“Non-Routine” Fees for Objections to Late Claims Allowed

Posted by NCBRC - November 24, 2014

In two nearly identical cases, the bankruptcy court granted the debtors’ attorney’s supplemental fee motions seeking compensation for work performed opposing proofs of claim for debts that were unenforceable due to the lapse of the state statute of limitations. In re Swilling, No. 13-12583 (Bankr. E.D. Tenn. Oct. 23, 2014), In re Alexander, No. 13-13462 (Bankr. E.D. Tenn. Oct. 22, 2014) (debtor’s attorney filed motions in five other cases based on similar factual scenarios).The court noted, however, that since the 2012 changes to Fed. Bankr. R. 3001(c), objections to those claims would now be deemed “routine.”

The fee agreement between the debtors and their counsel, Richard L. Banks, listed a routine charge of $3,000 for opposing late or duplicative claims and stated that “non-routine” objections would be subject to additional charge. With the exception of one late claim in Alexander, the fees sought in both cases were based on the claims being precluded by the state statute of limitations which, Mr. Banks argued, fell under the “non-routine” portion of the fee agreement. In both cases, the trustee opposed the motion on the grounds that the attorney fees would essentially eliminate any benefit to the estate resulting from the elimination of those claims. The debtor countered that his objections to claims addressed a systemic problem whereby creditors throw numerous unenforceable claims into a chapter 13 hoping at least some will stick. In addition, by eliminating those claims, the debtor avoids having to either lengthen the term of the plan or reduce the pro rata share to unsecured creditors.

The court began with general principles of attorney fee awards in chapter 13 finding that a court must approve counsel fees. (Citing In re Harris, 298 B.R. 319, 321-2 (Bankr. E.D. Tenn. 2003); 11 U.S.C. § 330(a)(4)(B); Fed. R. Bankr. P. 2016(a)). Local Bankruptcy Rules permit an attorney to charge a routine fee without itemization, but for fees over and above the routine amount itemization is required. Turning to whether additional fees were justified in this case, the court looked at the six factors set forth in section 330(a)(3)—1) time spent, 2) rates charged, 3) necessity or benefit of the services to the closure of the case, 4) reasonableness of time within which services performed, 5) certification or expertise of service provider, and 6) reasonableness of compensation sought.

The court found that the attorney’s rate of $300/hour for his services and $75/hour for paralegal services was reasonable. He did not spend excessive amounts of time preparing and pursuing the objections, and he appropriately delegated work to a paralegal. The primary point of contention was whether the work benefitted the estate. The court found that, in Alexander, benefits included “a net economic benefit of $1,373 for the estate,” and a shortened plan duration. Looking beyond those factors, the court also gave weight to debtor’s counsel’s claim that there is a theoretical benefit in “the disallowance of facially unenforceable claims filed by consumer debt buyers.” Although the court stopped short of finding an actual benefit to the bankruptcy system by reason of the objections, it recognized that “the Trustee has taken over filing these objections so he must consider these objections to serve a purpose.” The court also noted that had the debtor failed to pursue these objections and the case were dismissed prior to completion, the previously foreclosed claims against the debtor could have been revived.

Finally, the court turned to whether the objections were properly deemed “non-routine.” Examining the time and effort needed to file an objection based on staleness, the court found that “an objection to a proof of claim, to which Fed. R. Bankr. P. 3001(c) is applicable, based on the statute of limitations is a routine service where the objection relies solely on the information contained in or missing from the proof of claim.” Nonetheless, the court did not apply this conclusion to the fee requests before it. It found that such objections have not always been routine and have been increasingly problematic (citing Crawford v. LVNV Funding, LLC, 758 F.3d 1254, 1256 (11th Cir. 2014) (“A deluge has swept through U.S. bankruptcy courts of late.”)). Only since 2012 have the bankruptcy rules required a creditor to include last payment dates and charge off dates in their proofs of claim. Fed. R. Bankr. P. 3001(c). Before that, debtors were required to provide affidavits of staleness and lack of collection efforts. Since the advent of the Rule, debtors may now object without filing an affidavit rendering the objection process comparable to an objection based on late or duplicative claims. Presumably, therefore, such fee requests will not be granted going forward.




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