed in Guyana Development has been seriously criticized,
however, because the court applied a “sliding scale” approach that essentially
incorporated the maximum permitted compensation (calculated on a percentage
basis by statute) into the calculation of a “reasonable fee.” See In re Neill, 242
B.R. 685, 689 (Bankr. D.N.D. 1999); Marvel Entertainment, 234 B.R. at 38-39.
For this reason, we do not find Guyana Development persuasive.
In Marvel Entertainment, by contrast, the district court rejected a trustee’s
request for a percentage-based fee. In its well-reasoned decision, the court gave
several reasons for rejecting the request, many of which are also applicable here:
(1) section 326 serves only as a cap and does not establish the trustee’s
entitlement to a commission or percentage of amounts disbursed from the estate;
(2) there is no principled relationship between the amounts disbursed by a debtor
corporation and reasonable compensation based on the trustee’s actual efforts;
(3) there is no support in case law for a common fund approach; (4) setting
reasonable compensation based on a percentage of the debtor’s disbursements
would create a substantial risk of abuse in the selection and appointment of
trustees by the United States trustee; and (5) a percentage compensation approach
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could discourage courts from appointing a trustee when it might otherwise be
appropriate. Marvel Entertainment, 234 B.R. at 38-40.
Turning to the statutory language, § 330 requires a court awarding trustee’s
fees to consider “the nature, the extent, and the value of such services, the time
spent on such services, and the cost of comparable services other than in a case
under this title.” 11 U.S.C. § 330(a)(1). The “cost of comparable services” factor
plays an “overarching role” in assessing the reasonableness of a trustee’s fee,
given the nature and extent of the services rendered. Staiano v. Cain (In re Lan
Assoc. XI, L.P.), 192 F.3d 109, 124 n.9 (3d Cir. 1999).
Connolly argues that the “cost of comparable services” factor should take
into account the fact that attorneys can and do receive a common fund or
percentage-based recovery in non-bankruptcy cases. See, e.g., Brown v. Phillips
Petroleum Co., 838 F.2d 451, 454 (10th Cir. 1988). This argument, however,
begs an essential question: whether the services provided by a trustee are
“comparable” to those provided by an attorney in such cases. It is far from clear
that they are. Trustees do not have to be attorneys; indeed, the two serve
considerably different functions. See Guyana, 201 B.R. at 479 & n.11. An
attorney who serves as a trustee, in fact, may not be paid attorney’s fees for
performing duties that properly belong to his role as trustee. 11 U.S.C. § 328(b).
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Where the “common fund” has been created through litigation, the
distinction is particularly apt. An attorney litigating a case to judgment supplies
a significantly different expertise and function than that of a trustee. The
contingent fee trial lawyer generally advances his own money to finance
litigation. He enters his appearance before a court and does every task that the
litigation requires, personally or through other attorneys he employs, from
drafting the complaint to making the closing argument. Having entered his
appearance, he has no right to withdraw and his time commitment is not limited or
flexible. The trustee, by contrast, serves as a fiduciary whose non-bankruptcy
counterpart is a receiver, an executive or an in-house counsel. He is the
litigator’s client and has a right to periodic compensation, such as Connolly
received here.
Where, as here, the fund was created through negotiation by the trustee in
connection with the litigation, there may be more overlap between the functions
of trustee and attorney. Nevertheless, the overriding differences between the
functions of an attorney and a trustee lead us to conclude that cases in which an
attorney has been paid on a percentage basis for creating a common fund do not
represent the “comparable cost” of a trustee’s services, even where those services
may have contributed to the creation of the fund.
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Section 330 also requires the court to consider “the time spent on such
services.” If reasonable compensation for a trustee were predicated solely on a
common fund recovery, this factor could improperly be shortchanged. 2
While it cannot be denied that results obtained is a factor to be considered
in assessing the reasonableness of trustee compensation, see, e.g., In re Rauch,
110 B.R. 467, 473-74 (Bankr. E.D. Cal. 1990), we believe this factor is better
considered as merely one of the Johnson criteria for determining the multiplier, if
any, to be applied to the lodestar amount, rather than the sine qua non of the
reasonableness calculation.
For all the foregoing reasons, we reject a “common fund” or percentage-
based rationale for calculating reasonable trustee compensation under § 330.
4. Lodestar calculation
Having determined that percentage-based compensation is unavailable
under § 330, we turn to the appropriate basis for calculation of the fee. We
conclude that the lodestar test, with appropriate enhancements under Johnson, is
the appropriate method of calculation. This method encompasses each of the
2
The fact that attorneys and other professionals working for the trustee are
sometimes paid on a contingent fee basis, even though § 330 also applies to them,
is not dispositive. The bankruptcy code specifically permits a trustee to employ
an attorney on a contingent fee basis. 11 U.S.C. § 328(a). No such specific
authorization, however, is provided in the case of trustees.
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factors identified in § 330(a), as well as other factors that may be relevant in
calculating a reasonable fee.
The lodestar test is presently used as the dominant method for assessing
fees in fee-shifting disputes in federal court. See generally, Gisbrecht v.
Barnhart, 122 S. Ct. 1817, 1825 (2002). Strictly speaking, trustee’s fees in
bankruptcy do not involve a fee-shifting rationale. This court has long applied
the Johnson lodestar factors to assess “reasonableness” of attorney’s fees in a
variety of contexts, however, and has also specifically determined that the test
applies to attorney fee determinations under § 330(a)(1). Rubner & Kutner, P.C.
v. United States Trustee (In re Lederman Enters., Inc.), 997 F.2d 1321, 1323
(10th Cir. 1993) (attorney’s fees); see also generally First Nat’l Bank of Lea
County v. Niccum (In re Permian Anchor Servs., Inc.), 649 F.2d 763, 768 (10th
Cir. 1981). Other courts have applied an adjusted lodestar test, based on the
Johnson factors, to trustee compensation under § 330(a). See, e.g., Garb v.
Marshall (In re Narragansett Clothing Co.), 210 B.R. 493, 497 (1st Cir.
BAP1997); In re Draina, 191 B.R. 646, 649 (Bankr. D. Md. 1995). We therefore
apply the adjusted lodestar test here.
At the outset, we note Harris Trust’s failure to cross-appeal from either the
hourly rate determined by the district court, or the multiplier it applied. Given the
fact that Harris trust did not cross-appeal, our review is limited only to
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determining whether the record justifies the increase in either the hourly rate or
the multiplier contended for by Connolly. We have no occasion to consider
whether a reduction might be required on this record.
a. Hourly rate and hours expended
Judicial review of the bankruptcy court’s factual determinations in
connection with a fee award is highly deferential:
When we scrutinize factual determinations and discretionary
determinations made by a bankruptcy judge, such as may be involved
in calculating and fashioning appropriate fee awards, we give
considerable deference to the bankruptcy court[.] Historically,
bankruptcy courts have been accorded wide discretion in connection
with fact-intensive matters, and in regard to the terms and conditions
of the engagement of professionals. . . . The bankruptcy judge is on
the front line, in the best position to gauge the ongoing interplay of
factors and to make the delicate judgment calls which such a decision
entails.
Casco N. Bank, N.A. v. DN Assoc. (In re DN Assoc.), 3 F.3d 512, 515 (1st Cir.
1993) (quotation omitted).
The bankruptcy court initially determined that a uniform, reasonable hourly
rate of $500 should be applied to the 1,779 hours reasonably expended by
Connolly, resulting in a basic lodestar fee of $889,500. The district court rejected
the $500 per hour rate as unsupported, concluding that the hourly rates used
should vary according to the work done. When upon remand the bankruptcy court
adjusted the hourly rate to a uniform $400 per hour, however, the district court
abandoned the variable rate concept and approved the lower, uniform rate.
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A Chapter 7 trustee does perform a variety of functions in his role,
including investigating, liquidating, and distributing estate assets. In re Colburn,
231 B.R. 778, 783 (Bankr. D. Ore. 1999) (citing 11 U.S.C. § 704). Where the
trustee has performed work that differs in complexity, a solution is to adjust his
fee as a whole, to arrive at a “blended” rate. Garb, 210 B.R. at 499. We agree
that the appropriate approach here was a unified rate for all of the trustee’s
services.
The record, however, does not justify the rate of $500 per hour that
Connolly seeks. This is true for several reasons. First, the bankruptcy court
rejected expert testimony Connolly presented to justify a rate of $500 per hour.
Second, it found that the top rate generally charged by private attorneys for
bankruptcy work in the area was $350 per hour. MiniScribe, 257 B.R. at 62.
The bankruptcy court acknowledged the absence of specific evidence from which
a rate of $500 per hour could be justified. Given that Harris Trust has not
cross-appealed the district court’s determination that $400 per hour was a
reasonable rate, however, we will affirm that determination as unchallenged.
b. Lodestar multiplier
The bankruptcy court further concluded, in light of the exceptional results
obtained in this case and other Johnson factors, that a multiplier was required to
adequately compensate Connolly for his efforts. The district court disapproved of
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a 3.5 multiplier, however, concluding that the bankruptcy court had overstated the
risk of non-payment run by Connolly. We also conclude that the 3.5 multiplier
was excessive. The 3.5 multiplier risks double payment or overpayment for the
services provided. Cf., e.g., Rosenbaum v. MacAllister, 64 F.3d 1439, 1447-48
(10th Cir. 1995) (stating “our conscience is shocked by an award of a 3.16
multiplier that results in a fee equal to more than $900 per hour for every
attorney, paralegal, and law clerk who worked on the case”).
In its second decision, the bankruptcy court lowered the multiplier to 2.57,
relying on the multiplier used for the attorney fee award in Gottlieb v. Wiles,
150 F.R.D. 174 (D. Colo. 1993), subsequently reversed for application of a
common fund award in Gottlieb v. Barry, 43 F.3d 474 (10th Cir. 1994). The
2.57 multiplier, unchallenged by Harris Trust, finds some support in other
lodestar multiplier cases. See, e.g., In re Computron Software, Inc., 6 F. Supp. 2d
313 (D.N.J. 1998) (applying, in securities fraud class action, lodestar test as cross
check for common fund recovery and finding 2.5 multiplier “fair”); In re Biskup,
236 B.R. 332, 337 (Bankr. W.D. Pa. 1999) (applying fee that worked out to 2.76
multiplier for exceptional work by trustee in discovery and preservation of asset
in bankruptcy case). Given the strong findings by the bankruptcy court in support
of its determination that the results achieved were sufficiently extraordinary to
justify a multiplier, and the reasoning of the district court flowing from these
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findings, we cannot conclude, based on our standard of review, that the district
court erred by applying a 2.57 lodestar multiplier.
Harris Trust contends that Connolly improperly awarded himself the full
$3,044,953.69 nearly three years ago, and should be compelled to disgorge any
excess amounts, plus interest. These are matters that can be determined in further
proceedings. The judgment of the United States District Court for the District of
Colorado is AFFIRMED. Appellant’s motion to file a supplemental appendix
is granted; as is appellee’s motion for leave to file a surreply.
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No. 01-1263 - Connolly v. Harris Trust Company
HARTZ, Circuit Judge, concurring specially:
I concur in the result and join all of Judge Anderson’s opinion except the
dictum regarding the propriety of the lodestar multiplier. Because Harris Trust
did not cross appeal, we need not decide whether the multiplier used by the
district court was too high. I would refrain from asserting that the district court
did not err in using a 2.57 multiplier. That assertion is both unnecessary and
questionable.
My first disagreement with the majority is that I do not think the
considerations set forth in Johnson v. Georgia Highway Express, Inc., 488 F.2d
714, 717-19 (5th Cir. 1974), are “criteria for determining the multiplier.” Op. at
17. The appropriate use for almost all the factors listed in Johnson is to determine
the attorney’s hourly rate and the reasonableness of the number of hours expended
on the case; to consider those factors again in setting a multiplier would
constitute double counting. Indeed, Johnson itself does not discuss the use of a
multiplier.
As for the one Johnson criterion relied upon by the majority in approving
the multiplier here—“the results achieved,” Op. at 21—I question whether that is
an appropriate consideration in this case. A bonus for extraordinary results looks
a lot like a contingency fee; in both circumstances the fee depends upon the
result. To use a multiplier for “extraordinary results” in effect grants a
contingency enhancement for any recovery beyond “expected” results. Yet the
Supreme Court in Burlington v. Dague, 505 U.S. 557 (1992), rejected the use of a
contingency enhancement in setting a reasonable attorney fee under federal fee-
shifting statutes. Although the statute providing for a trustee’s fee might be
distinguished from such fee-shifting statutes, the discussion of contingency
enhancements in Dague should give a court pause before approving any result-
based enhancement in setting a “reasonable fee.” The Court wrote:
We note at the outset that an enhancement for contingency
would likely duplicate in substantial part factors already subsumed in
the lodestar. The risk of loss in a particular case (and, therefore, the
attorney’s contingent risk) is the product of two factors: (1) the legal
and factual merits of the claim, and (2) the difficulty of establishing
those merits. The second factor, however, is ordinarily reflected in
the lodestar—either in the higher number of hours expended to
overcome the difficulty, or in the higher hourly rate of the attorney
skilled and experienced enough to do so. Taking account of it again
through lodestar enhancement amounts to double counting.
The first factor (relative merits of the claim) is not reflected in
the lodestar, but there are good reasons why it should play no part in
the calculation of the award. It is, of course, a factor that always
exists (no claim has a 100% chance of success), so that computation
of the lodestar would never end the court’s inquiry in contingent-fee
cases. Moreover, the consequence of awarding contingency
enhancement to take account of this “merits” factor would be to
provide attorneys with the same incentive to bring relatively
meritless claims as relatively meritorious ones. Assume, for
example, two claims, one with underlying merit of 20%, the other of
80%. Absent any contingency enhancement, a contingent-fee
attorney would prefer to take the latter, since he is four times more
likely to be paid. But with a contingency enhancement, this
preference will disappear: the enhancement for the 20% claim would
be a multiplier of 5 (100/20), which is quadruple the 1.25 multiplier
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(100/80) that would attach to the 80% claim. Thus, enhancement for
the contingency risk posed by each case would encourage meritorious
claims to be brought, but only at the social cost of indiscriminately
encouraging nonmeritorious claims to be brought as well. We think
that an unlikely objective of the “reasonable fees” provisions.
Id. at 562-63 (citations omitted).
The analysis is essentially the same when the multiplier relates only to
recovery that exceeds the expected result. Like the situation considered in Dague,
the risk of not recovering more than the expected result arises from (1) “the legal
and factual merits of the claim [or claims]” for more than the expected result and
(2) “the difficulty of establishing those merits.” 505 U.S. at 562. Regarding the
second factor, to the extent that the result is extraordinary because of the talent
and energy of counsel, the lodestar computation should have already taken that
talent and energy into consideration in setting the hourly rate and fixing the
reasonable number of hours expended. As for the first factor, to the extent that
the result is extraordinary because of the relative lack of merit of the claims for
more than the expected result, awarding a multiplier encourages the expenditure
of excessive resources on claims that, because of their lack of merit, present a
relatively small opportunity for better-than-expected results.
Perhaps there are sound reasons for distinguishing Dague from the present
situation. But at the least, the issue is a subtle one. Resolving it requires more
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guidance than is provided by the briefs before us. I therefore express no view on
whether the 2.57 multiplier was reasonable.
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