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Category: Fees for Fees

Ninth Circuit Upholds Fees for Fees Under Statute

April 24, 2017

A recent Metropolitan News story by Kenneth Ofgang, “Panel Upholds Award of ‘Fees-on-Fees’ Under Statute” reports that a statute that permits federal judges to sanction attorneys for vexatious litigation permits an award of fees to opposing counsel for litigating the right to fees, the Ninth U.S. Circuit Court of Appeals ruled.

In a published order, the panel—Judges Alex Kozinski, Richard A. Paez, and Marsha S. Berzon—denied reconsideration of the appellate commissioner’s ruling calculating sanctions against Boston attorney Michael J. Flynn and his client, Timothy Blixseth.  The two were ordered to pay nearly $192,000 in fees and costs incurred by several creditors of Blixseth, a co-founder of the bankrupt Yellowstone Mountain Club.  Blixseth was found jointly liable for all but around $34,000 of the award, for which Flynn was found separately liable by statute.

Blixseth and one of his ex-wives developed the Yellow Mountain Club as an exclusive resort for “ultra-wealthy” golfers and skiers.  He has blamed the 2008 mortgage crisis for the collapse of his finances.  His wealth was estimated by Forbes magazine at $1.3 billion when it named him one of the 400 wealthiest Americans in 2006.  Creditors have claimed Blixseth has hidden assets.

Blixseth, represented by Flynn, appealed the denial of a motion to recuse the District of Montana bankruptcy judge assigned to his case.  The Ninth Circuit affirmed, agreeing with the district judge that Blixseth’s accusations were “a transparent attempt to wriggle out of an unfavorable decision by smearing the reputation of the judge who made it.”

In August 2015, the Ninth Circuit panel said Blixseth and Flynn were subject to attorney fees incurred by creditors on that appeal, citing Rule 38 of the Federal Rules of Appellate Procedure and 28 U.S.C. §1927.  “If a court of appeals determines that an appeal is frivolous, it may, after a separately filed motion or notice from the court and reasonable opportunity to respond, award just damages and single or double costs to the appellee.”

Section 1927 provides: “Any attorney or other person admitted to conduct cases in any court of the United States or any Territory thereof who so multiplies the proceedings in any case unreasonably and vexatiously may be required by the court to satisfy personally the excess costs, expenses, and attorneys’ fees reasonably incurred because of such conduct.”

In the order, the panel agreed with the appellate commissioner that fees incurred in litigating the right to fees, or “fees on fees,” cannot be awarded under Rule 38, but may be awarded under §1927.  The panel also denied, without comment, Flynn’s motion that the judges recuse themselves.

Because Rule 38 refers to “damages,” the judges said, it is not a fee-shifting statute, and the only attorney fees that may be awarded under the rule are those “incurred in defending against the frivolous issues or frivolous portions of an appeal.”

Section 1927, by contrast, “may be characterized as a fee-shifting provision, despite its sanctions trigger,” the panel said.  The legislation’s purpose, the judges said, it to shift the burden of the vexatious litigation onto the vexatious lawyer, noting that fee-shifting statutes generally are interpreted as permitting the award of “fees on fees.”

The case is Blixseth v. Yellowstone Mountain Club, LLC, 12-35986.

Bankruptcy Attorney Can Get Fees for Fees

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.

Judge Rejects Fee Proposal in New Gulf Bankruptcy

March 23, 2016

A recent American Lawyer story, “Judge Rejects Baker Botts Fee Proposal in New Gulf Bankruptcy,” reports that, following a defeat at the U.S. Supreme Court last summer, Baker Botts proposed a change in the way it charges for bankruptcy work, hoping to cover its financial bases if a Chapter 11 client later sues the firm after emerging from bankruptcy.

After weighing the firm's bid, a bankruptcy judge has now offered his take: Nice try, but no dice.

In an order on Monday, U.S. Bankruptcy Judge Brendan Shannon in Delaware shot down a modified fee structure in Baker Botts’ application to serve as lead debtors’ counsel for New Gulf Resources LLC, an Oklahoma-based energy company that filed for Chapter 11 protection on Dec. 17.  The order follows a letter ruling from the judge late last week rejecting the firm’s fee proposal.

In its application to represent New Gulf in the bankruptcy, Baker Botts sought to build in a layer of financial protection while also respecting the Supreme Court’s June 15 ruling in Baker Botts v. Asarco, which restricted the firm’s ability to recover bankruptcy litigation costs.

Shannon previously approved most of Baker Botts’ December application, but the judge had reserved judgment on the firm’s fee proposal.  At issue was a conditional fee premium that could have been triggered later, if a reorganized, post-bankruptcy New Gulf decided to challenge Baker Botts’ baseline fees.

In Asarco, the Supreme Court overruled a bankruptcy court decision that allowed restructuring lawyers at Baker Botts and Jordan, Hyden, Womble, Culbreth & Holzer to recoup litigation costs they incurred toward the end of mining company Asarco LLC’s bankruptcy.  Those expenses stemmed from a fee dispute that Asarco’s new owners lodged after the company emerged from bankruptcy in late 2009.  At the time the Supreme Court ruled, Baker Botts’ litigation costs in the Asarco fee dispute had reached about $7 million.

In its application in the New Gulf bankruptcy, Baker Botts explicitly nodded to Asarco while also seeking to protect itself financially from any future fee objections from whatever entity might take New Gulf out of bankruptcy.

The firm’s proposal, however, faced opposition from the U.S. Trustee’s office in Wilmington, Delaware, which argued that Baker Botts was trying to circumvent the Supreme Court’s decision.  In a Jan. 12 court filing, the trustee’s office described the proposed fee premium as a “windfall” for Baker Botts that undercut “the rights of parties to litigate fees in good faith.”

In his letter ruling, Shannon sided with the government over Baker Botts—though the bankruptcy judge did credit the firm’s attempt to work around the “Asarco issue.”

“The structure proposed by Baker Botts runs afoul of the holdings in Asarco,” the judge wrote.  “While I acknowledge the creative approach to the issue, I do not find that there is a meaningful distinction between the fee premium proposed here and the matters considered and ruled upon in [prior cases].”

Lawyers Try 'Workaound' to Get Paid for Defending Fees

February 9, 2016

A recent Bloomberg BNA story, “Lawyers Can’t Use ‘Workaround’ to Get Paid for Defending Fees” reports that lawyers can't include fee defense provisions in their retention applications as a way to circumvent a recent U.S. Supreme Court ruling, the U.S. Bankruptcy Court for the District of Delaware held Jan. 29.

The Supreme Court held 6–3 in Baker Botts LLP v. ASARCO LLC, 135 S. Ct. 2158 (2015) , that bankruptcy attorneys can't be awarded attorneys' fees for their work in defending their own fee applications.  The majority opinion, delivered by Justice Clarence Thomas, said that Bankruptcy Code Section 330(a)(1) doesn't permit bankruptcy courts to award fees to attorneys and professionals who work on behalf of an estate for defending fee applications.

“Almost as soon as the ink was dry on the ASARCO decision, bankruptcy professionals began to seek ways to escape the draconian impact of that holding,” Prof. Charles J. Tabb, Mildred Van Voorhis Jones Chair in Law, University of Illinois, told Bloomberg BNA Feb. 4.  “The primary effort to do so has focused on attempting to incorporate an indemnification provision for fee-defense fees in the contract retaining a bankruptcy professional pursuant to § 328,” he said.  This case has been a “closely-watched case by bankruptcy professionals across the country,” according to Tabb.

The opinion by Judge Mary F. Walrath concluded that the Supreme Court's ruling in ASARCO, “prevents the Court from concluding that section 328 permits defense fees even if they were routinely allowed by the market in bankruptcy or non-bankruptcy contexts prior to that ruling.”

While Walrath's decision may not bind other Delaware judges, they might follow the path that she has created if they have other cases pending with similar issues.  Attorneys need to know if this “workaround” method for getting their fee defenses paid will be accepted by the courts.

“[C]ontractual workarounds of ASARCO are unlikely to work,” Tabb said.  “Since Walrath did not universally reject the very concept of a possible contract exception to the American Rule, one can expect bankruptcy professionals to try to devise other forms of contracts to effect enforceable indemnification agreements,” he said.

“At the very least, it would seem, that the representative of the bankruptcy estate (either the DIP [debtor in possession] or trustee) would have to join such an agreement as a party, and indeed notice and the opportunity to object should be given to all parties in interest,” Tabb said.

“In short, it would seem that something akin to the procedure for approving critical vendor orders or other extraordinary entitlements would be required.  But even with that, it is hard to be sanguine about the prospects for success if other courts agree with Judge Walrath,” he said.

Brown Rudnick LLP and Morris, Nichols, Arsht & Tunnel LLP, Committee counsel to the Official Committee of Unsecured Creditors for debtor Boomerang Tube, LLC included a provision indemnifying them for expenses incurred in any successful defense of their fees.

Boomerang Tube, a maker of products used by drillers in the exploration and production of petroleum and natural gas, filed for bankruptcy June 9, 2015.

The U.S. Trustee objected to the applications, saying that it was precluded by ASARCO.  The UST also argued that the fee defense provisions shouldn't be approved because they are outside the scope of employment and aren't reasonable.

The Creditor's Committee contended that the court had the authority under Section 328 to approve the fee defense provisions.  Section 328 provides that with court approval, a professional may be employed “on any reasonable terms and conditions of employment, including on a retainer, or on an hourly fee basis.”  Section 330(a)(1)(A), which was the provision at issue in ASARCO, provides that bankruptcy judges may award “reasonable compensation” to attorneys and other professionals who work on behalf of an estate.

In ASARCO, the Supreme Court held that any statutory departures from the American Rule must be “specific and explicit” and must “authorize the award of ‘a reasonable attorney's fee,' ‘fees,' or ‘litigation costs,' and usually refer to a ‘prevailing party' in the context of an ‘adversarial action.'”  Under the American Rule, each litigant pays his own attorney's fees, win or lose, unless a statute or contract provides otherwise.

Walrath found that Section 328 doesn't provide a statutory exception to the American Rule and can't provide authority for approval of the fee defense provisions.  She agreed with the Creditor's Committee that ASARCO did acknowledge a contractual exception to the American Rule, but concluded that any such contract has to be consistent with other provisions of the Bankruptcy Code.  Walrath asked the parties to provide evidence that similar indemnification provisions are normally provided to counsel in non-bankruptcy contexts.

The Creditor's Committee cited to numerous bankruptcy cases in which indemnification provisions and fees for defending fees have been approved, and noted that the UST guidelines permit award of such fees “if it is judicially allowed in the district.”  In support of their market argument, they also cited to decisions in 11 states, including Delaware, where courts or state bar disciplinary authorities have held that similar indemnification provisions are permissible and don't “run afoul of the Model Rules of Professional Conduct.”

The UST argued that the Supreme Court's ruling in ASARCO precludes the court's consideration of the market in determining the reasonableness of the indemnification agreements.  The court didn't find the Creditor's Committee evidence to be compelling.  According to the court, the UST guidelines generally state that the UST will object to requests for fees defending fee applications.

Ultimately, Walrath agreed with the UST, and said that the cases considering market factors all pre-dated ASARCO.  Therefore, ASARCO prevents the court from “concluding that Section 328 permits defense fees even if they were routinely allowed by the market in bankruptcy or non-bankruptcy contexts prior to that ruling,” the court said.  The court also found that the fee defense provision isn't a “reasonable term of employment for serving as Committee Counsel.”

Chapter 13 Debtor’s Attorney Not Entitled to Fees, Costs

December 11, 2015

A recent Bloomberg BNA story, “Ch. 13 Debtor’s Attorneys Can’t Get Costs, Fees Paid” reports that a debtor’s attorney isn’t entitled to costs and fees in the absence of any proven injury to the debtor when the City of Philadelphia, through another entity, violated the Bankruptcy Code’s automatic stay by attempting to collect overdue real estate taxes after the debtor filed for bankruptcy, a district court in Pennsylvania ruled.

Reversing the judgment of the bankruptcy court, Judge Gerald J. Pappert of the U.S. District Court for the Eastern District of Pennsylvania concluded that the bankruptcy court failed to apply the proper legal standard when it awarded the debtor’s attorneys’ fees and costs.

Under the Bankruptcy Code Section 362(k)(1), an “individual injured by an willful violation of a stay provided by this section shall recover actual damages, including costs and attorneys’ fees, and, in appropriate circumstances, may recover punitive damages.”  The statute is straightforward, the court said, and requires the debtor to prove “(1) the offending party violated the automatic stay; (2) the violation was willful; and (3) that the willful violation caused the debtor an injury.”

The City of Philadelphia doesn’t contest that it willfully violated the stay, but argued that debtor Norman L. Walker failed to prove that the willful violation of the stay caused him any injury, the court said.  According to the court, it is the debtor’s burden to prove injury.

Even if the debtor had proven some form of injury, the U.S. Supreme Court in Baker Botts LLP v. ASARCO LLC, 135 S. Ct. 2158 (2015) (27 BBLR 861, 6/18/15) has prohibited bankruptcy courts from awarding attorneys' fees to counsel for work performed in defending a fee application.  The court noted that Baker Botts was decided three months after the bankruptcy court's decision in this case.

The Supreme Court concluded that “[i]n our legal system, no attorneys, regardless of whether they practice in bankruptcy, are entitled to receive fees for fee-defense litigation absent express statutory authorization,” the court said.  Baker Botts expressly disallows any award of costs of attorneys' fees to Robin A. Feeney, who represented Walker's counsel, Ronald McNeil, in the hearing on attorneys' fees, the court said.

The debtor filed for Chapter 13 protection, which allows individuals receiving regular income to obtain debt relief while retaining their property.  At the time of filing his Chapter 13 petition, the debtor hadn't paid his 2012 real estate taxes on the property.

The City of Philadelphia referred the matter to Goehring Rutter & Boehm (GRB), who made two telephone calls and mailed two notices to the debtor regarding the unpaid taxes.

The debtor filed a complaint against the City and GRB in the bankruptcy court seeking damages for an alleged violation of the automatic stay under Section 362(a).

The bankruptcy court found that the City willfully violated the automatic stay, but dismissed the debtor's claims for emotional distress and punitive damages.

The debtor filed an application for attorneys' fees, and the City objected.

Ultimately, the bankruptcy court awarded debtor's counsel (McNeil) $8,674 in attorneys' fees and $652 in costs for a total of $9,326, and counsel for debtor's counsel (Feeney) attorneys' fees of $2,750.

According to the bankruptcy court, the debtor should recover fees even though he did not recover other damages.  The bankruptcy court also found that Feeney's fees were “reasonable and necessary under the circumstances.”

Great Reviews for NALFA Webinars

June 3, 2015

NALFA is hosting a series of webinars on attorney fee and legal billing issues throughout 2015.  All our webinars are free for NALFA members and NALFA clients.  So far this year, NALFA has...

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NALFA Launches Resource Center

January 29, 2015

NALFA has launched a resource center for our members.  This resource center will be the largest collection of attorney fee related material in the world.  NALFA is building this resource...

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