November 3, 2016
A recent Bloomberg BNA story, “Bankruptcy Attorney Can Get Fees for Supplementing Fee Application,” reports that an attorney employed by a Chapter 7 trustee can recover $27,520 in fees he incurred for supplementing his fee application after the U.S. Trustee objected to it as deficient (In re Stanton , 2016 BL 356911, Bankr. M.D. Fla., No. 8:11-bk-22675 Chapter 7, 10/26/16).
Judge Michael G. Williamson of the U.S. Bankruptcy Court for the Middle District of Florida concluded that the challenged fees were “more akin to the preparation — rather than defense — of a fee application.” The work was in service of the bankruptcy estate and recoverable under Bankruptcy Code Section 330(a), the court said.
In Baker Botts v. ASARCO, 135 S. Ct. 2158 (2015), the U.S. Supreme Court held that Section 330(a) doesn’t authorize attorney’s fees for work performed defending a fee application because that work isn’t performed for the estate.
The U.S. Trustee interpreted Baker Botts broadly and tried to impose a “bright-line” rule that any fees incurred supplementing a fee application after it has been objected to are unrecoverable. The court, however, rejected that “bright-line” rule, concluding that it is the “nature of the work — not when it is performed — that determines whether it is compensable.
The court approved the attorney’s second fee application, which supplemented his first application, because it benefited the estate and was necessary for the administration of the case.
The Chapter 7 trustee employed Herb Donica as his attorney and Ed Rice as special counsel. Donica and Rice pursued fraudulent transfer claims against debtor John Stanton’s ex-wife. Ultimately, they settled those claims and recovered $3.5 million in proceeds for the bankruptcy estate.
In his first fee application, Donica asked for $748,875 in attorney’s fees for nearly 2,000 hours of work. The UST objected to the fee application because it didn’t contain the level of detail required for a fee application in a Chapter 11 case, which isn’t required in a Chapter 7 case.
Donica filed an 18-page supplemental fee application providing more details. He then filed a second interim fee application seeking $33,840 for time spent on his initial application and other fees.
The UST objected that $27,520 of the fees were unrecoverable under Baker Botts.
The court held that Donica’s $27,520 in fees was for work in service of the estate that was recoverable as reasonable compensation under Section 330(a). Using Justice Clarence Thomas’ analogy that he used in Baker Botts, Donica’s work supplementing his fee application and responding to the UST’s objection was “akin to the mechanic’s preparation of an itemized bill as part of his ‘services’ to the customer.”
The UST was concerned that the court’s ruling will lead to a “de facto two-step fee application process” where professionals will be encouraged to file “bare-bones” fee applications and when challenged, will supplement their applications to provide more detail.
Those concerns are “misplaced,” the court said. The UST’s proposed bright-line rule would cause more problems than the “minor ones it solves,” the court said. Such a rule would (1) increase the cost of estate administration; and (2) increase the time and expense in litigating over fees, the court said.