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.

A recent Texas Lawyer story by Angela Morris, “Court Lets Houston-Area Lawyer Keep $70,000 Fee, Despite Unethical Contract,” reports that a Houston-area attorney won’t have to pay back more than $70,000 in fees to two clients who argued the lawyer’s fee agreement was unconscionable, after Texas’ 14th Court of Appeals ruled that the clients’ defensive argument wouldn’t support a recovery.  But one of the justices on the three-judge panel disagreed, explaining that Bellaire lawyer Joe Alfred Izen Jr. had an unconscionable fee agreement with his clients, which breached the attorney’s ethical duties, and that it was right for the trial court to make him return the money.

“In Texas, attorneys are held to the highest standards of ethical conduct in their dealings with their clients.  As a result, attorneys must conduct their business with their clients with inveterate honesty and loyalty, and they must always keep the client’s best interest in mind,” said a concurring and dissenting opinion by Justice Jerry Zimmerer.  “The question of Izen’s fees must be viewed through that prism.”

Izen, who represented himself pro se in the appeal, didn’t immediately respond to a call seeking comment.  And Ralph Kraft, member in Kraft Lege Anseman in Lafayette, Louisiana, who represented Izen’s past clients Brian and Kimberly Laine, declined to comment.

Izen represented the Laines in a 2002 personal injury settlement agreement over Brian Laine’s injury at work, said the 31-page majority opinion by Justice Kevin Jewell, joined by Justice Bourliot.  His employer took care of him after the injury and initiated a settlement for two lump sum payments and a monthly annuity for 30 years, and then the Laines hired Izen to look over the settlement agreement.  The Laines also wanted Izen to research if they may have a claim against any third-party entities—but not to sue Brian Laine’s employer.

An attorney-client agreement between Izen and the Laines was for a 35% contingency fee of the settlement with the employer.  Izen testified at trial they paid him between $70,000 and $90,000 and eventually he expected nearly $229,000 total.  Izen wasn’t licensed to practice in Louisiana and he contracted with an attorney there to represent the Laines in litigation against a third-party entity.  However, Brian Laine eventually dismissed that litigation and he did not owe any contingent fee for it.

In 2007, Brian Laine terminated Izen’s representation because he didn’t need it anymore.  He also quit paying Izen 35% of his monthly annuity payments from the settlement with his employer.  In 2010, Izen sued the Laines alleging they still owed him 35% of the annuity payments.  In response, the Laines argued his fee agreement was unconscionable and filed counterclaims seeking the return of the fees they already paid him.

After a jury trial, the judge granted a directed verdict in favor of the Laines, ruling the fee agreement was unconscionable.  But Izen also got a favorable ruling dismissing the clients’ counterclaims because they weren’t filed within the four-year statute of limitations.  Later, the trial court ordered Izen to disgorge all his fees to the Laines and to pay prejudgment interest spanning back to 2002.  In the appeal, Izen attacked the notion that his attorney fee agreement was unconscionable.

The appellate court ruled that Izen’s work reviewing the Laines’ settlement agreement with Brian Laine’s employer, and going to a meeting where the parties signed the agreement, was representation with little risk or expense to Izen.  His work on litigation against the third-party entity did have some risk, that there would be no recovery—which did happen in the end.

The 14th Court rejected Izen’s “attempt to combine the two separate jobs he was hired to perform.”  He was insisting his 35% fee on the settlement wasn’t unconscionable because the money financed the third-party litigation.  “Any fees Izen collected under the guise of financing the litigation against the Louisiana third party defendants were collected under false pretenses in violation of an attorney’s duty of honesty and loyalty to his clients,” said the opinion.  “Izen is not entitled to any fee on the Louisiana third-party litigation because there was no recovery.”

The appellate court upheld a trial court ruling that said that the Laines should not have to pay Izen any more money under that agreement.  But it also determined that Izen shouldn’t have to pay back the fees the clients had previously paid him.

The clients didn’t file their counterclaims seeking fee forfeiture within the four-year statute of limitations, explained the ruling. It said they couldn’t get back the fees based on an affirmative defense that the agreement was unconscionable.  While the Laines’ defense did defeat Izen’s claims, it could not advance their own claims for relief, the ruling said.

A recent Law.com story by Lizzy McLellan, “Winston & Strawn Sues Pharmacy Chain Over $600K in Unpaid Fees,” reports that in another instance of a large, profitable firm suing a client over fees, Winston & Strawn recently brought a case against Tampa, Florida-based Benzer Pharmacy Holding, seeking more than $600,000 in unpaid legal fees and late payment fees.  Winston & Strawn filed its complaint against the client in November, in the Superior Court of Washington, D.C.  On Dec. 23, the firm filed a motion seeking an order of default against Benzer, a privately owned chain of pharmacy stores.

According to the complaint, Benzer originally hired a different law firm in D.C. to represent it, in March 2019.  But when the lawyer representing Benzer joined Winston & Strawn in July of that year, the company signed an engagement letter with the Am Law 50 firm.  The engagement letter, attached to the complaint as an exhibit, listed hourly rates of $745 to $1,650 for partners; $685 to $1,185 for of counsel; $540 to $860 for associates; $195 to $390 for paralegals and legal assistants; and $155 to $600 for practice support personnel.

According to the complaint, Benzer has not paid the firm since Aug. 12. Later that month, the company told the firm it would be transferring its case to another lawyer, and the firm transferred the files in September.  “Winston repeatedly asked Benzer to comply with its payment obligations and attempted to work with Benzer on its outstanding balance,” the complaint said.  The firm is seeking $608,960.99 from its ex-client.

Benzer has not filed any answer to the complaint, and no lawyer has entered an appearance on the company’s behalf.  Winston & Strawn is not the only vendor suing Benzer. McKesson Corp. has sued the company in federal court, alleging that it owes McKesson more than $7 million.  In that case, Benzer has filed an answer and counterclaims related to the supplier agreement with McKesson.

Another example of a large firm suing a client over fees came in October, when U.K. firm Allen & Overy issued a summons against digital currency platform Noble Talents and its former CEO John Betts, alleging that the company failed to pay invoices for services rendered totaling $938,235.  Betts denied the claims, which were filed in New York state court.

Over the summer, Pittsburgh-based Am Law 200 firm Eckert Seamans Cherin & Mellott sued a former client over nearly $1.5 million in legal fees.  The client, Nexus Services Inc. and Libre by Nexus Inc., which provides bail securitization services, had filed its own suit against Eckert Seamans earlier this summer, alleging that the firm breached its contract with the client by doing significantly more document review than necessary.

A recent Law 360 story by Jack Queen, “UBS Whistleblower Naps $1.8M in Atty Fees on $1M Jury Win,” reports that a Manhattan federal court awarded a former UBS Securities analyst who won a $1 million retaliatory firing verdict $1.77 million in attorney fees and costs, granting half the sum requested by his lawyers at Stulberg & Walsh LLP and Herbst Law PLLC.  U.S. District Judge Katherine Polk Failla said the case was one of the "closest [her] court has ever observed" in her 74-page order, which parsed seven years of tenacious litigation between Trevor Murray and UBS in two separate cases that yielded five published opinions and a $3.2 million request for fees that the investment bank pilloried as "jaw-dropping" and "excessive."

Judge Failla slashed Murray's fee request for both of his firms, finding that while he notched a victory in a developing area of the law against a well-armed opponent, there were "enormous disparities" between what Murray sought, what he got and what his attorneys ultimately asked for.  "Putting to the side the policy goals ostensibly vindicated by the jury's verdict, the fact remains that plaintiff obtained significantly less relief, quantitatively and qualitatively, than he sought," Judge Failla said.

Murray sought $14 million in damages under the Sarbanes-Oxley Act in a case Judge Failla described as "far from a slam dunk."  Jurors awarded the former mortgage-backed securities analyst about $1 million in 2017, finding he was fired for refusing to skew his research to impress investors but concluding he wasn't entitled to damages for future wages.  Murray argued that substantial fees were warranted because he secured an extremely rare trial win on a Sarbanes-Oxley retaliation claim after weathering a years-long onslaught from UBS' legal team.  Healthy compensation for his attorneys would encourage other lawyers to represent whistleblowers, he said.

UBS countered that Murray's lawyers "wasted countless hours in pursuing losing positions" and won only a "'success' worse than defeat" after years of fighting.  Murray won $653,300 in back pay and $250,000 in noneconomic damages plus interest while striking out on future pay and reinstatement, UBS noted.  Judge Failla found merit in both positions but still trimmed Murray's hours significantly, pointing to the gulf between his demand and award, the "top-heavy" billing practices of his lawyers and their litigation and staffing strategies, which she said led to wasted effort.

Murray waited until the eve of trial to hire Herbst Law because Stulberg & Walsh had inadequate trial experience to argue the case, which Judge Failla said led to duplicative billing.  Murray also mothballed his initial claim under the Dodd-Frank Act when it went to arbitration only to see it gutted by the U.S. Supreme Court's decision in Digital Realty Trust Inc. v. Somers , which found plaintiffs can only qualify as whistleblowers under Dodd-Frank if they go directly to the U.S. Securities and Exchange Commission.

"The court does not fault plaintiff or his counsel for not being prescient," Judge Failla wrote.  "That said, plaintiff and his counsel made strategic litigation decisions that had dramatic impact on his legal bills."  In a statement to Law360, Murray's attorney Robert L. Herbst said the "huge reduction disincentivizes civil rights lawyers and their clients to take on these difficult and protracted legal struggles against major law firms whose billings and hourly rates are double ours."  Robert Stulberg concurred, adding that "if courts do not believe that vindication of a whistleblower's rights, and a million-dollar judgment, are a 'success,' then the reason for fee-shifting in civil rights statutes has not been served."

A recent Law 360 story by Britain Eakin, “Virtu Can’t Get $3.2M in Fees for ‘First Class’ Attys,” reports that a magistrate judge has recommended that a unit of high-frequency trading firm Virtu Financial get only a fraction of the $3.2 million in attorney fees it sought for its win against a former employee, saying that $344,000 was a reasonable fee award.

KCG Holdings Inc., which prevailed in its trade secret misappropriation case in March, retained attorneys from Baker McKenzie and Seyfarth Shaw LLP and argued that the rates it was seeking were in line with — and in some cases lower than — comparable firms.  But U.S. Magistrate Judge Gabriel W. Gorenstein said in a report and recommendation that the rates KCG proposed were out of step with precedent requiring the court to consider rates in relation to attorneys of "average skill and ordinary competence."

The judge said KCG had not even tried to argue that its proposed rates were in line with that criteria.  "Certainly, in its choice of attorneys, a party may understandably choose to undertake the equivalent of flying first class," Judge Gorenstein said.  "But when it comes time to shift 'reasonable' fees to another party under New Jersey law, it may only collect the equivalent of an economy-class ticket."

In March, U.S. District Judge Alison J. Nathan found that KCG's former employee, Rohit Khandekar, misappropriated trade secrets by reviewing and copying trading codes developed by other quantitative strategists to his personal files before leaving for KCG's competitor, Two Sigma Securities. KCG had sued Khandekar in 2017 after he left for Two Sigma.  In June, KCG moved for fees and costs, arguing that it should get $3.2 million in attorney fees with costs on top of that for a total of nearly $3.6 million.

In opposing the motion, Khandekar had argued the demand should be rejected in its entirety for being "so outrageously excessive and unreasonable that it could not possibly have been made in good faith."  But Judge Gorenstein rejected that argument, saying the case he relied on to support that argument involved a party that made repeated misrepresentations to the court.  "Here, no such circumstances are present, and Khandekar's attack consists merely of the usual elements of an opposition to a fee application: an attack on the reasonableness of the hours sought and of the hourly rates," the judge's report said.

However, Judge Gorestein found that the amount of hours KCG billed for was "vastly excessive," as was the number of attorneys on the case.  That included 13 partners, 22 associates, seven contract attorneys, and 10 other members consisting of paralegals, counsel and a summer associate, which the judge said "undoubtedly caused inefficiency and contributed to the vast number of hours expended."

The judge went on to say that, while courts often reduce billing hours because of overstaffing, "this case stands alone."  "It is exceedingly rare, if not unprecedented, to see an application for fees in a single-plaintiff/single defendant case with the number of attorneys involved here," the report said.  Judge Gorenstein therefore reduced the number of billable hours by 70% and then cut the total fees in half to account for the financial disparities between the parties, noting that the full fee award would bankrupt Khandekar and would only marginally improve KCG's financial position.

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