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Category: Bankruptcy Fees / Expenses

Second Circuit: Bankruptcy Court Can Award Attorney Fees

May 18, 2022

A recent Law 360 story by Clarice Silber, “2nd Circ, Rules Bankruptcy Court Can Award Attorney Fees” reports that a Second Circuit panel has overturned a district court's decision and sent a suit filing for Chapter 7 back to bankruptcy court, finding that a bankruptcy judge has the authority to award damages and attorney fees.  The three-judge panel said that because bankruptcy judges have the power to impose contempt sanctions, they also have the jurisdiction to award those other fees.

"Bankruptcy court has the power to impose contempt sanctions, which traditionally includes the authority to award damages and attorneys' fees," U.S. Circuit Judge Richard J. Sullivan wrote for the panel in the ruling.  "This authority carries with it the ability to award appellate attorneys' fees."

The judges vacated the district court's judgment and remanded the case to the bankruptcy court to consider whether appellate fees should be awarded.  The decision stems from a case in which the appellant, the Law Offices of Francis J. O'Reilly Esq., had challenged the U.S. District Court for the Southern District of New York's order affirming a bankruptcy court's denial of the law firm's request for appellate attorney fees from the appellee, Selene Finance LP.

The U.S. Bankruptcy Court for the Southern District had originally denied O'Reilly's request for appellate fees because it decided that it lacked the authority to award them.  Carlos Cuevas, an attorney representing O'Reilly, told Law360, "It's a very important decision for the bankruptcy bar because it has ensured that if a party is in contempt, that an attorney who successfully dissents that contempt order on appeal has the opportunity to be compensated for his or her services."

"And that's especially important if you're representing a debtor, because debtors most of the time lack the resources to fund an appeal, to pay for the printing of an appellate brief, an appendix and the attorney's services that are involved," Cuevas added.  The debtor, Bret DiBattista, filed a Chapter 7 bankruptcy petition in July 2009, and won an order from the bankruptcy court preventing creditors from trying to collect on debts.  Despite this, Selene, the servicer of DiBattista's mortgage, made dozens of phone calls trying to collect on his delinquent mortgage payments, behavior the court called "absolutely egregious."  In 2019, DiBattista filed a motion for contempt sanctions against Selene, which the court granted.

Judge Sullivan wrote that DiBattista, who was represented by O'Reilly in 2019, had racked up appellate fees because of Selene's contempt.  "Indeed the record reflects that the appellate fees were more than $28,000, dwarfing the $17,000 in compensatory damages the bankruptcy court awarded to DiBattista," Judge Sullivan wrote.

SCOTUS to Rule on Chapter 11 Bankruptcy Fee Increases

January 10, 2022

A recent Reuters story by Maria Chutchian, “Supreme Court to Determine Constitutionality of Bankruptcy Fee Increases,” reports that the U.S. Supreme Court said it will review a dispute over a recent increase in fees that Chapter 11 debtors are required to pay the federal government.  The issue, which stems from a 2017 law that hiked the government fees that most large companies in bankruptcy must pay, has divided top appellate courts across the country.

The law's imposition of higher fees in most, but not all, U.S. bankruptcy courts has caused uncertainty over the legal status of around $324 million in fees imposed under the law, according to the U.S. Trustee, which serves as the U.S. Department of Justice’s bankruptcy watchdog.

The underlying lawsuit was brought by Alfred Siegel, the trustee who oversaw Circuit City’s liquidation process.  He argued that the 2017 law violated the U.S. Constitution’s Bankruptcy Clause, which requires bankruptcy laws to be uniform, because it hiked fees for Chapter 11 debtors in most states but failed to do the same for Alabama and North Carolina.  Those two states use a different government entity, known as the Bankruptcy Administrator program, to perform similar duties as the U.S. Trustee in large corporate bankruptcies.

The law was eventually amended to include Alabama and North Carolina, but Siegel argued in his September petition to the Supreme Court that companies that filed for Chapter 11 in those two states were still permitted to go several months without being subject to the same fee increases that were imposed in the other states.  The government argued in its response that the constitution’s bankruptcy clause gives Congress flexibility in creating new statutes that govern bankruptcy court administration.

The law has been challenged in several districts with conflicting outcomes.  The 4th U.S. Circuit Court of Appeal, which ruled in Siegel's case, and the 5th Circuit have upheld the law while the 2nd and 10th Circuits have deemed it unconstitutional.  Though they oppose each other’s interpretation of the law, the U.S. Trustee and Siegel both asked the Supreme Court to weigh in on the case.

USTP Asks Supreme Court to Review $324M Bankruptcy Fee Matter

December 11, 2021

A recent Reuters story by Marla Chutchian, “Government Asks Supreme Court to Review $324M Bankruptcy Fee Fight,” reports that the U.S. Department of Justice’s bankruptcy watchdog is urging the U.S. Supreme Court to take up a dispute over bankruptcy fees Chapter 11 debtors are required to pay the government that has divided top appellate courts across the country.

Solicitor General Elizabeth Prelogar said in a brief on behalf of the U.S. Trustee program that the high court should review the matter to resolve confusion over the fees created by the conflicting rulings.  She also argued the court should find that a 2017 law increasing government fees that many Chapter 11 debtors must pay complies with the U.S. Constitution’s Bankruptcy Clause, which requires bankruptcy laws to be uniform.  The law's imposition of higher fees in most, but not all, U.S. bankruptcy courts has caused uncertainty about the legal status of around $324 million in fees imposed under the 2017 law, according to the U.S. Trustee.

The dispute stems from a lawsuit filed by Alfred Siegel, the trustee who oversaw Circuit City's liquidation process.  He claims the law violated the uniformity requirement by increasing U.S. Trustee fees for Chapter 11 debtors in most states but failed to do the same for two states that use a different government entity, known as the Bankruptcy Administrator program, to perform similar duties in overseeing large corporate bankruptcies.

Siegel argued in a September petition to the Supreme Court that the alleged disparity forced the Circuit City liquidating trust to pay substantially higher fees than it had in prior years, while Chapter 11 debtors in North Carolina and Alabama, the states with the alternative program, went several months without being subject to the same fee increases.  North Carolina and Alabama opted in 1986 for the Administrator program.

While the U.S. Trustee opposes Siegel’s view of the law, it agrees that the Supreme Court should review the case.  The law has been challenged in several districts with conflicting outcomes – the 4th and 5th U.S. Circuit Courts of Appeal have upheld the law while the 2nd and 10th Circuits have deemed it unconstitutional.

The government argued that the constitution’s uniformity requirement does not restrict Congress’s ability to amend U.S. Trustee fees.  Additionally, it said, the bankruptcy clause gives Congress flexibility in creating new statutes that govern bankruptcy court administration.  “There is no basis for concluding that any of those administrative variations are unconstitutional,” the government said in Wednesday’s filing.

The case is Alfred Siegel v. John Fitzgerald III, U.S. Supreme Court, No. 21-441.

USTP Opposes Chapter 11 Fees for MTE Service Providers

August 20, 2021

A recent Law 360 story by Jeff Montgomery, “US Trustee Opposes Ch. 11 Fees For MTE Service Providers”, reports that the Office of the U.S. Trustee opposed a $2 million fee award for the ad hoc committee of service providers in MTE Holdings LLC's contentious Chapter 11 in Delaware, arguing that the committee failed to show how it benefited the estate.  Several other participants in MTE's case, including MTE itself, had also opposed the request, asserting that the committee failed to show that its efforts were for the benefit of any constituency "other than its own members."

No official committee of unsecured creditors was formed in the case, with the ad hoc group asserting rights under liens.  An insufficient number of creditors agreed to serve in a traditional unsecured creditor capacity, the trustee observed.  The debtors waded through complex disputes, the trustee wrote, including a push for the appointments of a Chapter 11 trustee and a new board, chief restructuring officer and other key figures, as well as the appointment of a mediator.

"There is nothing in the mediator motion, or in the ad hoc committee's motion for substantial contribution, that indicates that the ad hoc committee played a role in negotiating the appointment of a mediator," the trustee objection said, adding separately that "Creditors are presumed to act in their own interest until they satisfy the court that their efforts have transcended self-protection."  Committee members failed to show they acted beyond self-interest, the trustee wrote, or filed motions that duplicated those of the other groups in the case.

"Importantly, the motion fails to present any evidence that the ad hoc committee's actions permitted the reorganization to proceed with a minimum of litigation, keeping costs low and hastening the reorganization by, for example, ensuring that key parties were satisfied with the direction of the case," the trustee wrote.  MTE's own objection went further, arguing that "voicing support for work already done by other creditors or constituencies hardly rises to the lofty level of 'substantial contribution.'"

The committee presented a different picture in its motion, which included a request for more than $1 million in fees for its counsel from Potter Anderson & Corroon LLP.  "With no official committee of unsecured creditors appointed in these cases, the ad hoc committee stepped in and led the charge on behalf of all statutory lienholders," the group's motion said.  Its actions were said to have "ultimately resulted in the filing of a plan of reorganization, which benefited all interested parties and the debtors' estates."  A decision on the motion is pending.

Bankruptcy Court Denies Professional Fees to Law Firm

July 30, 2021

A recent Law 360 story by Rose Krebs, “Ashby & Geddes’ Appeal in Del. Bankruptcy Fee Row Tossed,” reports that a Delaware federal judge denied Ashby & Geddes PA's bid to force a lender to fund a roughly $980,000 carve-out reserve to pay professional fees in the now-closed bankruptcy case of life sciences company NeuroproteXeon Inc.  In a memorandum opinion, U.S. District Court Judge Maryellen Noreika said that she does not have jurisdiction to decide a cross-appeal mounted by Ashby & Geddes, former counsel to NeuroproteXeon in its Delaware bankruptcy case, related to a dispute over whether the lender should have been required to fund the carve-out for professional fees.

The judge rejected Ashby & Geddes' contention that she should weigh in on an August order issued by U.S. Bankruptcy Court Judge Mary F. Walrath, which the firm contended did not direct debtor-in-possession lender JMB Capital Partners Lending LLC to fund the carve-out as it should have per a financing agreement.  "As the [August] order cannot be considered final, and interlocutory review is not warranted, the court lacks jurisdiction over the cross-appeal, and it will be dismissed," the opinion said.

The firm incurred roughly $400,000 in fees while serving as the debtors' counsel during the bankruptcy case, according to court filings.  NeuroproteXeon, a pharmaceutical company that also develops medical devices and life sciences technologies, and its affiliates filed for Chapter 11 in late 2019 amid a liquidity crisis and with plans to sell its assets.  The debtors' had little unsecured debt and owed a $250,000 bridge loan that JMB provided to help the company fund operations as it prepared for bankruptcy, according to court filings.

JMB also provided up to $5 million in post-petition financing to fund operations during the Chapter 11 case, according to court filings.  Under a final DIP order, the lender was granted first-priority liens on the debtors' assets, subject to the terms of a carve-out being set aside to pay U.S. Trustee fees and professional fees, according to the opinion.  In January 2020, JMB notified the debtors of a default on the DIP agreement because a stalking horse bidder had not been selected by a required date, the opinion said.  As of that time, "the aggregate amount set forth in the budget for allowed professional fees plus budgeted U.S. Trustee fees" and other fees was about $980,000, an amount JMB did not contest, the ruling said.