Aug 082011
 

An Ohio judge, writing a memorandum of opinion for In re: C-N-D Industries, Inc., spoke out against the excessive fees often charged by attorneys representing the debtor. The opinion, 2011 WL 2263794 (Bankr. N.D. Ohio) , involves a Chapter 11  small business debtor (11 USC 101 (51D)) who operates a steel fabrication and machine shop to supply parts for melt shops and rolling mills.  The lead counsel listed for the creditors’ committee is Robert Stenfancin of Schottenstein, Zox & Dunn Co., L.P.A (SZA), who reportedly charges an hourly rate of $410 ($395 at the time of the initial filing).

The court does not criticize SZA for their rates per se. “The court’s disquiet is the increasing amount of professional fees in a small, local business case.” In re: C-N-D Industries, Inc. at *2.  Increasingly in these small business debtor situations, the legal and other professional fees (which are paid throughout the bankruptcy) are growing to a point where reorganization becomes difficult, if not impossible to achieve.

The Ohio court pointed to a case in Rhode Island where the judge presiding observed “It is fundamental that the bankruptcy process is for the benefit of the debtor and the creditors, not the professionals. If the fees are not reasonably proportionate to the size of the estate, the benefit shifts, as a practical matter, from the parties to the professionals.” In re Narragansett Clothing Co., 160 B.R. 477 (Bankr.D. R.I. 1993)(citations omitted). In cases such as a chapter 11 reorganization, creating a debtor in possession that can effectively run a business is the overriding goal.

The court in this case also looked to the discrepancy in charging Cleveland rates to a case that was exclusively in the Canton area. When services rendered do not require a specialized type of legal knowledge, charging rates for a specific market are generally uncalled for.  This type of situation comes up in the New York City suburbs, where firms charging rates appropriate to the Manhattan legal market represent cases in Long Island or New Jersey, and seek attorneys fees at levels far exceeding the forum.

Overall, this decision reflects a continuing move by the judiciary to control legal costs in bankruptcy cases, and puts professional firms on notice that their fee requests are being closely examined.