Attorney fees

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Panel Affirms Reduced Attorney Fees

The bankruptcy court did not abuse its discretion in reducing the chapter 7 bankruptcy attorney’s fees in two cases in which the attorney charged an additional $500 to clients due solely to their electing to pay his fees post-petition rather than up front. Ridings v. Cassamatta (In re Allen), No. 20-6023 (B.A.P. 8th Cir. June 21, 2021).

At issue in this case was Bankruptcy Attorney William Riding’s payment policy under which he offered two options for his chapter 7 clients. Under the first option, the debtor pays $1,500 prior to filing the petition. That amount comprises a $335 filing fee plus attorney fees of $1,165. Under the second option, the debtor pays nothing up front but pays $2,000 post-petition. That amount comprises the filing fee plus $1,665 in attorney fees. The services Mr. Ridings provided were the same regardless of whether the client paid up front or post-petition. [Read more…] about Panel Affirms Reduced Attorney Fees

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Standing Trustee Need Not Disgorge Fees when Plan Dismissed Prior to Confirmation

“[A] standing trustee is entitled to collect the statutory fee under [28 U.S.C.] § 586(e) upon receipt of each payment under the plan and is not required to disgorge the fee if the case is dismissed prior to confirmation.” McCallister v. Harmon, No. 20-1168 (B.A.P. 9th Cir. July 20, 2021) (unpublished).

The debtors made several payments in accordance with their proposed plan but voluntarily dismissed their bankruptcy prior to plan confirmation. The bankruptcy court’s order of dismissal included provision for the debtors’ attorney to collect his fee from the funds held by the trustee. The original order also provided for the trustee to retain the statutory fees she collected under section 586(e). Upon reconsideration of that order, though, the bankruptcy court concluded that section 1326(a)(2), which requires the trustee to retain plan payments until confirmation and return those payments to the debtor after deducting unpaid administrative claims if the case is dismissed prior to confirmation, mandated that the trustee return the fees to the debtor upon dismissal. In re Harmon, No. 19-01424-TLM, 2020 WL 6037759 (Bankr. D. Idaho June 23, 2020). [Read more…] about Standing Trustee Need Not Disgorge Fees when Plan Dismissed Prior to Confirmation

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Attorney Fees Intended To Pressure Debtor Unnecessary

The creditor’s attorney fees attributable to its repeated motions to continue foreclosure proceedings during the debtor’s pending bankruptcy cases were unnecessary given that the automatic stay was in place, and the bankruptcy court deducted those fees from the allowed claim. In re Peta, 2021 WL 608233 (Bankr. E.D. Pa., Feb. 10, 2021) (case no. 2:19-bk-13264). [Read more…] about Attorney Fees Intended To Pressure Debtor Unnecessary

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Scotus: Three Denials and a Pending

The Supreme Court recently denied cert petitions in three bankruptcy-related cases: Hull v. Rockwell, No. 20-499 (pet’n denied Feb. 22, 2021); GE Capital Retail Bank v. Belton, 20-481 (pet’n denied March 8, 2021); and Marino v. Ocwen Loan Servicing, No. 20-409 (pet’n denied March 22, 2021). [Read more…] about Scotus: Three Denials and a Pending

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Debtors Entitled to Fees for Creditor’s Collateral Attack on Contempt Motion

Where the creditor raised all its defenses to the debtors’ contempt motion in a collateral adversary complaint, the debtors were entitled to at least a portion of their attorney fees incurred in litigating the adversary proceeding under section 362(k)(1). Moon v. Rushmore Loan Management Services, LLC., No. 20-1199 (B.A.P. 9th Cir. Feb. 4, 2021) (unpublished). [Read more…] about Debtors Entitled to Fees for Creditor’s Collateral Attack on Contempt Motion

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Ninth Circuit Applies Scotus Standard in Discharge Injunction Case

On remand from the Supreme Court, the Ninth Circuit found that, under the Supreme Court’s objective standard, the debtor’s active post-bankruptcy litigation in state court of the terms of his separation from his business partnership established sufficient cause for his business partner creditors to have a reasonable belief that he had “returned to the fray” and that their motion for attorney’s fees would not violate the discharge injunction. Lorenzen v. Taggart, No. 16-35402 (9th Cir. Nov. 24, 2020). [Read more…] about Ninth Circuit Applies Scotus Standard in Discharge Injunction Case

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$67,000 in Fees and Costs Reasonable for Stay Litigation

The debtors’ attorney was entitled to approximately $67,000.00 in attorney’s fees and expert witness fees and costs for his representation of the debtors in their action against the creditor for violation of the automatic stay. In re Moon, No. 13-12466 (Bankr. D. Nev. May 29, 2020).

After they had obtained their discharge, the debtors reopened their bankruptcy with new counsel, Christopher Burke, in order to file a motion to hold Rushmore Loan Management Services, LLC, in contempt for violation of the automatic stay and the discharge injunction. After an evidentiary hearing, the bankruptcy court found Rushmore in violation of the automatic stay, but because the date Rushmore learned of the discharge was not established, the court did not find it in violation of the discharge injunction. The bankruptcy court awarded the debtors over $100,000 in actual damages, $200,000 in punitive damages, and attorney’s fees and costs under section 362(k)(1).

Mr. Burke then submitted his fee application seeking $56,150 in fees based on 112.3 hours of work at $500.00/hour, $1,950.30 in costs, and $8,907.64 in witness fees for the expert testimony of John Rao. He further sought an order enhancing his fees by a multiplier of 1.5. Rushmore objected to the fee application generally, arguing that because he did not have a written fee agreement with the debtors, Mr. Burke did not comply with ethics requirements. Rushmore further argued that Mr. Burke’s hourly rate and the expert witness fee were excessive. Finally, Rushmore argued that Mr. Burke was not entitled to a fee enhancement. [Read more…] about $67,000 in Fees and Costs Reasonable for Stay Litigation

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

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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SCOTUS Hears Arguments on Discharge Violation Sanctions

Addressing the reach of a bankruptcy court’s contempt powers in the context of a violation of the discharge injunction, the Supreme Court heard arguments on April 24, in the case of Taggart v. Lorenzen, No. 18-489.

Daniel Geyser appeared for the debtor, Bradley Taggart. Nicole Saharsky represented the creditor, Shelley Lorenzen, executor. Sopan Joshi, from the office of the Solicitor General, argued as amicus not in support of either party. NACBA submitted an amicus brief in support of reversal.

The controversy hinged on a state court finding that Mr. Taggart’s creditor could seek contractual attorney fees in the litigation before it, even though those fees would have been subject to the discharge order injunction had Mr. Taggart not “returned to the fray.” The bankruptcy court found that the “returned to the fray” doctrine did not apply and that the litigation violated the discharge injunction. It awarded sanctions, at least in part representing the debtor’s attorney’s fees. The Ninth Circuit ultimately reversed the sanctions stating broadly that a creditor acting in good faith cannot be held liable for discharge injunction violation even if that belief is unreasonable. Lorenzen v. Taggart (In re Taggart), 888 F.3d 438 (9th Cir. 2018).

At the outset, all the parties agreed that the Ninth Circuit rule was incorrect. The parties agreed that in the case of a discharge violation, even one made in good faith, the bankruptcy court may order the creditor to cease the violation and restore any property taken.

Where there was disagreement between parties was in the application of the bankruptcy court’s contempt powers. Calling contempt a severe remedy, several of the Justices appeared concerned at its application in the context of discharge injunction where the creditor’s conduct was based on a “fair ground of doubt.”

The debtor advocated for the bankruptcy court’s discretion under section 105(a) to make the determination as to the nature of the creditor’s conduct and whether it merits sanctions, including attorney’s fees. The creditor has a “safe harbor” in Rule 4007 which allows it to seek guidance on the question of dischargeability from the bankruptcy court.

The government advocated for a purely objective test as to the reasonableness of the creditor’s belief that the discharge injunction did not apply. In Justice Gorsuch’s questioning, it appeared that an objective reasonableness would prevail even in the absence of the creditor’s subjective reasonableness (i.e. where there existed good reason to believe the conduct non-violative but the creditor was unaware of that good reason and went forward nonetheless.)

The creditor advocated a similar “reasonable good faith belief,” test as the government (though with the subjective element intact) emphasizing the “chilling effect” of requiring a creditor to jump through the Rule 4007 hoop to have dischargeability determined in an action before the bankruptcy court.

One concern expressed by several Justices was the establishment of a strict liability standard which put the creditor in a position of being permitted to seek a ruling on dischargeability from the state court but not be able to rely on that ruling as a defense to discharge injunction violation if the state court was in error.

The question of who should bear the burden of harm echoed throughout the questioning. Justice Kavanaugh noted to Mr. Geyser that under tradition rules of injunction good faith is a defense. Mr. Geyser disagreed stating that traditionally, the burden of uncertainty falls on the person subject to the decree. In a similar vein, Justice Kagan asked Ms. Saharsky: “As between the victim of the violation and the person who, with all the good faith in the world, perpetrated the violation, why shouldn’t we look to the person who perpetrated the violation?”

Justice Roberts, while noting the long history of the American Rule against fee-shifting, posited the possibility that a bankruptcy court could award sanctions for contempt using the debtor’s attorney’s fees as a reasonable number for that award.

See the SCOTUS blog for further discussion of the argument here.

Taggart SCt transcript April 2019

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Bifurcated Attorney Fee Agreement Gets Thumbs Up

A Utah bankruptcy court upheld a chapter 7 debtor’s attorney’s bifurcated fee agreement in the face of a motion for sanctions by the U.S. Trustee. In re Hazlett, No. 16-30360 (Bankr. D. Utah Apr. 10, 2019).

Attorney Russell B. Weekes, of Capstone Law, entered into a fee agreement with the chapter 7 debtor, Brett Hazlett, under which Mr. Hazlett would pay no retainer fee, but would pay post-petition costs and expenses in the amount of $2,400 in ten monthly installments. Capstone had an arrangement with BK Billing, under which BK Billing would buy the account from Capstone for $1,800 and collect the fee payments from Mr. Hazlett. Mr. Weekes explained that arrangement to Mr. Hazlett. Mr. Weekes filed all the necessary bankruptcy papers and Mr. Hazlett received his chapter 7 discharge without complications in March of 2017.

In September, 2017, the U.S. Trustee reopened the case and moved for sanctions based on the fee agreement. Specifically, the UST challenged: “(1) the marketing of Zero-Down Chapter 7 bankruptcy services; (2) the bifurcation of bankruptcy services into pre-petition and post-petition fee agreements; (3) filing the petition and the Initial Bankruptcy Papers for purportedly no charge; (4) the reasonableness of the $2,400 post-petition fee; (5) the use of BK Billing to factor and collect the fee; and (6) the propriety of utilizing electronic signatures in bankruptcy.”

In its preliminary discussion, the court noted several factors contributing to the problem of fees for chapter 7 representation, not least of which is the fact that chapter 7 debtors tend not to have the funds to pay a retainer. Adding to the difficulty, the Supreme Court held in Lamie v. United States Trustee, 540 U.S. 526 (2004), that a chapter 7 debtor’s attorney cannot be paid out of estate funds and that any fee still owed at the time of the petition is dischargeable along with other debts. The court reviewed the various, less-than-optimal, choices chapter 7 debtors have, beginning with the pro se route (or use of petition-preparers who often overcharge and underperform), which typically results in needlessly complicated chapter 7 cases and a low discharge rate of 70%.

In the absence of established law in the district on the topic of bifurcated fee agreements, the court found guidance in an ethics opinion issued by the Utah State Bar which emphasized that any such agreement must be for post-petition service, must be entered into after full disclosure and evidence of an understanding on the part of the debtor, and must be permissible under bankruptcy law.

The court found that Capstone’s fee agreement procedures—which included verbal explanation of the ramifications of all the payment options; extensive documents to be signed by the client laying out the disclosures, warnings and explanations; a general information document requiring the client’s initials on each paragraph; and more—satisfied the requirements of full disclosure and informed consent.

The court turned next to whether such agreements are permissible in bankruptcy. Section 329 requires that fees be reasonable, and Rule 2016(b) imposes disclosure requirements on attorneys. Evidence of compliance with both requirements must be presented to the court in the Form B2030 Disclosure of Compensation. The court found that bifurcated fee agreements are not per se prohibited and set forth the following “prime directives” for their use:

  1. The agreement must be in the debtor’s best interest.
  2. All fees must be reasonable and necessary. Where the attorney charges more for the post-petition agreement, he or she must justify the increased fee other than by work performed pre-petition.
  3. The fee arrangement must be revealed in Form B2030 within fourteen days of the petition.
  4. If the debtor opts to proceed pro se or with different counsel, the attorney must comply with the Local Rule pertaining to withdrawal or substitution of counsel.

The court acknowledged that Local Rule 2091-1 essentially requires a lawyer to complete all aspects of a bankruptcy case, but noted that in this case, the attorney fee agreement contemplated just that; Mr. Weekes was obligated under the agreement to complete the bankruptcy case unless the debtor opted to proceed pro se or hire new counsel.

Finding that Mr. Weekes’s fees were reasonable and necessary, the court went on to examine Capstone’s use of BK Billing for collection of payments. The court expressed concern about the use of such services due to systemic issues of overcharging debtors and creating a conflict of interest for the debtor’s attorney between the debtor and the collector. It noted, however, that the Utah Ethics Opinion found that such arrangements were permissible so long as all the requirements of full disclosure, informed consent, and reasonable fees were met. The court found that to be the case here.

The same was true for Capstone’s use of electronic signatures for some of the documents Mr. Hazlett signed. Though Local Rule 5005-2(e), which pertains to documents an attorney must retain, refers to “original signatures,” various rules and statutes in Utah sanction the use of electronic signatures, and it was therefore not unreasonable for Capstone to use e-signatures. Moreover, from a practical standpoint, the court noted that it is not always feasible to obtain wet signatures when financial pressures require immediate action.

The court concluded that Mr. Weekes provided valuable and ultimately successful services to Mr. Hazlett, that the terms of the fee agreement were fully disclosed, that the fee itself was reasonable and necessary and that, for all these reasons, sanctions were not warranted.

Hazlett Opinion Bankr Utah April 2019