Court Has Discretion to Reimburse Expenses Not Included in No-Look Fee Order

Posted by NCBRC - May 22, 2019

Under the bankruptcy court’s no-look fee standing order, debtor’s counsel could not obtain reimbursement for advancing pre-petition costs including filing fees and credit counseling, but the court had discretion to allow those expenses as part of counsel’s compensation. McBride v. Riley (In re Riley), No. 18-30535 (5th Cir. May 13, 2019).

Under its “no money down” fee agreement, the McBride Law Firm advanced the chapter 13 debtor’s filing fees, credit counseling, and the cost of obtaining credit reports. McBride later sought to recover the advance along with its regular fees under the bankruptcy court’s no-look fee standing order. The bankruptcy court found that the attorney fees were limited to those fees specified in the standing order, and it further held that it had no authority to award additional fees or reimbursements. At the same time, the bankruptcy court denied reimbursement of pre-petition expenses in eighteen other cases in the district. McBride and the attorneys from two of the other cases appealed to the district court. That court affirmed.

On appeal to the Fifth Circuit, the bankruptcy court’s position was represented by two chapter 13 trustees who reiterated the reasoning of the bankruptcy court. At the request of the circuit court, the UST also weighed in and supported the bankruptcy court.

On appeal, McBride argued that the expenses were reimbursable under section 503. Specifically, section 503(b)(1), which permits payment of expenses necessary to preserve the estate, or section 503(b)(2), which, in conjunction with section 330(a)(4)(B), permits an award of “reasonable compensation” for attorneys based on services rendered. In finding that McBride was not entitled to reimbursement, the bankruptcy court relied on its February, 2017, standing order permitting the bankruptcy court to award attorney’s fees up to a specified amount without the necessity of the attorney filing an itemized fee application. Prior to February, 2017, the court’s standing order provided that pre-petition expenses were not reimbursable separately from the no-look fee amount. The February, 2017, order removed the language relating to reimbursement of expenses with one exception: the order specifically allowed the cost of postage for service of a motion to modify to be added to the no-look fee.

The Fifth Circuit began with McBride’s argument that, by its silence on the subject, the new no-look fee standing order permits reimbursement of pre-petition expenses. The court disagreed. It held that where the purpose of the standing order was to simplify payment of attorney’s fees, it was reasonable to conclude that silence on a given expense meant that expense was not covered by the order. This conclusion was further supported by language in the standing order that counsel seeking fees or expenses beyond those allowed in the no-look fee order must file an itemized fee application.

The court next rejected McBride’s argument that the expenses were reimbursable under sections 503(a) and (b)(1)(A) as necessary to the preservation of the estate, finding that neither of the two prerequisites were met. First, the expenses were not post-petition transactions with the bankruptcy estate, but were personal debts incurred by the debtor pre-petition. Second, the expenses were incurred as an administrative requirement belonging to the debtor. Payment of the pre-petition fees did not benefit or add value to the estate.

The court turned to the bankruptcy court’s finding that, under sections 503(b) and 330(a)(4)(B), debtor’s counsel may be compensated only for services, and that “all bankruptcy courts lack the discretion to ever award debtor’s counsel compensation that includes reimbursement for advancing the costs of those three fees.” The circuit court rejected the notion that the definition of “compensation” could never encompass “reimbursement.” It found the permissive language in section 330(a)(4)(B), that the court may award compensation for reasonable and necessary expenses, is broad enough to encompass reimbursement. The court was unpersuaded by the bankruptcy court’s reasoning that permitting reimbursement of expenses owed by the debtor as the price of entering the world of bankruptcy, would necessarily diminish the funds available to pay other creditors. While that reasoning may have been relevant to the determination that the expenses were not administrative costs necessary to the preservation of the estate under section 503(b), it was not relevant to consideration of whether counsel’s advance of those fees was in the best interest of the debtor and reimbursable as part of counsel’s compensation under section 330(a)(4)(B). Emphasizing the discretionary nature of section 330(a)(4)(B), the court noted that permitting a court to award reimbursement of pre-petition expenses would not eviscerate Rule 1006’s provision for payment of filing fees through an installment plan.

In sum, the Fifth Circuit affirmed the bankruptcy court’s holding that the no-look fee standing order does not permit additional fees for reimbursement of pre-petition expenses, and that advancing those fees does not fall under administrative expenses necessary to preservation of the bankruptcy estate under section 503(a). However, the court vacated the bankruptcy court’s holding that bankruptcy courts lack all discretion to award reimbursement of those expenses as part of counsel’s compensation under section 330(a)(4)(B).

McBride 5th Cir May 2019


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