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Category: Practice Area: Bankruptcy / Restructuring

Article: No-Look Fees May Limit Chapter 13 Resources in COVID-19 Era

December 31, 2020

A recent Law 360 article by George Vogl and Xiaoming Wu, “No-Look Fees May Limit Ch. 13 Resources in COVID-19 Era” reports on no-look fees in Chapter 13 cases.  This article was posted with permission.  The article reads:

With the potential for a surge in new consumer bankruptcy filings in the coming months due to the COVID-19 crisis, bankruptcy attorneys and trustees are expected to be busier than ever.  To ease the burden on courts, no-look Chapter 13 fees can provide a streamlined approach for judges to approve debtor attorney fees without the need to review them individually.

Under local rules/standing orders, these provisions generally allow that:

[If] the attorney charges no more than a given amount, the fee sought will be deemed presumptively reasonable under Section 330 with no need to provide time records.

However, across many jurisdictions with no-look fees, there is a wide variation in whether debtor attorneys are permitted to recover additional out-of-pocket expenses, and in some instances, they are completely prohibited from doing so.

An Uneven Playing Field

Under the U.S. Bankruptcy Code, debtor attorneys are to be provided adequate compensation for their services equitably regardless of the type of bankruptcy matter at hand.  However, many believe Chapter 13 attorneys are held to a different standard from other chapters of the Bankruptcy Code when it comes to their ability to recover case-specific expenses incurred during the course of the bankruptcy proceedings.

Within the Chapter 11 process, debtor attorneys are retained and compensated as an administrative expense of the bankruptcy estate, ensuring their expenses will be paid throughout the case.  In large-scale corporate bankruptcies, a claims agent is retained as an agent of the court under Title 28 of the U.S. Code to alleviate the debtor and its professionals from the administrative burdens of claims and noticing, and the cost is paid out of the estate.

Debtor attorneys within Chapter 9, 12 and 15 cases are equitably compensated. Yet, under Chapter 13, expenses incurred by debtor attorneys are often expected to be covered as part of their no-look fees which precludes them from recovering these out-of-pocket costs.

For a typical Chapter 13 case, there is no rhyme or reason from jurisdiction to jurisdiction regarding the fee structure and how the debtor attorney can go about requesting additional fees to cover their time and expenses.  In fact, even within the same state, there is often substantial variation across jurisdictions in their fee structures.

When the volume of cases becomes multiplied due to the COVID-19 pandemic which many believe will lead to a surge in new Chapter 13 filings, these debtor attorneys may face significant, and in some cases, insurmountable, challenges in meeting the demand if they cannot be adequately compensated for their services.

A Brief Overview of No-Look Fees

Generally speaking, no-look fees are intended to cover the routine tasks of counsel to the debtor for the duration of the case.  Some jurisdictions will vary the amount of the no-look fee based on the expected level of complexity involved in the case or the level of expertise provided by the attorney.  At the onset of the case at the time of the Rule 2016(b) disclosure, debtor attorneys can elect to accept the no-look fee that is in place, or they can choose to submit an itemized fee application.

If the no-look fee is elected, debtor attorneys either do not have to file a fee application or they file a standardized fee application without a time itemization.  If the debtor attorneys elect to itemize, then the lodestar compensation model is generally applied, whereby compensation is calculated by the attorney's time billed at a reasonable hourly rate.

Case-specific expenses are generally allowed as part of the lodestar method so long as the court finds them reasonable.  Most courts will not permit counsel to convert the fee structure once the fee disclosures are filed.  While there are multiple variations of no-look fees in effect across the jurisdictions, two general structures are most common.

The first common structure allows for a flat fee to be presumptively allowed for the duration of the case, from filing through discharge.  In these jurisdictions, there is great disparity as to whether debtor's counsel is permitted to seek reimbursement of case-specific allowable expense in addition to the no-look fee.  Several require a full itemization to be submitted proving to the court the full fee has been exhausted before awarding any additional fees or expenses, obviating the time-saving benefits of the no-look fee for debtor attorneys.

In other jurisdictions, there is no set standard, with expenses only being allowed for specific actions or only by specific judges.  Many jurisdictions simply believe that case-specific expenses are accounted for in the no-look fee and cannot be sought by debtor attorneys at all.

The second common fee structure allows for a flat fee to be presumptively allowed from filing through case confirmation.  In these jurisdictions, debtor's counsel can generally recover additional legal fees for post-confirmation work either by filing a fee application detailing the amount of time spent on the action or through utilization of menu fees, wherein a presumptive fee amount is set for each post-confirmation activity.

In many of the jurisdictions that allow for additional fees post-confirmation, debtor's counsel must again first provide an itemization to prove that the entirety of the no-look fee has been earned, which is a significant burden.  Recovery of case-specific expenses in either structure is still tenuous in many of these jurisdictions.

Across the United States, jurisdictions have used differing approaches to try and address the issue of expenses.  In some, attorneys are able to file a motion to recoup expenses. In others, debtor attorneys are permitted to request a one-time allowance to cover all case-specific expenses in addition to the no-look legal fee.  In yet others, debtor attorneys are permitted to detail specific expenses, such as postage costs, in their notices and they are presumed allowed.

One unique approach applied by the U.S. District Court for the Eastern District of Virginia, where the court operates with a no-look fee structure which includes expenses, ties the fee to the consumer price index so that it increases on a regular basis to stay consistent with the rising cost of goods and services.

Firm Overhead vs. Expenses

Another issue surrounding the fee structure for Chapter 13 debtor attorneys arises from the differentiation, or perceived lack thereof, between overhead and case-specific expenses.  In many cases, the presiding judge will assume that the no-look fees incorporate all of the expenses of the firm, and that additional case-specific expenses cannot be recovered.  However, it is not always clear and simple as to what constitutes overhead vs. recoverable expense.

For example, most would agree that expenses such as law firm marketing, rents and salaries are overhead and would not be recoverable expense, yet if a firm requires outsourced legal noticing services in the context of a Chapter 13 case, would that not be considered an allowable additional cost to be recovered?

One would be hard pressed to find a fee application in a Chapter 9, 11 or 12 case that did not include recoverable expenses for printing, copying and noticing, yet these expenses that would not have been incurred but for the case in question are often not recoverable by Chapter 13 debtor attorneys.

Section 330(a)(4)(B) provides:

In a Chapter 12 or Chapter 13 case in which the debtor is an individual, the court may allow reasonable compensation to the debtor's attorney for representing the interests of the debtor in connection with the bankruptcy case based on a consideration of the benefit and necessity of such services to the debtor and the other factors set forth in this section.

Section 330(a)(1)(B) allows the court to award "reimbursement for actual, necessary expenses" incurred by professionals.  Since the court no longer serves an amended Chapter 13 plan on creditors, the burden falls on the filers of those plans, namely the debtor's attorneys.

In a case involving dozens of creditors or more and several amended plans, the cost of serving the plan and various motions throughout the case easily add to hundreds of dollars, which erodes the flat fee awarded by the court.  This raises the question as to why the cost of serving a plan and motion is not an actual, necessary expense that can be reimbursed, especially in light of the fact such cost is considered an "actual, necessary expense that can be reimbursed" in Chapter 11 cases.

While there has been discussion of creating a more uniform approach across jurisdictions and states for the recovery of fees and expenses for debtor attorneys, it has not been a high priority focus when compared to other issues facing the consumer bankruptcy system.  However, with the impending wave of consumer bankruptcy filings, industry professionals are questioning whether this system that often limits compensation for debtor attorneys will ultimately hurt consumer debtors.

Many feel the uneven playing field of no-look fees and expense recoveries can significantly limit the resources that debtor attorneys can allocate toward successful representation in each case.  With less staff and resources, some argue that we may even see a greater number of cases getting dismissed from the bankruptcy courts.

Furthermore, if debtor attorneys are not able to recover expenses, some fear they may not incur these expenses rather than reduce their profitability, which may raise ethical issues.  As the COVID-19 pandemic continues, the fortitude of the bankruptcy system and its professionals is critical to the success of the process.

While there are many questions as to how best prepare for what may be a tsunami of bankruptcy filings, the compensation models within Chapter 13 continue to raise questions and concerns among debtor attorneys, and hope that these will lead to a more uniform approach to fee structures in the future.

George Vogl is director at Stretto.  Xiaoming Wu is a partner at Billbusters Borges & Wu.

Law Firm Billing Tips For Good Client Relations

December 1, 2020

A recent Law 360 story by Aebra Coe, “Law Firm Billing Tips For Avoiding An Irate Client,” reports that a recent lawsuit filed against K&L Gates LLP by a client unhappy with a legal bill highlights some common pitfalls that law firms face when it comes to billing practices, but there are ways to avoid a similar situation, experts say.  The lawsuit against K&L Gates, which was filed in August by Chicora Life Center LC, accuses the firm of using several tactics to increase its bill for representing the bankrupt medical center in a Chapter 11 proceeding over a lease termination dispute.

Some of the alleged billing practices are not entirely uncommon among law firms, according to two experts who declined to comment directly on the lawsuit but provided their thoughts on client billing more generally.  The alleged practices include "block billing," where a lawyer "blocks" together a number of tasks over a set amount of hours; "hoarding," when an overqualified lawyer with a high billing rate retains work rather than passing it on to someone with a lower billing rate; and "multibilling," which occurs when multiple attorneys are tasked with performing the same work.

"All of those things mentioned have been going on for years and years.  This is not at all new," said James Wilbur, an expert on law firm billing at consulting firm Altman Weil Inc.  Regardless of how the K&L Gates suit shakes out in court, other law firms are likely looking for ways to avoid being in a similar position.  While such situations are not entirely preventable because clients can sometimes file bad-faith suits, there are steps firms can take to ensure clients are as happy as possible with a bill at the conclusion of a matter, Wilbur said.

He suggested firms rely on three things to accomplish this: technology, training and collaboration.  E-billing software can often catch double billing and block billing, he said, as well as phrases that might irk a client, like "reviewed phone notes," that may not indicate that the time spent added any value to the matter.

And that leads to training, which should be conducted at all levels on a regular basis so that any attorney or paralegal who puts together a bill is aware of best practices and is skilled in conveying the value brought to the client via the time the individual spent working, he said.  Senior attorneys billing for work that could be done by someone more junior is another beast, Wilbur said, and one that law firm management must work to dissuade by encouraging collaboration and the sharing of work.

Clients have many different rules when it comes to fees, but "no surprises" is a big one, said Toby Brown, chief practice management officer at Perkins Coie LLP.  "The bottom-line answer is more transparency.  And more real-time updates about what's going on," Brown said.  "The lawyers are uncomfortable talking about these things, and so they don't talk about them head-on."

He said lawyers and clients can often get wrapped up in the legal issues at hand, with fee issues taking a back seat.  For example, if the volume of discovery in a major case increases substantially, a conversation on cost might not always occur, but it should, he said.  Real-time sharing of information on the cost of a matter is vital, Brown said.  He said his firm has worked to incorporate the help of its project management team to flag when the scope of a matter has changed so that the attorney on the matter is aware a conversation is needed.

The firm has also implemented technology that goes beyond basic e-billing software to allow attorneys to better monitor their budget on a matter, he said.  Ultimately, according to Wilbur, having a strong relationship with a client to begin with will go a long way.

"Even in a firm that's highly ethical and has training around these issues, mistakes are going to happen. Something is going to creep through," he said.  "The first thing is you have to have a good enough relationship with the client so they know they can text or email you, pick up the phone and point out a problem in the bill, and you will deal with it without arguing."

When contacted by Law360 for comment about its case, K&L Gates described Chicora's claims as "a transparent attempt to re-litigate issues that were raised and rejected years ago through final orders in a concluded bankruptcy."  A third-party fee examiner, it said, expressly found that the fees requested by the firm were reasonable and should be recoverable, and then the bankruptcy court adopted that determination.  "We are confident the present claims also will be rejected," the firm said.

Article: 3 Tips for Working with Bankruptcy Fee Examiners

October 2, 2020

A recent Law 360 article by Robert M. Fishman, “3 Tips For Working With Bankruptcy Fee Examiners” provides practice tips for working with outside bankruptcy fee examiners.  This article was posted with permission.  The article reads:

The appointment of a fee examiner and the fee examination process in any given bankruptcy case seem to generate a variety of questions.

Will a fee examiner process be better for the case — read: me — than having the judge address the reasonableness and appropriateness of fees?  Will there now be three parties — the fee examiner, the court and the U.S. Trustee — scrutinizing my fees as well as criticizing my staffing, timing and approach to the case?  What will the nature and approach of the fee examiner be in my particular case?  Will the appointment of a fee examiner speed up the review and payment process?

Fee examiners are most often appointed in larger cases.  In such cases, the ability of the court to make the time to review, analyze and rule on fee applications may be a concern.  This is especially true if that court is one in which a large number of substantial cases are currently pending.

The number of parties that will be submitting fee applications to the court also plays a role in the consideration of whether a fee examiner is appropriate in a particular case.  Multiple law firms, financial advisers and other professionals for the debtor and one or more committees, creates a substantial burden on the court in terms of reviewing and ruling on fee applications.

A request for the appointment of a fee examiner can either come from the parties in the case or directly from the court.  Some courts routinely appoint a fee examiner in large, complex cases, while others do so only upon the request of one or more parties in interest.

The selection of the particular fee examiner can originate from any of three places.  Once a court decides to appoint a fee examiner, the court may: (1) select its own fee examiner; (2) appoint one that has been suggested, or agreed to, by the principle parties in the case; or (3) defer to the Office of the U.S. Trustee for the selection.  Courts are often happy to utilize a qualified fee examiner that has been agreed to by the main parties in the case.

In light of the current number of pending large cases, particularly in a few, specific jurisdictions, the burden of the fee review and allowance process is going to be substantial.  Further, I anticipate that the upcoming months may see an even greater number of small, medium and large cases filed, which will place an even greater strain on the system's ability to efficiently and timely process fee applications for numerous professional firms.

As a result, I believe that both courts and the affected parties will look to the appointment of fee examiners to ease that burden and provide a more timely and efficient practice for processing fee applications.  In evaluating candidates for fee examiner appointments, the following questions may be pertinent.

Is the candidate:

An experienced practitioner with actual bankruptcy case experience or an analyst who identifies typical problematic situations and focuses on them;

A reasonable, big picture type of examiner or a more granular, item-by-item examiner;

One that believes that he has been appointed to:

Cut fees (to a specific or general degree), or

Determine if the applicable rules have been followed and the services and expenses are actual, reasonable and necessary in the context of the particular case; or

One who generally gives deference to the billing partner involved or is more apt to substitute his/her own judgment for that of the billing partner as to how to staff cases or how much time it should take to write a brief?  As an attorney discussing fee application issues with fee examiners, I have discovered that examiners have a wide range of approaches and attitudes.

In my role as a fee examiner discussing fee application issues with countless professionals, I have found that they also exhibit a broad range of approaches and attitudes.  My experience both as an attorney submitting numerous fee applications subject to review by fee examiners, and as an appointed fee examiner in both large and medium-sized cases has led me to a view on the preferred type of fee examiner and how best to work with them.

Understanding where your fee examiner fits into the above criteria is essential to both having a realistic expectation of how you will be dealt with and knowing how best to interact with the fee examiner.   So, what lessons have I learned? Here are what I have found to be the three most important guidelines for a successful relationship with a fee examiner.

Every Case has Ground Rules

They include the Bankruptcy Code, the applicable local rules and the cases interpreting the same.  Importantly, the ground rules also include the process that the fee examiner intends to utilize — and most likely have the court bless — to govern the timing, organization and review of the fee applications.

One of the best pieces of advice I can give an applicant is to present the fee application in the way requested by the fee examiner.  Independent creativity is often not rewarded.  Most fee examiners have a method to their madness.

Choose the Right Person to Prepare the Fee Application.

The fee application or invoice must be prepared — or at least thoroughly reviewed — by someone who understands the case and is able to explain the issues handled by the firm and the staffing decisions that were made in support of providing the necessary services.  Many issues that fee examiners raise come from an inability to truly understand what has taken place and why things were handled in the manner in which they occurred.

Most fee examiners are willing to be at least somewhat deferential to the billing partner when presented with a cogent and rational explanation of what happened and why.  This approach tends to be even more effective when the explanation is part of the original application rather than offered only in response to concerns raised by the fee examiner.

It Doesn't Pay to Fight with a Fee Examiner

First of all, most fee examiners aren't out to get anyone.  They are merely trying to apply the rules in an even-handed way to provide for the allowance of reasonable compensation for actual and necessary services.  Every fee application or invoice has potential issues, such as too many professionals working on a project, too much time spent working on an issue or overqualified professionals providing basic services.

Also, a firm cannot be compensated for fighting fee objections in court, where raised by a fee examiner of a party in interest.  Be rational and open minded.  Fee examiners want to reach agreements and resolve differences of opinions by consent.  They will almost always compromise on the amount of reductions necessary to address any point they are raising.

The right fee examiner can be a valuable asset in a case.  They are likely to allow for a more timely resolution of interim fees.  A fee examiner who is also an experienced practitioner will likely speak the same language as the applicant and have a good feel for what it takes to perform the services for which the applicant seeks payment.  In short, a good and experienced fee examiner should really be your ally in making the process move quickly and efficiently, and in obtaining a fair and reasonable outcome for everyone.

Robert M. Fishman is a NALFA member and a member at Cozen O’Connor in Chicago.  He served as the fee examiner in the city of Detroit Chapter 9 case.

Billing Rates at Issue in Bankruptcy Matter

September 17, 2020

A recent Daily Business Review story by Michael Mora, “Carlton Fields Billing Rates in Spotlight as Firm Battle for About $80,000 in Attorney Fees” reports that Carlton Fields is demanding tens of thousands in fees to prepare several partners for a series of depositions.  The problem?  The other side argues the lawyers are merely fact witnesses, entitled under federal rules only to a maximum $40 daily witness fee for depositions.  It’s the latest issue in a malpractice suit that has dogged the firm, and garnered widespread attention.

Jan L. Jacobowitz, the director of the professional responsibility and ethics program at the University of Miami Law School, said the fee determination is complicated, because it is a bankruptcy case with a creditor trustee adversely pleading against the debtor’s former counsel.

The dispute is between Carlton Fields and Dan Stermer, the court-appointed creditor trustee pursuing claims against people or entities responsible for ATIF’s demise. The litigation is pending in the U.S. Bankruptcy Court for the Middle District of Florida.

Carlton Fields attorneys and former ATIF counsel mentioned in the litigation include Steven Dupré, Nathaniel l. Doliner and William G. Giltinan, shareholders in the Tampa office, as well as Marty J. Solomon, who is now a partner at Awerbach | Cohn in Clearwater.

Dupré, a whose professional biography describes him as a seasoned business trial lawyer and Carlton Fields shareholder with more than four decades of experience, billed about $73,000 for nearly 88 hours at his standard hourly billing rate of $830.  Doliner — who specializes in mergers and acquisitions, corporate law, corporate governance and joint ventures — sought compensation for five hours at $820 an hour.  Solomon sought 3.5 hours at $735 an hour. And Giltinan, who chairs the firm’s intellectual property practice, sought about two hours’ pay at $620 an hour.

In total, Carlton Fields billed the ATIF bankruptcy estate around $80,700.  Bob Jarvis, a professor of law at Nova Southeastern University, said based upon his review of the motion, the argument made by Carlton Fields is overreaching, and the court will likely reject it.

However, Dennis P. Waggoner, a partner at Hill Ward Henderson and outside counsel for Carlton Fields, justified the deposition fees, citing the Federal Rules of Civil Procedure, which governs discovery from a non-party.  “It specifically authorizes the court to impose as a sanction lost earnings or reasonable attorney fees against the subpoenaing party, who does not take reasonable steps to avoid imposing an undue burden for the party being subpoenaed here,” Waggoner said.  Now, it will be up to U.S. Bankruptcy Court Chief Judge Caryl E. Delano to decide whether to award those fees to Carlton Fields.

Thomas M. Messana, a partner at Messana P.A. in Fort Lauderdale who is representing the creditor trustee, said the relief the Carlton Fields lawyers have sought should not be granted for three reasons.  Messana argued that when Carlton Fields received the Rule 30(b)(6) subpoena, the law firm had an obligation to choose a person with sufficient knowledge about the topics listed.  Instead of doing that, Messana claimed the representative the firm selected required nearly 90 hours to educate himself, and then later wrongly required the party seeking testimony to pay for it, which is contrary to the Federal Rules of Civil Procedure.

The trustee’s counsel also argued the U.S. Code fixes witness fees for a fact witness to attend a deposition at $40 per day.  And since the plaintiff called for fact witnesses, not court-appointed experts, it should not cover the difference between the hourly rate and the amount designated by the U.S. Code.

Plus, according to the creditor trustee, Carlton Fields’ actions resulted in the plaintiff having to incur the cost and expense of taking four depositions, instead of one Rule 30(b)(6) deposition. Messana said Carlton Fields’ request to have the plaintiff cover those fees are invalid.

Jarvis believes the trustee’s objection is well-founded.  “Clearly, there is a difference between a fact witness and an expert witness,” Jarvis said.  “And just because the fact witness is a lawyer does not mean that the witness is entitled to his or her normal billing rate.”

K&L Gates Accused of Padding Bill in Chapter 11 Case

August 25, 2020

A recent Law 360 story by Xiumei Dong, “K&L Gates Accused of Padding Health Center’s Legal Bills” reports that a Layton, Utah, health center is accusing K&L Gates LLP in a lawsuit of engaging in multiple deceptive billing practices while working for the health center, resulting in about $1.6 million in legal fees between May 2016 and October 2016.  In the complaint filed in Utah federal court, Chicora Life Center LC, a subsidiary of Chicora Garden Holdings, claimed that K&L Gates used several tactics to increase its billing for representing the bankrupt medical center in a Chapter 11 proceeding against the County of Charleston over a lease termination dispute.

Chicora Life is managed solely by Douglas Durbano, a Utah lawyer and developer. According to the complaint, Chicora Life and K&L Gates have agreed that it would use Durbano Law Firm for the majority of the legal services.  Meanwhile, K&L Gates acts as local counsel for the Chapter 11 proceedings.  "Notwithstanding the arrangement between Durbano Law and K&L, K&L's billing records show substantially more time billed for the very documents that Durbano Law initially drafted, with only minimal changes to the papers to show for it," the complaint alleged.

The suit accuses K&L Gates of engaging multiple deceptive billing practices, including "block billing," where a lawyer "blocks" together a number of tasks over a set amount of hours; "hoarding," when an overqualified lawyer with a high billing rate retains work rather than passing it onto someone with a lower billing rate; and "multi-billing," which occurs when multiple attorneys are tasked with performing the same task.  "These excessive and deceptive billing practices resulted in K&L billing approximately $1.6 million dollars in legal fees between May 2016 through October 2016," the suit says.

Chicora Life hired K&L Gates on May 31, 2016. In the complaint, the company said it had an "amicable and cooperative" relationship with K&L Gates when attorney Richard Farrier Jr. was the lead counsel at the firm for the matter.  But the relationship soured following the death of Farrier in March 2017, and Russel Abrams resumed his role.  Abrams left K&L Gates to start law firm Abrams LawWorks LLC in July 2020.

"Following Mr. Abrams' involvement in the proceedings in April 2017, K&L intensified its deceptive billing practices— billing no less than $100,000 in legal fees each month and as much as $354,434.28 in August alone," it claimed. 

By the time the county proposed a "cramdown plan" in which the county would purchase Chicora Life's property to satisfy its obligations to creditors, K&L Gates had accrued over $1 million in legal fees against Chicora Life, according to the suit, which says that K&L had shown a particular interest in the cramdown plan because it was Chicora Life's creditor — and therefore an adversary to Chicora Life.  The lawsuit levels claims of breach of contract, attorney malpractice and breach of fiduciary duty, fraudulent billing, and knowingly aiding and abetting Chicora Life's breach of fiduciary duties.