The opinion of the court was delivered by: CONNER
R. Hoe & Company, Inc. filed a petition for reorganization under Chapter X of the Bankruptcy Act in July of 1969. Proceedings related to the reorganization consumed a nine-year period and have now drawn to a close. Presently before the Court are the applications of numerous petitioners for awards of final allowances in connection with services rendered in the lengthy reorganization proceeding. A hearing on the applications was held before this Court on November 11, 1977. In awarding fees, the Court has taken full account of the written applications of the petitioners, briefs and supplemental letters furnished the Court, the testimony presented at the November 11 hearing, and the memorandum submitted by the Securities and Exchange Commission, which has participated as a party to this case since its inception in July 1969, pursuant to Section 208 of Chapter X of the Bankruptcy Act, 11 U.S.C. § 608.
A brief account of Hoe's history as a company and of the essential facts of the reorganization will suffice, for purposes of this Opinion, to place the fee applications in perspective.
Hoe is an old company whose history as a manufacturer of printing presses dates back to 1805. In July 1969, Hoe's principal business was the manufacture and sale of printing presses ("Press Division") and metal-decorating presses ("Metal Decorating Press Division"). In addition, Hoe was engaged in the manufacture and sale of saws and related products ("Saw Division").
Press operations, which comprised 90% Of Hoe's business, were conducted out of Hoe's plants located in the Bronx, New York and Dunellen, New Jersey, while saw operations were conducted in the Bronx and in larger plants located in Birmingham, Alabama and Portland, Oregon. At the inception of the case, Hoe employed close to 2,000 persons, most of whom were engaged in press operations. Hoe had two classes of stock owned by public investors, Class A stock and common stock. The Class A, of which 448,704 shares were outstanding, was held by about 1,300 persons and the common stock of which 1,937,412 shares were outstanding, was held by about 5,000 persons.
The Press Division of Hoe was sold early in the case, and the Company was thereafter reorganized around its profitable Saw Division. The reorganized Hoe is thus a modest-sized company engaged in the manufacture and sale of saws and related products with annual sales of about $ 10-11 million and with profits in the range of $ 1-2 million. In its opinion of June 2, 1977, this Court valued the company at approximately 17 million dollars as a going concern. Hoe is now the employer of approximately 225 persons.
Shortly after Hoe's filing of its voluntary Chapter X petition, on July 7, 1969, John J. Galgay was appointed as trustee by the Honorable Sylvester J. Ryan, United States District Judge for the Southern District of New York.
On July 11, 1969, the law firm of Winthrop, Stimson, Putnam & Roberts was appointed general counsel to the trustee. On July 22, 1969, S. D. Leidesdorf & Co. was appointed accountant to the trustee. On June 30, 1970, the law firm of Townley & Updike was appointed special counsel to the trustee.
Mr. Galgay was appointed a Bankruptcy Judge on June 27, 1973. Because of the imminence of this appointment, the Court appointed Robert M. Corrao as additional trustee on April 27, 1973 and James B. Kilsheimer III, Esq. as successor trustee to Mr. Galgay on May 9, 1973 (collectively "trustees"). Winthrop, Stimson, Putnam & Roberts, Townley & Updike and S. D. Leidesdorf & Co. continued to serve the trustee as general counsel, special counsel and accountants, respectively.
An internal plan of reorganization proposed by the trustees was approved by the Court on July 7, 1977 (the Third Amended Plan of Reorganization) and was confirmed on October 7, 1977. The confirmed Plan provided, in pertinent part, that administration and priority claims would be paid in full in cash; unsecured creditors whose claims are $ 500 (including interest) or less, or who reduce their claims to this amount, would be paid in full in cash; all remaining unsecured creditors would receive 5% Of their claims (including interest) in cash and shares of common stock of the reorganized company at the rate of one share for each $ 5.00 of the balance of their claims; and each Class A stockholder would receive one share of common stock of the reorganized company for each 1.2 shares of Class A stock. The interests of common stockholders were eliminated.
Considering the posture of Hoe in July 1969, when the Company did not have funds even to meet its payroll, these proceedings have been successfully concluded. Difficult tasks were accomplished and problems overcome, including: (1) the renegotiation of outstanding contracts between the Debtor and certain press customers, resulting in substantial cash payments to the Debtor prior to completion of the presses and payments of premiums above the contract prices. These infusions of cash provided the necessary working capital to enable the Debtor to continue as a going concern; (2) sale of the Press Division and the Metal Decorating Press Division; (3) extensive negotiations with a secured creditor ("Talcott") asserting liens on all of Hoe's non-real estate assets and institution and settlement of a lawsuit seeking to set aside the liens; (4) institution and settlement of a lawsuit against Hoe's former auditors and management resulting in a substantial recovery for the estate and withdrawal of some $ 25 million in related shareholder proofs of claims; (5) formulation and confirmation of a plan of reorganization; and (6) relocation of Hoe's Bronx corporate offices and saw facilities to Eastchester and Mount Vernon, New York, respectively.
Aggregate Allowances Sought and Financial Posture of the Estate
The requests of petitioners aggregate $ 5,675,735, of which $ 1,844,795 has already been paid as interim allowances or otherwise,
leaving a net sum of $ 3,830,940 now sought. Additionally, reimbursement for expenses is sought in the amount of $ 52,846.98. Five of the petitions are those of court-appointed officers, that is, the trustees, their attorneys and accountants. Not surprisingly, since these petitioners were charged with the principal responsibilities of administering the Debtor's affairs, their requests, totalling $ 5,355,735, comprise the bulk (94.4 percent) of the allowances sought.
Hoe's cash on hand (unaudited) as of September 30, 1977 was $ 4,710,147. At the November 11, 1977 hearing, the additional trustee furnished a projection of Hoe's excess cash as of February 28, 1978. That projection raised question then and continues to raise question as to the ability of the reorganized company to bear safely the fees and expenditures now sought. The net requests, including expenses, aggregate $ 3,883,786.98. According to the additional trustee's projection, however, Hoe's cash balance at February 28, 1978 (after, Inter alia, disbursements for cash distributions to creditors under the Plan, capital expenditures and allowances for required Saw Division working capital) was to be only $ 3,456,147.
Moreover, these fee requests must also be viewed from the perspective of the estate's present value. The payments requested by the applicants ($ 3.8 million) represent approximately 22.5% Of the $ 17 million value of the estate as found by the Court. The Securities and Exchange Commission strenuously urges that payments in this amount would unduly burden the estate and possibility jeopardize the reorganization. Its own proposed figure for total final allowances would represent maximum net payments of approximately 14% Of the estate's present value, a percentage the Commission believes should not be exceeded. Specifically, the Commission recommends total final allowances of $ 4,163,335, of which $ 1,819,795 has already been paid in interim allowances (including regular salary payments to the additional trustee through September 30, 1977), leaving a maximum net sum of $ 2,335,540 to be paid by the Debtor,
or approximately $ 1.5 million less than is being sought by petitioners.
Applicable Legal Principles
The fundamental tenet that must guide the Court in the determination of final allowances is that Chapter X of the Bankruptcy Act is primarily a public investor protection statute that was enacted for the relief of debtors and their creditors and shareholders.
In practical terms, it is the creditors and Class A shareholders of Hoe who will bear the cost of paying the fees sought by petitioners in this case. Chapter X was derived from former § 77B of the Bankruptcy Act which "had as one of its chief purposes the establishment of a more effective judicial control over reorganization fees and expenses. One of the controlling reasons for enactment of the statute was a desire to reduce the costs of reorganization administration, which in equity receiverships were neither adequately controlled by the courts nor, in many cases, commensurate with the relief to or interests of the security holders. It was recognized by Congress that a depletion of the cash resources of a debtor's estate may have a severe effect on both the fairness and feasibility of a plan of reorganization, and that any determination by a court of the fairness and feasibility of a plan must logically include as one of its components a determination of the fairness and reasonableness of the amounts paid as fees and expenses to those participating in the reorganization case."
Notably, in replacing § 77B of the Bankruptcy Act in 1938, Chapter X "set up even more comprehensive supervision over compensation and allowances . . . and provided a centralized control over all administration expenses, of which lawyers' fees are a part."
In its Note to Rule 10-215 of the Chapter X Rules of Bankruptcy Procedure, entitled "Compensation for Services and Reimbursement of Expenses,"
the Advisory Committee states that "(t)he premise for including in these rules provisions governing the allowance of compensation to officers, attorneys, and accountants is that it is peculiarly a judicial responsibility to supervise the administration of estates and in particular to assure that allowances for compensation to those rendering services in connection therewith are fair but not excessive." The Advisory Committee notes further that "(t)he costs of bankruptcy administration have been a matter of continuing concern in the history of American bankruptcy law" and that "(t)his concern has led to an increasing recognition of the necessity for close judicial control of these costs."
Sections 241-244 of the Bankruptcy Act, 11 U.S.C. §§ 641-644, and Rule 10-215 thereunder, specify the persons who may properly apply for compensation and reimbursement of expenses in Chapter X and define in general terms the services that may be considered compensable. Insofar as is pertinent here, those sections provide that the judge may allow "reasonable compensation for services rendered and reimbursement for proper costs and expenses" to the following categories of persons: (1) a trustee and his counsel and other court-appointed officers,
and an attorney for the debtor (Section 241, 11 U.S.C. § 641; Rule 10-215(c)(1)(A); and (2) committees or representatives of creditors or stockholders and their attorneys or agents (Section 242, 11 U.S.C. § 642; Rule 10-215(c)(1)(B)).
Court-appointed officers such as a trustee, his counsel and accountants are charged with specific duties and responsibilities for which, as Section 241 indicates, they are entitled to "reasonable compensation," whether or not they can show benefit to the estate, as is required of other applicants.
Thus, while success in their reorganization endeavors is a factor to be considered in awarding compensation, lack of success does not necessarily bar compensation.
Allowances to an attorney for a debtor are also provided for in Section 241. It has been held, however, that the inclusion of the debtor's attorney within Section 241, rather than Sections 242 or 243, was not intended to alter the principle that an allowance award to a debtor's attorney is based on a showing that services were of benefit to the estate or the proceedings.
Similarly, as regards committees, their attorneys or agents, compensability is restricted to services which are shown to have benefited the estate or the proceedings.
Beneficial services include: (1) services which contributed to a plan of reorganization which has been confirmed by the judge; (2) services which contributed to the refusal of confirmation of other plans as unfair or unsound; and (3) services that were beneficial to the administration of the estate.
The burden of proof is on the applicant. The applicant must show affirmatively that he has made a contribution to the objectives of the proceeding and establish the value of his services.
The Court considers each application on its merits, whether or not objections are filed or raised.
The mere participation in a reorganization proceeding does not create a right to compensation.
Thus, attendance at hearings, examination of papers, the mere giving of advice, criticism and suggestions are not matters that in and of themselves establish a basis for compensation.
And, the estate should not bear the burden of duplication or multiplication of services.
The fact that several may espouse the same cause does not permit an increase in the aggregate allowance, for the estate is to be charged "only one fee for particular services, regardless of the number of (persons) involved in performing that service."
Nor should compensation be allowed for services rendered which were inept, unnecessary or wasteful.
The standard to be applied is the time that was necessarily required to accomplish the task rather than the time actually expended.
A determination of a fair and reasonable fee in proceedings of this kind requires some knowledge or estimate of how much time was productive, necessary, routine or ministerial and duplicative. Towards this end, the courts have repeatedly stressed the importance of maintaining contemporaneous and adequate time records describing the services rendered; for example:
"We wish to emphasize that any attorney who hopes to obtain an allowance from the court should keep accurate and current records of work done and time spent. Lawyers are well aware that, especially where services of the nature here involved are spread over a period of time and ultimate payment is virtually assured, they are valued principally on the basis of time required. There is no excuse for an established law firm to rely on estimates made on the eve of payment and almost entirely unsupported by daily records or for it to expect a court to do so." In re Hudson & Manhattan Railroad Company, 339 F.2d 114, 115 (2d Cir. 1964).
"We stress that it is the attorney's obligation to keep and submit to the court time records supporting an application for compensation. And, absent unusual circumstances, it is the court's independent obligation to give credit only where there are such supporting documents, even in cases where no interested parties raise objections to the claim." In re Meade Land & Development Co., Inc., 527 F.2d 280, 284 (3d Cir. 1975).
The courts have also repeatedly admonished that the principle of strict economy must govern compensation in Chapter X cases,
and that applicants cannot expect to be compensated at the rates which similar services might command in private employment.
As stated in Finn v. Childs, 181 F.2d 431, 435-36 (2d Cir. 1950):
"We have examined the applications for allowances of each of the parties involved here, with their detailed record of amount of time spent and the kind of work performed. We are not disposed to question the reasonableness of such fees by metropolitan practitioners for services of this kind when performed in the course of ordinary litigation. But in a reorganization proceeding, where the lawyers look for compensation to the debtor's estate which may belong, in equity, largely to others than those who have requested their services, they should have in mind the fact that the total aggregate of fees must bear some reasonable relation to the estate's value. Under these circumstances they cannot always expect to be compensated at the same rate as in litigation of the usual kind."
The emphasis placed on economy of administration is by no means a directive to be parsimonious. Allowances should when resources with which to pay them are available be liberal enough to encourage competent persons to render the onerous and socially useful labors incident to reorganization proceedings. Here, as elsewhere in the law, a balance must be struck among conflicting considerations. As the Court of Appeals for the Fifth Circuit has said:
"The public interest which is inherent in bankruptcy matters must be considered in awarding fees. The object is to draw a balance to the end that competent trustees and counsel are obtainable in matters of this kind because of the knowledge that they will be fairly compensated. They must not and cannot expect, however, to be overcompensated, for the court must exercise its discretion for the double purpose of fairly treating the trustee and his counsel while at the same time doing equity to the debtor and creditors." Massachusetts Mutual Life Insurance Co. v. Brock, 405 F.2d 429, 432-33 (5th Cir. 1968).
Accordingly, the courts have set forth a number of factors that should be considered in arriving at an appropriate allowance.
Among these factors are: (1) the nature of the services rendered; (2) the difficulties and complexities encountered; (3) time necessarily expended; (4) the results achieved; (5) the burden the estate can safely bear; (6) the size of the estate; (7) duplication of services; (8) professional standing, ability and experience of the applicant; (9) fairness to each applicant; and, of course, (10) economy of administration.
Finally, the Court has relied heavily upon the recommendations of the S.E.C. respecting these Chapter X allowances as representing the expert opinion of a wholly disinterested agency skilled and experienced in reorganization affairs.
The rule in this Circuit is that such recommendations "should not be exceeded without definite findings and conclusions showing why this step is deemed necessary."
A. The Trustees' Applications
Messrs. Kilsheimer and Corrao seek final allowances of $ 630,000 for the approximate 43/4 years encompassing their trusteeship. Expressed otherwise, they are seeking aggregate compensation at the rate of about $ 133,000 per annum for their services as chief executive officers during that period. They request no reimbursement of expenses.
The original trustee was awarded a final allowance of $ 185,000 for the approximate 31/2 years of his trusteeship, or compensation at the rate of about $ 53,000 per annum. He expended more than one-half of his time on the Debtor's affairs. It may also be noted, that Hoe's chief executive officer at the inception of these proceedings in 1969 was paid $ 54,000 per annum for his full-time services.
When these trustees were appointed, Hoe was ripe for reorganization. The major impediments to reorganization had been largely overcome. The press contracts outstanding at the inception of the case had been renegotiated. Press operations and major assets associated with such operations had been sold. The Saw Division was profitable. The litigation with Talcott was for all practical purposes settled. And, the trustee's report under Section 167(5) of the Bankruptcy Act was, for the most part, prepared. The filing, transmittal and completion of the report was held in abeyance, however, pending settlement of the lawsuit against Hoe's former auditors and management.
The principal activities of the trustees were the general administration of the estate, operation and improvement of the Saw Division, and formulation of a plan of reorganization. Expenses were reduced in Hoe's sprawling and largely vacant Bronx facilities. Ultimately, the Bronx buildings were demolished. Attempts were made to sell the Bronx real estate. A substantial capital improvement program was implemented in Hoe's Portland and Birmingham saw plants. Hoe's Bronx corporate headquarters and saw operation were relocated. A plan of reorganization was formulated and confirmed by the Court. Clearly, these efforts and others were beneficial to the estate.
The trustees' applications present the problem of allocating fair and reasonable compensation in a dual trusteeship within the framework of the principle that only one fee should be awarded for particular services, regardless of the number of persons who performed them.
Mr. Kilsheimer states at page two of his Affidavit of Services that "in many respects" the services were "jointly performed." Mr. Corrao states at page two of his Affidavit of Services that "most" of the services were "jointly rendered by us." Mr. Kilsheimer further testified that "50 per cent of my time was together with Mr. Corrao either in person or on the telephone."
An analysis of the trustees' time records discloses that there were at least 300 discussions or conversations between the ...