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Category: Fee Jurisprudence

$100K in Attorney Fees Awarded Under Catalyst Theory in California

August 2, 2018

A recent Metropolitan News story, “$100,000 Sufficient Attorney Fees for Catalysts of Impound Rule Change,” reports that plaintiffs whose lawsuit prompted the City of Los Angeles to change its policy of impounding cars driven by holders of drivers’ licenses issued by foreign countries have lost a bid in this district’s Court of Appeal to increase their award of attorney fees from $100,000 to $1.7 million.  Los Angeles Superior Court Judge John S. Wiley Jr., sitting on assignment to Div. Seven, wrote the unpublished opinion.  It affirms a judgment by Judge Elihu Berle in three appeals from the same case.

In two of the challenges, the plaintiffs contend the award was unjustifiably meager.  The City of Los Angeles cross-appealed, arguing that no fees should have been awarded at all.  The opinion also rejects the protest by three other plaintiffs to the dismissal of their causes of action against the cities of Escondido and Long Beach on the ground that disputes with those defendants were resolved in prior actions.

The underlying case concerns the cities’ policies in interpreting Vehicle Code §14602.6(a)(1), which allows police to impound a car when it is driven by a person who has never “been issued a driver’s license.”  All plaintiffs in the case had cars impounded despite having driver licenses issued in foreign countries.  In 2007, a federal class action was brought against various California government entities in the case of Salazar v. Schwarzeneggar.  The Salazar litigation involved many plaintiffs and defendants at different times, most of whom were not parties to the present appeal.

That case was unsuccessful for the plaintiffs.  The court dismissed with prejudice their claim under Art. I, §13 of the California Constitution—the right to be secure from unreasonable seizures—ruling that the section “does not provide a private cause of action for damages.”  The court also declined to take supplemental jurisdiction over the remaining state claims, and several of the plaintiffs and others sued various cities in state court in 2011.  Two of the plaintiffs in the state case, Laurencio Marin and Vincent Soltero, settled with Los Angeles for $4,000 each.  Berle awarded the two men $100,000 in attorney fees under Code of Civil Procedure §1021.5, the private attorney general statute.

Wiley explained that the award of fees was proper under a catalyst theory, which allows for attorney fees when a plaintiff prompts the defendant to change its behavior, even if there was no judicial resolution of the dispute.  In 2012, before the city settled with Marin and Soltero, then-Los Angeles Police Chief Charlie Beck, since retired, issued “Special Order No. 7,” which changed the LAPD’s impound policy.  The order—which drew considerable controversy—removed from officers discretion as to whether a vehicle driven by an unlicensed vehicle should be impounded, directing that it not be under specified circumstances.  The order provided that a driver’s license issued “by any jurisdiction (foreign or domestic)” would be recognized.

(The Court of Appeal for this district held in 2014 “that Special Order 7 is within the wide discretion of the police chief.”)  Wiley said:  “The catalyst theory required Marin and Soltero to establish (1) that their lawsuit was a catalyst motivating the City of Los Angeles to provide the primary relief sought; (2) that the lawsuit had merit and achieved its catalytic effect by threat of victory, not by dint of nuisance and threat of expense; and (3) that Marin and Soltero reasonably attempted to settle the litigation before filing their suit…

“The trial court found Marin and Soltero satisfied these three requirements and thus were entitled to a fee award.  The court expressly identified each factor and made appropriate findings.”  Although Berle found that Marin and Soltero had been successful, he noted that it was a limited success.  The settlement amount they had each received was minute, and they had suffered many failures throughout the litigation, including a failure to obtain class certification.  Wiley said:

“The court acknowledged the plaintiffs contributed in some degree to the advent of Special Order No. 7, but noted even that success was mixed.  Special Order No. 7 was a move in the right direction, as far as plaintiffs were concerned, but plaintiffs continued to challenge Los Angeles Police Department’s impound policies even as embodied in Special Order No. 7.  The trial court dryly remarked ‘[i]t is unusual to argue that plaintiffs have been successful in remedying a state of affairs which they continued to attack.’ ”

For this reason, Wiley explained that Berle had appropriately denied the plaintiffs their requested lodestar and multiplier.  As to the third appeal in the case, Wiley noted that Escondido and Long Beach had shown the three elements of claim preclusion applied to the three plaintiffs challenging the award of summary judgment to those cities.

“Claim preclusion applies when a second suit involves (1) the same cause of action (2) between the same parties (3) after a final judgment on the merits in the first suit,” he wrote.  The three plaintiffs and both cities had all been parties to the Salazar litigation, which had included a cause of action for the California Constitution claim which was the only claim in their state case.  The federal court had dismissed that claim with prejudice, which is a final judgment on the merits.

The case is Sancandi v. City of Los Angeles, B268839.  Counsel for the plaintiffs were Barrett S. Litt of Pasadena; Cynthia Anderson-Barker of Los Angeles; and Robert Mann and Donald W. Cook of Los Angeles.  The cities were represented, respectively, by Assistant City Attorney Gabriel S. Dermer for Los Angeles, Deputy City Attorney Adam C. Phillips for Escondido, and Deputy City Attorney Howard D. Russell for Long Beach.

Jones Day Warns of ‘Protracted’ Fee Actions if Circuit Ruling is Upheld

July 25, 2018

A recent NLJ story by Erin Mulvaney, “Jones Days Warns of ‘Protracted’ Fee Fights if Circuit is Upheld,” reports that Jones Day lawyers, representing CVS Pharmacy Corp., are raising alarms that a federal appeals court decision that erased a fee award misapplied legal standards and will invite “protracted” litigation over compensation in future cases.  The U.S. Court of Appeals for the Seventh Circuit in June overturned a $307,000 fee award for the law firm, which had successfully challenged U.S. Equal Opportunity Commission claims that a CVS severance agreement unlawfully interfered with protected workplace rights.

The appeals court, finding the EEOC’s case against CVS wasn’t fruitless, vacated the legal fees awarded to Jones Day.  The applicable fee statute, the court said, “does not punish a civil rights litigant for pursuing a novel, even ambitious theory.”  The law firm asked the court to reconsider the decision stripping fees.  Jones Day’s Eric Dreiband, leading the team for CVS, took issue with how the appeals panel resolved the fee dispute.  The Seventh Circuit, according to lawyers for CVS, should not have granted “fresh” review but instead should have approached the dispute using a standard that gives greater deference to the trial court.

“Although this particular fee award may not be of great importance, the standard of review for all fee awards assuredly is,” Dreiband wrote in court papers.  “The panel opinion gets it wrong and, worse, invites protracted fee litigation by promising de novo appellate review.”  Citing an earlier Seventh Circuit case, Dreiband, who is the Trump administration’s nominee to lead the U.S. Justice Department’s civil rights division, said it would be “’wasteful’ for appellate courts to ‘redo’ a lower court’s analysis of ‘how far from the correct legal position’ a party strayed.”

The lawyers for CVS also are urging the Seventh Circuit to correct an alleged “legal misstatement” that could lead other courts astray.  The Jones Day lawyers, including partner Yaakov Roth, argue the panel decision incorrectly stated the EEOC can litigate certain types of employment cases without an underlying charge.  The attorneys also contend the appeals court strayed in saying it was “questionable” whether legal fees can ever be awarded in scenarios where the EEOC violated a duty to try to resolve disputes before any lawsuit is filed.

The case is rooted in a 2014 lawsuit filed by the EEOC over a severance agreement the agency said limited the rights of employees to file complaints.  The EEOC called the severance agreement “overly broad” and argued it was part of a CVS “pattern or practice of resistance” to restrict the civil rights of employees.  The agency lost in the U.S. District Court for the Northern District of Illinois.

Dreiband, formerly the head of Jones Day’s labor and employment group, in 2016 identified his hourly rate at $560, according to court papers in the case.  Dreiband earlier served as general counsel to the EEOC from 2003 to 2005.  Roth, a former clerk to the late Justice Antonin Scalia, billed at $475 per hour in 2016, and Nikki McArthur at $275 per hour, according to court records.

Taxation of Attorney Fee Awards in Legal Malpractice Cases

July 24, 2018

A recent New Jersey Law Journal article by Paul J. Maselli, “Taxation of Attorney Fee Awards in Legal Malpractice Cases,” reports on the taxation of attorney fee awards in legal malpractice cases.  This article was posted with permission.  The article reads:

The recent tax law changes may impact and increase damage awards in legal malpractice cases.  In New Jersey, when a former client successfully sues a former attorney for legal malpractice, the client is entitled to recover the fees incurred for the malpractice lawsuit as part of the measure of damages.  New Jersey’s Supreme Court established this fee-shifting rule, which is an exception to the American Rule that provides each party pays their own attorney fees for a lawsuit, in the 1996 case Saffer v. Willoughby, 143 N.J. 256 (1996).  The court stated that attorney fees in a legal malpractice case are consequential damages and available “to put a plaintiff in as good a position as he [or she] would have been had the [attorney] kept his [or her] contract.” Id. at 271.

Under the tax laws that expired at the end of 2017, an individual’s attorney fees (whether incurred or reimbursed) were either fully excluded from income or deductible as a miscellaneous expense to the extent the attorney fees exceeded 2 percent of the individual’s adjusted gross income, and the individual was not subject to the Alternative Minimum Tax.  The Tax Cuts and Jobs Act of 2017 eliminated miscellaneous expenses as a deduction from adjusted gross income, which means that attorney fee awards are now taxable in a whole category of situations not previously taxed.

If the underlying claim is for recovery of money that will be taxed (such as a claim for unpaid wages or lost profits), the award of attorney fees is not taxed.  26 U.S.C.A. §212(1). Where the claim is for non-taxable damages, the award of attorney fees is taxed.  This means that, with some exceptions, a plaintiff awarded attorney fees pursuant to a statute, case or court rule must treat the recovery as income subject to taxation by the Internal Revenue Service and State of New Jersey, including the legal fees paid to plaintiffs in legal malpractice cases where the compensatory damages are not taxable.

As for exceptions, the compensatory damages in personal injury or sickness cases are not taxable whether the funds are retained by the client or paid to the attorney. 26 U.S.C.A. §104(a).  Awards for damages and attorney fees in discrimination suits and whistleblower claims are not included in adjusted gross income and thus not taxable.  26 U.S.C.A. §62(a)(20) and (21).  But awards of attorney fees to individuals are now taxable in all other cases not related to the collection of taxable money.

Attorney fee awards in legal malpractice cases handled on a contingency fee basis are not subject to the time spent/hourly rate lodestar, instead, courts may award the one-third contingency fee if that is the arrangement between malpractice lawyer and client.  Distefano v. Greenstone, 357 N.J. Super. 352, 361 (App. Div. 2003).  Awards can be quite high.

Whether the compensatory damages awarded in a legal malpractice case are taxable depends on the nature of the underlying claim.  United States v. Gilmore, 372 U.S. 39, 49 (1963).  If the plaintiff sues her attorney for professional negligence in her representation in a claim for an inheritance, the compensatory damages recovered in the malpractice case are not taxable because there is no federal or state inheritance tax.  If the plaintiff sues the attorney for malpractice in handling a case for the recovery of unpaid wages, on the other hand, the compensatory damages are taxable because the unpaid wages would have been taxed.  26 U.S.C.A. §104(a)(1)(a).  Finally, if the attorney’s negligence occurred in a claim to recover the client’s security deposit, the compensatory damages would not be taxed since there is no tax on the recovery of a party’s capital.  Clark v. Commissioner, 40 B.T.A. 333 (1939), acq., 1957-1 C.B. 4 and Rev. Rul. 57-47, 1957-1 C.B. 23.

In the inheritance and security deposit case, the attorney fee awards are taxed because they do not fall within an exception and the claim for compensatory damages is not taxable income.  If the measure of damages is to place the plaintiff “in as good a position” as he or she would have enjoyed had the attorney not malpracticed, then the plaintiff’s obligation to treat the attorney fee award as income and pay taxes on it certainly detracts from the plaintiff being in as a good a position.

Plaintiffs now will be seeking an augmentation of any attorney fee award to recoup an amount sufficient to pay the taxes. Known as a “tax gross up,” this concept is not new.  In Oddi v. Ayco Corporation, 947 F.2d 257 (7th Cir. 1992), the court considered a negligent tax planning and advice claim in which the tax advisor made an error calculating the tax impact of a transaction for his investor client.  The court awarded damages not only for the difference between the advised amount and the actual amount, but augmented the award to include an amount for the income taxes that would be incurred on the award. Id. at 261.  The trial court’s award was not disturbed on appeal.

In Jobe v. International Insurance Company, 933 F.Supp. 844 (D. Ariz. 1995), the court relied on Oddi as it outlined the damages available to a plaintiff in a tax malpractice case:

Damages in a tax malpractice case are the difference between what the plaintiff would have owed if the tax returns had been properly prepared and they owe now because of the professional’s negligence, plus incidental damages.  Thomas v. Cleary, 768 P.2d 1090, 1091–92 n. 5 (Alaska 1989).  The injured plaintiff in a tax malpractice action may recover: (1) the taxes paid after audit, appeal and/or settlement attributable to the negligence; Thomas, 768 P.2d at 1092; (2) interest paid on those taxes; (3) prejudgment interest on taxes and interest paid, Wynn v. Estate of Holmes, 815 P.2d 1231, 1235–36 (Okla. Ct. App.1991); (4) professional fees incurred in defending the audit, Thomas, 768 P.2d at 1092; (5) all fees paid to a lawyer who acts while in a conflict situation, Day v. Rosenthal, 170 Cal. App.3d 1125, 217 Cal.Rptr. 89, 113 (Ct.App.), cert denied, 475 U.S. 1048, 106 S.Ct.1267, 89 L.Ed.2d 576 (1986); and (6) additional taxes a plaintiff will incur on receipt of the damages award. Oddi v. Ayco Corp, 947 F.2d 257 (7th Cir.1991).

Id. at 860 (emphasis added).

While it benefits the clients, the attorneys and the insurance company to pay taxes that the government uses for education, roads and police, most litigants see it differently—not welcoming the opportunity to pay taxes.  One tax-avoidance strategy for settlement negotiations is to attribute all or as much of the settlement amount to compensatory damages that have some justification in fact.  The plaintiff may be asserting $100,000 in compensatory damages but may have proof problems with $30,000 of that amount which results in the plaintiff accepting an $80,000 settlement offer.  Instead of itemizing the settlement as $70,000 for compensatory damages and $10,000 for taxable attorney fees, the parties can agree to settle for $80,000 in compensatory damages with the plaintiff waiving the claim for attorney fees.  The settlement number is still less than the maximum compensatory claim and the itemization is justifiable, and no part of the settlement was paid for attorney fees.

This strategy is supported by the finding of the United States Tax Court in Concord Instruments Corp. v. C.I.R., 67 T.C.M. (CCH) 3036 (T.C. 1994) (1994 WL 232364).  There, a taxpayer sued for compensatory damages of $466,000 arising from legal malpractice for its attorney’s failure to file an appeal of a tax assessment.  The $466,000 was comprised of taxes and interest paid from the taxpayer’s capital.  The case settled for $125,000 and the IRS wanted to tax the settlement, asserting that it was income to the taxpayer.  The tax court ruled that $125,000 was paid to settle a claim in which the taxpayer sought a return of capital, and since damages for a return of capital are not taxed, the $125,000 settlement was not taxed.

The court reasoned that the nature of the settlement (whether taxable income or non-taxable return of capital) is determined by looking at the nature of the claim, not the merits of the claim.  “The tax consequences of an award for damages depend on the nature of the litigation and on the origin and character of the claims adjudicated, but not the validity of such claims.” Id.

The IRS argued that the taxpayer would never have won its appeal if the attorney had timely filed the appeal, and since the taxpayer would not have won the appeal, the payment of $125,000 must be considered income to the taxpayer.  The court disagreed.  As the tax gross up issue evolves with the settlement and adjudication of legal malpractice cases in New Jersey, practitioners will likely develop more strategies for the avoidance of the payment of taxes on attorney fee awards. Creative minds are required.

Paul J. Maselli is a shareholder with Maselli Warren in Princeton.

NJ Supreme Court Sets ‘Hard Limit’ on Additional Fees in High-Low Settlements

July 20, 2018

A recent New Jersey Law Journal story by Michael Booth, “High-Low Agreement Sets ‘Hard Limit,’ Court Says in Barring Additional Fee Award,” reports that the New Jersey Supreme Court ruled that parties who enter into a high-low agreement may not later seek additional counsel fees and litigation costs if the agreement is silent on the issue.  In a unanimous decision, the court ruled that a high-low agreement should be considered a contract and that, unless expressly agreed to, the award of counsel fees and costs permitted under the offer of judgment rule cannot be considered.

“We determine that the high-low agreement is a settlement subject to the rules of contract interpretation,” Justice Faustino Fernandez-Vina said for the court.  A high-low agreement “is not the sort of settlement contemplated by Rule 4:58; rather, it serves a different purpose and provides distinct benefits,” he wrote.

“An offer of judgment pursuant to Rule 4:58 is designed to encourage parties to settle claims that ought to be settled, saving time, expense, and averting risk, while the specter of the continued prosecution of the lawsuit remains,” he said.  “A high-low agreement, in contrast, only mitigates the risk faced by the litigants—it saves no time or expense related to litigation and requires the full panoply of judicial process, up to and including a jury verdict.”  “The agreement is a settlement contract ”that” superseded and extinguished the offer of judgment,” the court held.

The issue reached the court on a question of whether the estate of a deceased medical malpractice plaintiff could be awarded fees over and above the $1 million “high” after a jury verdict of $6 million.  The Supreme Court affirmed lower courts, which said the answer was no.

In the suit, plaintiff Benjamin Serico of West Caldwell claimed he was administered a colonoscopy by physician Robert Rothberg in December 2007, but two years later he was diagnosed with colon cancer that had spread to his liver.  Serico died two years after his diagnosis, in December 2011, at age 62, after which his wife, Lucia Serico, continued to pursue claims that Rothberg negligently failed to treat the cancer.

Lucia Serico made a pretrial offer of judgment of $750,000, to which Rothberg’s carrier never responded, according to documents.  According to the court, settlement negotiations began in earnest during the trial, and the parties entered a high-low agreement providing for a minimum recovery of $300,000 and a maximum of $1 million.  During the negotiations, neither side raised a possible fee award, or a reservation or waiver of rights, or the offer of judgment, the court said.

A jury found for the plaintiff after a two-week trial before Essex County Superior Court Judge James Rothschild Jr., and awarded $6 million, thus triggering the $1 million “high.”  The jury attributed 20 percent of the fault to the decedent’s pre-existing cancer, which, absent the high-low, would have set the recovery at $4.8 million.  Because the $1 million judgment was more than 120 percent of the previous $750,000 offer, Serico, citing Rule 4:58, moved for an award of fees and costs.  Each side acknowledged that the issue hadn’t been raised at the negotiations during trial.

Rothschild denied the motion.  He found there was no evidence of intent to determine that Serico’s rights to a fee sanction under the rule had been preserved.  He said high-low settlements are rarely if ever followed by fee applications under Rule 4:58.  In a February 2017 ruling, the Appellate Division affirmed, saying: “Without evidence that the parties agreed to allow plaintiff to seek amounts in excess of the high, [the plaintiff] was not entitled to any other payments.”

Fernandez-Vina and the other justices agreed.  “The resulting agreement set a hard limit of $1,000,000,” Fernandez-Vina said.  “We conclude that the parties intended $1,000,000 to be the maximum recovery, including all expenses and fees.  “The agreement on the record reveals a meeting of minds on both the floor and the ceiling of Serico’s recovery, including fees and expenses,” Fernandez-Vina said.  “A crucial aspect of any high-low agreement is finality; both parties benefit from the strict and explicit limitations of financial exposure that such agreements provide,” he added.

Rothberg’s attorney, James Sharp of Schenck, Price, Smith & King in Florham Park, issued a statement through another attorney, Benjamin Hooper of the same firm.  “We were confident in the correctness of our position, that the plaintiff was ineligible to collect fees and costs under the offer of judgment rule,” Hooper said.  “The high-low contract superseded the offer-to-take judgment.  “As a matter of policy the decision benefits all litigants.  High-low agreements assist both plaintiff and defendant to mitigate the risk of an unfavorable jury verdict,” Hooper said.

Fees for Defending Fees – Post-Asarco Cases

December 4, 2017

A recent article by Benjamin Feder, “Fees for Defending Fees – Recent Rulings Permit Contractual Circumvention of Supreme Court’s Baker Botts v. Asarco Decision,” reports on post-Asarco cases.  This article was posted with permission.  The article reads:

The Supreme Court two years ago ruled in Baker Botts v. Asarco that bankruptcy professionals entitled to compensation from a debtor’s bankruptcy estate had no statutory right to be compensated for time spent defending against objections to their fee applications.  Since then, “estate professionals,” i.e., those retained in a bankruptcy case by a trustee, debtor in possession or an official committee of creditors, have sought ways to limit the potentially harsh impact of that decision.  A subsequent opinion in a Delaware bankruptcy case, In re Boomerang Tube, declined to allow Baker Botts to be circumvented by contract.  However, decisions in another Delaware case, Nortel Networks, and more recently in a New Mexico case, Hungry Horse LLC, have distinguished Boomerang Tube and permitted contractual provisions that allow payment for the defense of fees.  The pragmatic approach taken in Hungry Horse in particular offers a template that other courts will likely be urged to adopt.

In every bankruptcy case, the retention of estate professionals must be approved by the bankruptcy court. Their fees and expenses are paid out of the debtor’s bankruptcy estate and are subject to review and approval by the bankruptcy court pursuant to Section 330 of the Bankruptcy Code.  Objections from other parties have always been a recognized hazard for such professionals.  Prior to Baker Botts a majority of courts permitted the recovery of fees incurred in defending against such challenges.

The Court’s analysis in Baker Botts was straight-forward.  Under American jurisprudence, each side in a litigated dispute bears its own attorneys’ fees unless there is an applicable statute or agreement that provides otherwise.  Section 330(a)(1) of the Bankruptcy Code states: “After notice to the parties in interest and . . . a hearing . . . the court may award to . . . a professional person . . . reasonable compensation for actual, necessary services[.]”  The Court ruled that the plain text of Section 330(a) does not support a deviation from the “American Rule” regarding attorneys’ fees.  The Court’s majority stated, “[t]he word ‘services’ ordinarily refers to ‘labor performed for another.’”  Since Baker Botts was litigating to defend its own fees, the Court reasoned that it was not providing an “actual, necessary service” to the bankruptcy estate and therefore was not entitled to compensation for such time.

Baker Botts makes clear that the Bankruptcy Code does not provide a statutory exception to the American Rule.  The question remaining is whether estate professionals can sidestep it by contract.

In Boomerang Tube, Judge Mary Walrath answered that question in the negative.  The law firm chosen in that case to represent the official committee of unsecured creditors, in its application to the bankruptcy court, asked for the approval order to include a provision that would entitle it to be compensated from Boomerang Tube’s bankruptcy estate for fees incurred in defending its fees against any challenges.  The firm pointed to Section 328 of the Bankruptcy Code, which allows for the retention of estate professionals “on any reasonable terms and conditions.”  It argued that the Supreme Court in Baker Botts had noted that parties could and regularly did contract around the American Rule.

Judge Walrath denied the request. She first held that Section 328 does not create a statutory exception to the American Rule, as it makes no mention of awarding fees or costs in the context of an adversarial proceeding. She observed in contrast that several discrete Bankruptcy Code provisions do contain express language providing for payment of fees to a prevailing party.  She next rejected the law firm’s argument that Section 328 permitted a contractual agreement for the payment of defense fees.  The retention agreement was between the law firm and the official creditors’ committee, but it would be Boomerang Tube’s bankruptcy estate, a non-party to such agreement, that would bear the costs.  Finally, she determined that the proposed fee shifting provisions were simply not “reasonable” terms of employment of professionals with the meaning of Section 328.

In view of the extent to which challenges to estate professionals’ fees (or at least the threat of doing so) are ingrained in chapter 11 practice, it was unlikely that Boomerang Tube would be the last word on this issue.  Recent decisions in two cases, Nortel Networks and Hungry Horse, have distinguished Boomerang Tube.

Judge Kevin Gross, a Delaware colleague of Judge Walrath, ruled in Nortel Networks that Baker Botts and Boomerang Tube did not apply to a fee dispute between an indenture trustee and certain bondholders, and permitted the trustee to recover its attorneys’ fees for defending against the challenge.  Although this case is not directly on point as it did not involve an estate professional, and Judge Gross was not opining on whether Section 328 would permit such an agreement, he held that the bond indenture qualified as a contractual exception to the American Rule, noting that, unlike the retention agreement in Boomerang Tube, it was an agreement directly between the debtor and the trustee.

In Hungry Horse New Mexico Bankruptcy Judge David Thuma looked to Nortel Networks for support in holding that a retention agreement in a chapter 11 case between proposed debtor’s counsel and the debtor could pass muster under Section 328, thereby permitting a contractual work-around to Baker Botts.  Judge Thuma first determined that nothing in Baker Botts prevented a bankruptcy court from finding a fee defense provision in a retention agreement to be “reasonable” within the meaning of Section 328.  In his reading of Baker Botts, the Court simply limited the compensation an estate professional could receive under Section 330 to fees for services to the client, rather than on its own behalf, and noted that Section 328 had no applicability to that issue.

He then considered various other provisions typical of retention agreements, and observed that several were “reasonable” under Section 328 even if they were intended to favor the professional, rather than the client. He pointed to provisions, among other things, setting out retainer requirements, permitting an attorney to withdraw under certain conditions, and granting a lien on certain recoveries.  “A typical employment agreement between a lawyer and a client has many terms; some benefit the client, while others benefit the lawyer.  Considered together, they may be reasonable.”  The overall effect, he noted, is that “the client obtains the services of needed, able professionals.”

Judge Thuma concluded that Section 328 therefore can permit contractual exceptions to the American Rule, and outlined the terms of a fee defense provision in a retention agreement that he believed was “reasonable” and “violat[ed] neither the letter nor spirit of [Baker Botts].”  He stated that, among other things, it needed to be agreed to by the bankruptcy estate, in order to avoid the issue highlighted by Judge Walrath in Boomerang Tube, and provided also that it extended to the creditors’ committee’s professionals, in order to “level the playing field.”  He suggested sample language that he believed could be acceptable under Section 328:

The Client agrees to pay all reasonable legal fees and expenses incurred by the Firm, and also by any counsel retained by the unsecured creditors’ committee (if one is formed in the Client’s bankruptcy case) for successfully defending their respective fee applications. The bankruptcy court must approve all of such fees as reasonable. The Client will have no obligation to pay for any fees or expenses the Firm incurs defending fees that are not allowed.

Disputes over payment of estate professionals’ fees will invariably remain part of the bankruptcy landscape. Estate professionals in chapter 11 cases are likely to ask bankruptcy judges in other jurisdictions to follow the pragmatic approach of Judge Thuma in Hungry Horse in order to blunt the detrimental impact of Baker Botts.

Benjamin Feder is Special Counsel at Kelley Drye & Warren LLP in New York.

4 Reasons to Get Help on a Fee Requests

November 24, 2017

A recent CEBblog article by Julie Brook, “4 Reasons to Get Help on a Fee Motion,” reports on attorney fee requests.  This article was posted with permission.  The article reads: Just because...

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