‘Doing Everything Possible’ Can Result in Cutting a Fee Request, Judge Thad Collins Says
An oversecured lender may not be entitled to a fee allowance from the estate that a private client might be willing to pay.
Chief Bankruptcy Judge Thad J. Collins of Cedar Rapids, Iowa, wrote an opinion that could be understood to mean that counsel for an oversecured creditor cannot charge the estate more than the debtor’s counsel.
In his November 30 opinion, Judge Collins said that Section 506(b) requires a lender’s counsel to work efficiently and “exercise restraint” when making billing judgments.
The family farmer ultimately confirmed a liquidating chapter 12 plan. The lender had a claim for $2 million with collateral that “significantly exceeded” the amount of the claim, Judge Collins said.
To confirm, the debtor filed four successive plans, with each amendment making refinements in the prior version. Judge Collins said the case required “far more work than the ordinary chapter 12” case for both the debtor and the lender.
Initially, the lender filed a motion for relief from the automatic stay. Given abundant collateral protecting the claim, the lender abandoned the motion on realizing that pursuing stay relief would be futile.
Instead, the lender adopted a strategy “to resist confirmation, and pursue liquidation or dismissal,” Judge Collins said.
At the conclusion of the case, the lender filed an application for the allowance of about $220,000 in fees. The debtor’s counsel said his fee request would be for some $160,000.
Judge Collins was effusive with compliments for both counsel. He said that the debtor’s lawyers “have a reputation for excellence for this type of work.” From appearances in previous cases, he said the debtor’s firm was “incredibly thorough, detail-oriented, and well-prepared.” Even though the firm’s “approach pushes up the cost of . . . services,” he said the fee requests were “always” reasonable.
The lender’s counsel, Judge Collins said, “are some of the very best attorneys to appear before this Court.”
Although conceding that the fully secured lender was entitled to recover fees under Section 506(b), the debtor objected to the reasonableness of the request. While not specifically pegging the amount that should be allowed, the debtor’s counsel argued that the lender’s attorneys’ fees should not exceed the debtor’s.
The fee allowance turned on Section 506(b), which permits a fully secured creditor to recover “any reasonable fees.”
Judge Collins said that the section “is not a blank check for oversecured creditors to incur any amount of legal fees and have them paid by the debtor.” He read the section as requiring the court to look at “efficiency with an eye towards fairly preserving the value of the bankrupt estate.” Efficiency, he said, includes exercising “restraint” in billing judgments.
Judge Collins meticulously combed through the lender’s counsel’s time records. He was “concerned with the volume and repetitive nature of billing entries related to confirmation hearing preparation” and had “particular concern” about “the numerous billings related to objecting to each new plan and fully preparing for each rescheduled confirmation hearing.”
For example, Judge Collins focused on a particular confirmation hearing. Even though the hearing was only preliminary, he said that the lender’s attorneys incurred “a substantial amount of fees . . . for all aspects of preparation, as if it was a final, contested, evidentiary hearing.”
In all, there were eight hearings related to confirmation. “Nevertheless,” Judge Collins said, counsel “did a full preparation” eight “separate times.”
Judge Collins counted 450 hours billed for the confirmation hearings. He found 80 time entries regarding the preparation and review of witness and exhibit lists. He identified 66 hours for reading, reviewing and drafting the same motions and documents. He listed 335 hours with identical entries in multiple places.
In other words, the lender’s counsel were fastidious to a fault. Judge Collins said that “Section 506(b) is intended to check claims for unrestrained billing and billing based on excessive caution.”
Judge Collins said that counsel’s diligence “may very well be perfectly acceptable to a client that wanted its lawyers to use excessive caution.” But when an application is being made under Section 506(b), he said that billing judgment includes “avoiding duplication.”
Judge Collins allowed about $154,000, saying that a 30% reduction “is appropriate” after an “in-depth review of the record and in light of the circumstances of this case.”
Commiserating with the lender’s counsel, Prof. Nancy Rapoport said that “legal professionals are worried that they’ll get accused of breaching their fiduciary duties if they don’t do everything possible for their clients. When someone else (the estate) is paying the bills, doing everything humanly possible for every task runs the risk of being found unreasonable.”
Prof. Rapoport is the Garman Turner Gordon Professor of Law at the Univ. of Nevada at Las Vegas William S. Boyd School of Law. An expert on ethics, she is often appointed as fee examiner in major reorganizations.