April 6, 2010, Decided
COUNSEL: Kirschenbaum & Kirschenbaum P.C., Attorneys for the Chapter 7 Trustee,Kenneth Kirschenbaum, Esq., By: Steven B. Sheinwald, Esq., Garden City, NewYork.
Thaler & Gertler LLP, Attorneys for the Debtor, By: Richard G. Gertler, Esq.,East Meadow, New York.
Siller Wilk LLP, Claimant, By: Eric J. Snyder, Esq., Stephen D. Hoffman, Esq.,New York, New York.
JUDGES: Honorable Dorothy T. Eisenberg, United States Bankruptcy Judge.
OPINION BY: Dorothy T. Eisenberg
Before the Court is the Trustee's objection to proof of claim number 2 filedby Siller Wilk LLP in the amount of $ 343,367.08 for prepetition legal fees.This Court has jurisdiction over this core proceeding under 28 U.S.C. Ã‚Â§Ã‚Â§ 1334(b)and 157(b)(2)(A), (B), and (O) and 11 U.S.C. Ã‚Â§ 502. The following constitutesthe Court's findings of fact and conclusions of law as mandated by Fed. R.Bankr. P. 7052.
Debtor was the Chief Financial Officer for Breslin Realty Development Corp.("BRDC"). Debtor was allegedly terminated from BRDC when he gave testimonyadverse to the interests of BRDC. Debtor submitted a claim for unemploymentinsurance which was challenged by BRDC. BRDC also commenced a state courtlawsuit against the Debtor in January of 2005 (the "Breslin Action"). The statecourt action alleged that the Debtor used his position as the Chief FinancialOfficer to authorize bonuses and payments to himself and several employeeswithout consent of BRDC's principal, Wilbur Breslin, and sought $ 500,000 indamages on the grounds of, inter alia, breach of contract, fraud, conversion,unjust enrichment with the last claim brought under the federal RacketeerInfluenced and Corrupt Organizations Act ("RICO"). The RICO claim carried thethreat of treble damages. Siller Wilk was retained by the Debtor prepetition todefend against the Breslin Action.
Siller Wilk removed the Breslin Action to the United States District Court inan attempt to get the RICO claim dismissed to eliminate the debtor's potentialexposure to treble damages. The District Court denied a motion to dismiss theRICO claim that was made on behalf of the Debtor and the parties proceeded toconduct discovery. Siller Wilk conducted more than 10 depositions, somepurportedly at the request of the Debtor. In the middle of 2006, the Debtormoved for summary judgment to dismiss the RICO claim and the motion was denied.Trial was then scheduled to take place in April 2007. On or about March 21,2007, BRDC and Siller Wilk, on behalf of the Debtor, reached an oral settlement.Siller Wilk received the proposed settlement agreement on April 2, 2007. Theproposed agreement did not contain any general release for the benefit of theDebtor.
On or about April 17, 2007, Siller Wilk was informed that the Debtor was thesubject of a criminal investigation by the Nassau County District Attorney'sOffice regarding the alleged payment of additional salary. The Breslin Actionwas stayed pending the outcome of the criminal investigation.
Meanwhile, on or about March 1, 2007, Siller Wilk had attempted to get theDebtor to assign a security interest in his 20% interest in a real estateinvestment company, Arbor Inn Homes LLC, as collateral for the payment of theDebtor's outstanding legal fees accrued in defending the Breslin Action. Theonly substantial asset the Debtor had at the time was his 20% interest in ArborInn Homes LLC and approximately $ 200,000 equity in his residence. The Debtornever executed the agreement, stating that his 20% interest in Arbor Inn HomesLLC was the only asset he could use to settle the Breslin Action. If he agreedto Siller Wilk's request, he would not be financially able to resolve the BRDC'sclaim. Debtor had previously paid Siller Wilk approximately $ 200,000 of themore than $ 500,000 of legal fees that had accrued and the Debtor and SillerWilk were unable to reach any arrangement regarding the reduction or payment ofthe outstanding legal fees. On May 18, 2007, Siller Wilk filed a motion with theDistrict Court to be relieved as Debtor's counsel in the Breslin Action whichwas subsequently granted.
The Debtor had to retain new counsel to finalize the settlement in theBreslin Action. Under the settlement, the Debtor agreed to pay BRDC $ 625,000secured by the debtor's 20% interest in Arbor Inn Homes and a mortgage againsthis residence in the amount of $ 145,000.
On July 14, 2008, Siller Wilk filed an involuntary Chapter 7 bankruptcypetition against the Debtor in this Court. Siller Wilk was the only petitioningcreditor and listed a claim for legal fees in the amount of $ 330,274.95. Debtorfiled an answer on August 5, 2008 asserting, inter alia, that Siller Wilk'sclaim is subject to a bona fide dispute as to liability and/or amount. Debtorclaimed that the Siller Wilk's claim was for work performed in formulating asettlement agreement with BRDC and alleged that Siller Wilk filed theinvoluntary petition solely for the purpose of avoiding the settlement agreementas a preference under the Bankruptcy Code. Accordingly, Debtor argued that theavoidance of the settlement agreement would render Siller Wilk's servicesvalueless. As Siller Wilk's claim was the subject of a bona fide dispute, theDebtor asserted that Siller Wilk cannot be a petitioning creditor under 11U.S.C. Ã‚Â§ 303 and the involuntary petition should be dismissed.
The Court held a hearing on the Debtor's objection to the involuntarypetition on August 14, 2008 and set deadlines for discovery. Subsequently, theDebtor withdrew his answer and consented to the entry of an order for Chapter 7relief. The order of relief was entered by the Court on September 26, 2008.
On December 22, 2009, the Trustee filed the motion seeking to disallow SillerWilk's proof of claim based upon the absence of any documentation supporting theclaim and the Debtor's dispute over Siller Wilk's claim. The Debtor argued thatSiller Wilk's legal services did not produce any benefit or result in any valueto the Debtor. Siller Wilk's fees totaled more than the $ 500,000 in damagessought by BRDC under the state law claims. While BRDC's RICO claim would haveresulted in treble damages of $ 1.5 million, the Debtor argued that the RICOclaim was a throw-in without any serious expectation by Breslin of prevailing.The Debtor argues Siller Wilk allegedly wasted time and money attacking the RICOclaim in District Court.
Rather than obtaining a settlement which reduced the debtor's liability,Siller Wilk negotiated a settlement which resulted in a liability of $ 625,000to the Debtor. In addition, the proposed settlement did not provide for ageneral release which exposed the Debtor to further liability. Debtor accusesSiller Wilk of acting in its own best interest rather than that of the client byattempting to have the Debtor assign his interest in Arbor Inn Homes LLC assecurity for its legal fees when the Debtor's ownership interest was his onlysubstantial source for funding a potential settlement with BRDC. When the Debtorand Siller Wilk were unable to reach an agreement with respect to legal fees,the Debtor asserts that Siller Wilk abandoned him by withdrawing as counsel onthe eve of trial and then filed the involuntary petition to set aside theDebtor's settlement agreement with BRDC so that it could participate with BRDCin any distributions arising from the Debtor's interest in Arbor Inn Homes LLCas a creditor of the Debtor's bankruptcy estate.
Siller Wilk filed its objection to the Trustee's motion and the documentationsupporting its legal fees with the Court under seal. Siller Wilk argued that itprovided value by reducing the Debtor's exposure to treble damages under theRICO claim which Siller Wilk perceived as a real threat and there were swornaffidavits by third parties that could negatively impact the Debtor'scredibility and veracity as a potential witness. Siller Wilk also asserted thatwhile it negotiated an oral settlement with BRDC, it was the Debtor'sreplacement counsel that negotiated and finalized the settlement with BRDC.
A hearing on the Trustee's motion in regard to the allowance of Siller Wilk'sclaim was held on March 16, 2010. It was noted that the Trustee is a neutralparty in this dispute over Siller Wilk's proof of claim and needs a resolutionas to the allowance of Siller Wilk's claim in order to determine whether SillerWilk would be entitled to receive any distribution from the Debtor's bankruptcyestate. The only other significant creditor of the bankruptcy estate is BRDC.Other than the allegations as stated herein, the Debtor did not object to anyparticular time spent or particular rate charged for the legal services providedby Siller Wilk.
A proof of claim executed and filed in accordance with the Federal Rules ofBankruptcy Procedure constitutes prima facie evidence of the validity and theamount of the claim. Fed. R. Bankr. P. 3001(f). Pursuant to 11 U.S.C. Ã‚Â§ 502(a),a proof of claim is deemed allowed unless a party in interest objects. The partyobjecting to the proof of claim has the burden of rebutting the presumption ofvalidity. In re Koloch, 416 B.R. 375, 378 (Bankr. E.D.N.Y. 2009).
While the Debtor claims that Siller Wilk's filing of the involuntary petitionwas to advance its own interest by seeking to have the Debtor's settlement withBRDC set aside as a preference and thereby undoing the settlement in whichSiller Wilk had a hand in negotiating and for which it seeks reimbursement ofits legal fees, the Court notes that there is no legal authority that providesthat an attorney's filing of an involuntary petition against a client wouldrequire a reduction of the attorney's claim for legal fees for prepetitionservices. Siller Wilk as a prepetition creditor has the ability under theBankruptcy Code to file an involuntary petition against the Debtor. The Debtorhad an opportunity to object to the involuntary petition and in fact initiallycontested the involuntary petition on several grounds, including the defensethat Siller Wilk's claim was subject to a bona fide dispute. However, the Debtorsubsequently withdrew his objection and consented to the entry of the order ofrelief. Having agreed to proceed under the Bankruptcy Code, the Debtor cannotnow claim that Siller Wilk's filing of the involuntary petition was wrongful andshould be penalized for it. Indeed, the time to object to Siller Wilk's filingof the involuntary petition and whether Siller Wilk's claim was the subject of abona fide dispute was prior to the Court's entry of the order of relief. Havingfound no evidence of any illegality or impropriety relating to Siller Wilk'sfiling of the involuntary petition, Siller Wilk's legal fees should not bereduced simply because the filing undid some of the work for which Siller Wilkis seeking reimbursement.
As to whether the fees for Siller Wilk's legal services are reasonable, thecourts in this Circuit have considered, inter alia, the following:
(1) the time and labor required; (2) the novelty and difficulty of the questions; (3) the level of skill required to perform the legal service properly; (4) the preclusion of employment by the attorney due to acceptance of the case; (5) the attorney's customary hourly rate; (6) whether the fee is fixed or contingent; (7) the time limitations imposed by the client or the circumstances; (8) the amount involved in the case and the results obtained; (9) the experience, reputation, and ability of the attorneys; (10) the "undesirability" of the case; (11) the nature and length of the professional relationship with the client; and (12) awards in similar cases.
Arbor Hill Concerned Citizens Neighborhood Ass'n v. County of Albany, 522 F.3d182, 186-90 (2d Cir. 2007)(finding that courts should consider the factors inJohnson v. Ga. Highway Express, Inc., 488 F.2d.714 (5th Cir. 1974)). While it isnatural that "a reasonable, paying client wishes to spend the minimum necessaryto litigate the case effectively", Id., 522 F.3d at 190, the amount involved ina case and the results obtained are not the only deciding factors in determiningwhether an attorney's fees are reasonable. Siller Wilk expended time and laborin defending the Debtor in the Breslin Action over the course of several yearswhich involved filing pleadings and conducting discovery and depositions. Theattorneys at Siller Wilk that worked on the Breslin Action were experienced andcapable litigation attorneys and they were faced with a litigious Plaintiff.While the Debtor argues that the fees incurred were excessive, he does notspecify with particularity as to which of the services and charges whereobjectionable. Rather, in hindsight, the Debtor disagrees with the strategy andefforts undertaken by Siller Wilk in defending the Breslin Action and assertsthat the $ 200,000 Siller Wilk received prepetition was adequate and that SillerWilk should not be entitled to receive any more legal fees. What appears to besimple and clear in hindsight may or may not be obvious during the pendency oflitigation and different attorneys who are just as experienced and capable couldundertake different litigation strategies. It is not the Court's position todetermine whether one litigation strategy is more or less effective thananother, especially when legal strategies are subject to many variables and maychange over time as a result of discovery and steps taken by opposing counsel.While the Debtor is unsatisfied with the amount of legal fees incurred, legalservices amounting to more than $ 500,000 were nevertheless provided by SillerWilk prior to its withdrawal as Debtor's counsel. It is unfortunate that theparties could not resolve a reduction of these fees amicably, but since theparties could not do so, the Court finds Siller Wilk's fees to be reasonable andits claim allowed.
Based upon the foregoing, the Trustee's objection to Siller Wilk's proof ofclaim in the amount of $ 343,367.08 is denied.
Dated: Central Islip, New York
April 6, 2010
/s/ Dorothy Eisenberg
United States Bankruptcy Judge