Bankruptcy case that discusses lawyer fees and how they are divided in bankruptcy cases.
IN RE BUCKNER 350 B.R. 874 (Bankr. Idaho 2005)
United States Bankruptcy Court, D. Idaho.
MEMORANDUM OF DECISION
Background
Chapter 7 Debtors’ Counsel, Paula Sinclair, filed a motion for Court approval of her attorney fees (the “Fee Motion”). Docket No. 24. The Court conducted a hearing on the Fee Motion on January 31, 2005. After due consideration, the Court concludes that Counsel’s Fee Motion will be granted in part.
Facts
Debtors Daniel and Laurie Buckner (“Debtors”) filed a petition under Chapter 7 of the Bankruptcy Code on May 14, 2004. Docket No. 1. Counsel’s Rule 2016(b)(fn2) disclosure of compensation showed that she had agreed to represent Debtors in the bankruptcy case for a flat fee of $541, which fee she had received. Docket No. 2. The disclosure indicates the parties’ fee agreement did not include representation by Counsel for contested matters that might arise after filing the petition.
On August 25, 2004, through Counsel, Debtors filed a motion seeking to recover damages under § 362(h) because one of their creditors, Bank of America (“Creditor”), had violated the automatic stay. Docket No. 15. The Court conducted a hearing concerning this motion on September 20, 2004. When the case was first called on the Court’s calendar, Creditor was not represented or otherwise present. The Court postponed consideration of the motion until the remaining hearings on the calendar were completed. When the case was recalled, Creditor still did not appear. After considering the testimony, evidence and oral argument Debtors offered, the Court granted the motion and awarded.
Debtors actual damages of $73, $533 in attorney fees for prosecution of the motion, and $5,730 in punitive damages. See Minute Entry, Docket No. 18; judgment, Docket No. 21. The attorney fees included in the award were based upon Counsel’s representation at the hearing that such an amount was a reasonable fee for her services in prosecuting the motion.
Apparently, during the delay in calling Debtors’ case on the day of the hearing, Counsel and her clients struck an agreement concerning her fee for handling the motion.(fn3) Debtors agreed to pay Counsel 50% of any amount the Court awarded on account of the alleged stay violation. Fee Motion, Docket No. 24. The agreement provided that payment of Counsel’s fees was contingent upon collection of the judgment, and Counsel agreed she would be entitled to no fees if she could not collect from Creditor. Sinclair Aff. at 3, 11, Docket No. 31.
Thereafter, Creditor paid the full amount of the judgment. Counsel first disclosed the contingent fee agreement to the Court and parties in the bankruptcy case when Counsel filed her Fee Motion on January 10, 2305, in which she seeks approval of compensation of $3,135, representing 50% of the judgment paid by Creditor, and which sums she now holds in her client trust account. Fee Motion, Docket No. 24.
No objections or responses to the Fee Motion were filed. However, at the hear- ing, it appeared that Debtors had not been served with a copy of the Fee Motion or been given notice of the hearing. In addition, the Court noted that Counsel had filed no supplemental Rule 2016(b) disclosure concerning the contingent fee agreement. As a result, the Court asked Counsel to promptly file a supplemental disclosure, obtain her clients’ consent for the fee payment, and file an affidavit in support of the Fee Motion detailing the services she provided in connection with the stay violation motion.
Disposition
Counsel deserves considerable credit for her efforts in pursuing what appeared to the Court to be a serious violation of the Bankruptcy Code by a sophisticated institutional creditor. Counsel’s services were necessary and beneficial, and there is no reason to question the amount of time spent by Counsel in obtaining relief for her clients. In seeking, recovering and collecting punitive damages from Creditor, Counsel has helped highlight the seriousness of creditors’ obligations to comply with the Bankruptcy Code. Hopefully, entry of the judgment in this case will deter stay violations. Moreover, Counsel should not be criticized for the amount of the fees she seeks here simply because she was successful in collecting the judgment in this case. Obviously, if Debtors had recovered a lesser amount, Counsel’s challenge in justifying her fees under her contingent fee agreement would be correspondingly reduced.
In the interests of fairness to all the debtors’ attorneys in this District who have been called to account for their failures to strictly comply with the Code and Rules concerning disclosing fee arrangements, Counsel’s failure to timely satisfy her obligation to disclose her fee arrangement must be addressed. Under the circumstances, a reduction of Counsel’s approved fee by 13% is appropriate.
When an attorney’s fee is awarded under § 362(h) as a component of actual damages, the Court considers, in each case, the services that were actually performed and whether the fees charged were reasonable in amount to arrive at an appropriate fee. In this case, when the Court sought her advice at the hearing, Counsel suggested $500 was a reasonable amount based, presumably, upon the time she spent on the task and her customary hourly fee. To the Court, this amount indeed seemed reasonable, at least at that point of the litigation. If Debtors and Counsel had negotiated some different fee agreement, clearly that information would have been relevant to the Court’s inquiry, and would have been helpful in fixing the fee award at the hearing.
Use of a contingent fee agreement by a debtor and his or her attorney is not per se unreasonable. See In re Yermakov, 718 F.2d at 1473 (noting that “nothing inherent in a contingency fee agreement between a debtor and his attorney prevents it from being enforceable in bankruptcy.”). Even so, the fee eventually paid under such an arrangement must reflect the reasonable value of the attorney’s services.
On the other hand, the Court appreciates the risk involved in prosecuting, and then collecting, stay violation judgments. In this case, by agreeing to a fee contingent upon the outcome, Counsel assumed the risk that the stay violation motion would be hotly contested; that the Court would deny the motion; that if granted, the Court would award Debtors only minimal damages; and that any judgment could not be collected. Under any of those circumstances, Counsel risked inadequate compensation. Given all these potential pitfalls, it is doubtful Counsel would agree to a contingent fee to pursue a frivolous claim.
While a contingent fee may have been justified, Counsel has not adequately demonstrated to the Court why a 50% fee was warranted as compared to a lower percentage in this particular case. Counsel has not shown whether there were potential defenses to the stay violation motion; whether a defense would be mounted by Creditor; whether Debtors’ compensatory damages were speculative; whether there was doubt that Creditor’s conduct was sufficiently egregious to warrant the imposition of significant punitive damages; or whether there was some likelihood any judgment obtained could not be collected. Had Creditor made an appearance and vigorously defended its position during the stay violation proceedings, the reasonableness of Counsel’s proposed fee may have been self-evident. But on this record, where the Creditor did not appear, defend, or apparently resist payment of the judgment, the Court lacks the kind of facts necessary for it to conclude that Counsel should be paid $3,315.00.
In the absence of a showing to support this amount, the Court must revert to the lodestar approach for guidance. The Court acknowledges that, under their bankruptcy case fee arrangement, Counsel was not obligated, nor previously compensated, to litigate a contested matter. Additional compensation beyond Counsel’s flat fee is clearly justified. And Counsel should not be prevented from receipt of more fees than the $500 awarded by the Court, despite recommending this sum as reasonable at the time, since Counsel did not have the benefit of reviewing her time records, nor could she know what post-hearing services would be required.
In this case, Counsel accepted a potentially challenging and time-consuming legal assignment. Her commitment to this case precluded her attention to other cases that she had pending at the time, and which guaranteed her payment at a higher hourly rate for her nonbankruptcy services. Sinclair Aff. at 3, ¶ 9, Docket No. 31. The prosecution of the stay violation was not included in the customary fee for preparing Debtors’ routine case. Moreover, because of the risk factors discussed above, the pursuit of stay violations in bankruptcy cases may be seen as undesirable by other bankruptcy practitioners Debtors might have asked to represent them. The outcome of the litigation was extremely favorable. Debtors benefitted, the integrity of the bankruptcy system was protected, and a sophisticated institutional creditor’s disregard of the law redressed. Finally, at the time she undertook the assignment, the outcome of this litigation was uncertain, and there was a significant risk she would not be paid, both because of Debtors’ lack of resources to pay fees, and the uncertainty and delay attendant in collecting the judgment from Creditor.
Conclusion
Counsel is entitled to reasonable compensation for her services. No adequate showing was made by Counsel to sustain her request that she be paid $3,135.00. Therefore, the lodestar approach must be used to determine a reasonable fee. Based upon the uncertainties and undesirability of the litigation, her clients’ lack of ability to pay significant fees, the risk of nonpayment by Creditor, and the results obtained from her services, Counsel is entitled to an enhanced hourly rate for her efforts. But Counsel failed to comply with the Rules requiring supplemental disclosure of her fee agreement with her clients, so the total amount of her fees should be reduced to address the seriousness of this mistake.
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Counsel’s Fee Motion will be granted, but only in part. Fees to Counsel shall be approved in the amount of $1,984.50. A separate order will be entered.Athens GA bankruptcy lawyers and GA bankruptcy attorneys that assist our clients in filing for Chapter 7 Bankruptcy and Chapter 13 Bankruptcy in Athens GA.
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