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IN RE HARDWICK & MAGEE CO.

February 6, 1973

In the Matter of HARDWICK & MAGEE COMPANY, Bankrupt

Edward R. Becker, District Judge.


The opinion of the court was delivered by: BECKER

I. Preliminary Statement

 This case raises important questions as to the proper criteria to be applied in determining fees to be awarded to attorneys for receivers and trustees in Chapter XI and straight bankruptcy proceedings. The principal questions involved are the following: First, should "time spent" by counsel be a prime consideration in determination of fees; Second, must the referee distinguish between the legal and non-legal services of counsel in determining fees; and Third, may the referee refer to statistical averages prepared by the Administrative Office of the United States Courts as a guideline.

 The matter comes to us on the petition of Langhorne Carpet Company (Langhorne), a general creditor of Hardwick & Magee Company (the Debtor), *fn1" for a certificate of review *fn2" of the Order of the referee awarding counsel fees to: (1) counsel for the operating receivers of the Debtor when it was a Chapter XI debtor; (2) counsel for the liquidating receivers of the Debtor after it had been adjudicated a bankrupt; and (3) counsel for the trustee in bankruptcy. *fn3"

 Needless to say, the referees in this, as in all districts, regularly determine counsel fees *fn4" and have formulated their own practices in such matters. The referee's certificate on petition for review in this case states that the referees in this district do not consider "time spent" (as opposed to other considerations) to be a prime consideration in Chapter XI (in contrast with Chapter X) proceedings. Indeed, the supplemental memorandum filed by receivers' and trustee's counsel in opposition to the certificate of review represents that the policy of ignoring time spent as a criterion in determining fees in Chapter XI and straight bankruptcy proceedings has been in existence for over forty years in our local (Eastern District) bankruptcy court. The referee's certificate also indicates to us that the referees in this district may not deem it necessary to distinguish between the legal and non-legal services of counsel, and that they do refer in at least some measure to the statistical averages in determining fees. Langhorne's vigorous exception to these practices and to the referee's approach gives rise to the recitation of facts and discussion which follow.

 II. A Capsule History of the Debtor and the Proceedings

 The Debtor was one of Philadelphia's vintage firms, having been founded as a sole proprietorship in 1837 and continued thereafter as a partnership until its incorporation in 1910. The Debtor was engaged in the business of the manufacture and sale of carpeting at wholesale and retail as well as the sale at retail of rugs and furniture. It maintained wholesale showrooms in Chicago, Detroit, Los Angeles, San Francisco, New York, and Philadelphia for the display and sale of its carpets and rugs at wholesale and also operated eight retail outlets in the Philadelphia area. Shortly prior to the Chapter proceedings, the manufacturing operations had been discontinued, the wholesale showrooms had been closed, and the eight retail outlets had been reduced to four, located at 620 W. Lehigh Avenue, Philadelphia, 1207 Chestnut Street, Philadelphia, Ashland Terrace, Cherry Hill, N.J. and 874 Baltimore Pike, Springfield, Pennsylvania.

 At the time the Chapter XI proceedings were instituted, the Debtor was solvent, and had, according to its books, a net worth of over $650,000. However, during the five months preceding the filing of its petition on October 26, 1971, it had suffered an operating loss of $500,000. Moreover, the Debtor's real estate and accounts receivable and, in a limited amount, its inventory, were pledged as collateral to the Girard Bank to cover loans aggregating $572,628. At the time of the filing of its petition, the debtor had no working capital and no cash to finance its operations. While for many years the Debtor had enjoyed an excellent reputation in this area as a retailer of quality rugs, carpeting, and furniture, and its sales for the five months preceding bankruptcy were in excess of $60,000, these had substantially declined from prior periods by reason of its inability to finance manufacturing operations and purchases of furniture, rugs, and carpeting for resale.

 The Chapter XI petition was filed on October 26. Pursuant thereto, this Court appointed operating receivers who, with the aid of counsel, attempted to obtain financing and to keep the Debtor alive so as to reorganize it. The operating receivers continued the business of the Debtor until December 13, 1971, at which time they were advised by counsel that further operation of the business was not warranted in view of continuing losses. On December 16, 1971, the Debtor was adjudicated a bankrupt. The operating receivers became the liquidating receivers and one of them subsequently became the trustee in bankruptcy. With the exception noted above (see note 3), counsel remained the same throughout. The bulk of the assets of the Debtor, including real estate, inventory, and accounts receivable has been liquidated (the liquidation is still continuing).

 At the time of audit of the operating receiver's account (October 3, 1972), the referee acted upon the fee applications of counsel as follows:

 (1) he approved the application of counsel for the operating receivers for a fee of $10,000;

 (2) he approved the application of counsel for the liquidating receivers for a fee of $5,000;

 (3) he considered the application of counsel for the trustee in bankruptcy for a fee in the sum of $52,500, and he allowed the fee in the sum of $47,500. Langhorne's objections to the fees were made at the time of audit, and have been renewed in this appeal.

 III. The Services Rendered by Counsel

 A. Counsel for the Operating Receivers

 In addition to counseling the operating receivers as to their duties and responsibilities throughout (said to be on a daily basis), counsel's principal activities consisted of the following:

 1. Preparing the Petition for Appointment of the Receivers and Counsel and processing and filing the receivers' bond.

 2. Negotiating a loan with Girard Bank to enable the receivers to meet payroll (and preparing the certificates of indebtedness and the petition seeking leave to borrow).

 3. Preparing petitions for appointment of an accountant and for leave to employ certain officers of the debtor; also instructing the accountants as to audits required.

 4. Consulting with persons interested in implementing a plan of arrangement.

 5. Filing other miscellaneous petitions (for leave to borrow other sums, for leave to reject certain burdensome executory contracts), and attending hearings on such matters.

 6. Defending certain reclamation petitions including, in one instance, an appeal to this Court; briefs were involved in "several" cases.

 7. Assisting in the negotiations for the private sale of certain stock owned by the Debtor, as well as preparing and filing the petition authorizing the sale and handling the settlement for same.

 8. Negotiating with Debtor's counsel for the filing by the Debtor of its consent to be adjudicated a bankrupt.

 9. Attendance at a meeting of the Creditors' Committee in New York City.

 Our independent review of the docket entries reflects some 15 orders entered by the referee which were in response to the filing of petitions by counsel for the operating receivers. We feel constrained to note that most appear to be routine in nature, at least for experienced bankruptcy counsel.

 Counsel's memorandum represents that the comprehensive program of representation of the Debtor "involved constant daily attention by the two senior partners of the firm and assistance, on the part of one and sometimes two other partners." Characterizing the nature of those services, that memorandum further observes:

 
Counsel for the receivers believe that their request for compensation in the amount of $10,000 . . . was fair and reasonable in view of the size of this estate and the complex problems presented in the attempted preservation of the business of the debtor and in the preservation of its assets. The responsibility placed upon counsel for the receivers was substantial inasmuch as they were obliged to participate in negotiations with the debtor, the secured creditor and with others. Counsel for the receivers are experienced in arrangement, reorganization and bankruptcy proceedings having devoted themselves largely to this specialty over a period exceeding forty years for one of the senior partners and a period exceeding twenty years for another of its senior partners. In this case, counsel for the receivers were obliged to and did devote their best efforts and their expertise acquired over many years of experience in the solution of the problems presented by the operating receivership.

 Apparently in view of the failure of the arrangement proceedings, no reference in support of fee is made to the results obtained by counsel's services to the operating receivers, which extended from October 26, 1971, to December 15, 1971.

 The services of counsel for the liquidating receivers extended from December 16, 1971, to February 2, 1972, when one of the receivers was elected sole trustee. According to their filed papers, the principal activities of counsel during the period, in addition to conferring from time to time with the receivers, consisted of the following:

 1. Counseling the receivers with respect to the difficult decision as to whether to sell the Debtor's principal piece of real estate located at 620 W. Lehigh Avenue, Philadelphia, a complex of multi-story buildings comprising 326,000 square feet of floor space.

 2. Negotiating with persons making offers to purchase the real estate at private sale.

 3. Negotiating the private sale of the Debtor's trade name and preparing a petition for leave to complete the sale and attending a hearing thereon (this petition was initially denied by the referee).

 4. "Assisting the receivers in the opening of their bank accounts and in connection with the telephone service."

 5. Attending a creditors' meeting in New York City.

 6. Conferring with the auctioneer with respect to certain sales.

 7. Assisting in connection with the filing of the inventory and preparing and filing the receivers' operating and liquidating accounts.

 8. Preparing and filing various miscellaneous petitions (for compensation, for appointment of an appraiser, etc.).

 9. Responding to various inquiries from creditors, employees of the debtor, prospective purchasers of assets, and other parties in interest.

 10. Setting up of files and a system for collection of some 1100 individual accounts receivable, writing demand letters, and handling hundreds of ...


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