Wednesday, April 08, 2009

10th Circuit Affirms Denial of Employment of Attorneys Who Were Too Expensive

In these days of exponentially increasing hourly rates, a bankruptcy court told a creditors' committee that its proposed counsel was too expensive when there were local firms competent to do the work for half the cost. That decision was recently affirmed by the 10th Circuit Court of Appeals. In re Southwest Food Distributors, No. 08-5160 (10th Cir. 3/31/09).

The Debtor filed a chapter 11 petition in Tulsa, Oklahoma. The Unsecured Creditors Committee sought to employ Bell, Boyd & Lloyd, a Chicago firm, and to also employ Gable & Gotwals of Tulsa as its local counsel. Bell Boyd sought to charge rates ranging from $250 to $505 per hour. A large unsecured creditor objected on the basis that there was no need to bring in a national firm when there were local firms available at half the cost. The Bankruptcy Court agreed and approved employment of the local counsel only.

On appeal to the 10th Circuit, the Court of Appeals ruled that the Bankruptcy Court is not required to rubberstamp a party's choice of counsel even when that counsel meets the requirements of 11 U.S.C. Sec. 1103 and Fed.R.Bankr.P. 2014. The court noted that close scrutiny is required when more than one attorney is sought to be employed.

Several thoughts come to mind after reading this opinion. Many, if not most, courts require that out of district firms retain local counsel. If retaining both primary counsel and local counsel is looked upon with disfavor, this is almost a de facto rule that outside attorneys need not apply. Was the bankruptcy court engaging in protectionism here or was this simply a case which could not afford the extra attorneys? The bankruptcy court's decision to promote the committee's local counsel to lead counsel raises an interesting issue. If local counsel was chosen purely to satisfy the requirement to have a local attorney and not because they had the expertise to represent the committee, should the committee be saddled with counsel who was not their first choice? Of course, in this case, the court found that local counsel was perfectly competent and that no one had objected to their qualifications. Perhaps the committee should have selected less qualified local counsel in order to obtain their choice of lead counsel. Finally, the objection stated that qualified local attorneys could be hired at half the cost of Bell Boyd's rates of $250-$505. Does this mean that the going rate for creditors' counsel in Tulsa is $125.00-$252.50 per hour? If that is the case, the Tulsa bankruptcy bar may find itself in demand elsewhere where the going rates are much higher.

4 comments: said...

The committee, is of course, free to hire whoever they want. They just don't get to bill the estate for the privilege. They could always hire the national firm at the local rate and agree that the committee members will come out of pocket for the difference.

The issue is that the compensation provisions of the Code require that compensation of professionals be reasonable. Assuming that there is competent local counsel who will bill at half the rate, is it reasonable to allow a committee to hire more expensive attorneys at the expense of the estate.

Steve Sather said...

But here, the Court didn't just limit fees. It denied employment. Therefore, the Commitee could hire the Chicago lawyers, but could not get them paid out of the estate.

David Leibowitz said...

Price does not equate with value. The Court could not have reasonably found that Bell Boyd's fees were unreasonable until he looked at them against the results achieved. He could have allowed them to have been hired and warned them that he would evaluate their fees with strict scrutiny. But what he did was to deny the committee of counsel of its choice. This went too far, in my humble opinion.

David Leibowitz

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