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Sixth Circuit: Bankruptcy Attorney Fee Cuts Denied Due Process

August 23, 2023 | Posted in : Bankruptcy Fees / Expenses, Expenses / Costs, Fee Issues on Appeal, Fee Jurisprudence, Fee Reduction, Fee Request, Fees as Sanctions, Practice Area: Bankruptcy / Restructuring

A recent Law 360 story by Alex Wittenberg, “6th Circ. Says Bankruptcy Court’s Atty Fee Cut Denied Rights”, reports that a Tennessee bankruptcy court violated two attorneys' due process rights by slashing their fees by more than $60,000 without proper notice or an opportunity for a hearing, a Sixth Circuit bankruptcy appellate panel ruled, saying the move functioned as a sanction. 

The panel said in its opinion that a hearing on the fees held by the U.S. Bankruptcy Court for the Western District of Tennessee was unfairly sprung on an unsuspecting Glankler Brown PLLC lawyer, who wasn't prepared to answer questions about the fee application because there were no objections filed to it.  Local rule and the express language of the hearing suggested that no hearing would be held on a matter to which no party had objected, the panel said.

Yet the court proceeded with a hearing anyway, telling the Glankler Brown attorney, Michael P. Coury — who was only in the courtroom for a separate matter heard earlier — that it would consider the issue despite the absence of objections.  "There is no reason to think that anyone other than the bankruptcy court expected a hearing to occur when Glankler had already submitted its certification that no objection was filed," the Sixth Circuit panel said.  "Glankler simply had no reason to suspect there might be a hearing on the fee application."

The court had decided to cut the fees for Glankler by 25% in part because its client's earlier bankruptcy case was dismissed for bad faith, a move that amounted to a sua sponte sanction for which Glankler received no notice or hearing – violating due process, the panel found.  The panel moved to vacate the bankruptcy court's order on the fee reduction.

The decision stems from a bankruptcy case involving debtor Island Industries Inc., for which Glankler served as counsel. Island Industries filed for Chapter 11 in February 2022.  Shortly after, a separate company, Sigma Corp. brought forth an adversary action alleging Island violated trade secret acts, according to the opinion.  A U.S. District Court then withdrew the reference to that action from the bankruptcy court, assuming jurisdiction over the trade secrets dispute.  Sigma then moved to dismiss Island's bankruptcy case, arguing it was filed in bad faith, and the bankruptcy court dismissed it in November 2022.

A month later, Glankler filed its final application related to compensation, with about $249,000 for fees and $7,800 for expenses, according to the opinion.  The law firm said roughly $100,000 of the fees related to its work on the bankruptcy case, while $150,000 were for the trade secrets case.