Bankruptcy in the Northern District of Texas and Attorneys’ Fees | Freeman Law
In re Shayne Allan Steen and Tracie Melissa Cole, Case No. 20-50042 (Bankr. ND Tex, July 7, 2021) deals with the attorney fees of a debtor incurred to defend the debtor in adversarial non-discharge proceedings filed after the debtors have filed their Chapter 13 bankruptcy case. After filing for bankruptcy, the ex-wife of Shayne Steen (“Shayne”) filed adversarial proceedings against him, claiming that the debt Shayne owed her was unreliable under 11 USC §523 (a) (4). With the help of his lawyer, Sam Gregory, Shayne successfully dismissed the adversarial process. Gregory subsequently sought compensation for his services rendered in his portrayal of Shayne to the opponent. Robert Wilson, the permanent Chapter 13 trustee (“trustee”), opposed the request, saying the bankruptcy estate should not have to pay Gregory’s fees.
The trustee’s objection did not relate to the amount or reasonableness of Gregory’s fees, but to the payment of fees out of his disbursements. The trustee argued that unsecured creditors should not, in fact, have to bear the burden of the work being done on Shayne’s behalf. The trustee further argued that the US rule – which provides that parties involved in civil litigation are generally responsible for paying their own attorney fees, in the absence of legal provisions providing for the transfer of fees – prevents Gregory’s fees to be paid from the Chapter 13 estate. Finally, the trustee argued that the services rendered by Gregory did not benefit the estate and, therefore, the estate should not bear the burden. to pay for his services.
The Court first analyzed §330 (a) (4) (B) and noted that the law allows attorney fees when the services rendered provide a benefit and are necessary. to the debtor; there is no requirement in a Chapter 13 case that the services of a lawyer benefit the estate. Section 330 (a) (4) (B) therefore creates an exception to the general rule that fees are only compensable by the estate if the services benefit the estate. The Code creates an exception to § 330 (a) (4) (B) for debtors-individuals under Chapters 12 and 13 because the earning capacity of a debtor is usually the principal asset of the estate – the the debtor’s income funds the plan. The Court cited cases concluding that the services available to the debtor in connection with the case facilitate the success of the debtor’s plan. For example, the Court noted, a debtor’s dispute over the discharge of a particular debt or the defense against a motion to lift a stay may determine whether the debtor will pursue the Chapter 13 case. The Court thus concluded that an attorney for a Chapter 13 debtor is entitled to an administrative expense for compensation for work that is beneficial and necessary for the debtor without proof of benefit or necessity for the Chapter 13 estate or the creditors.
In this context, the Court first sought to determine whether Gregory’s services benefited the debtor or the estate. The court easily concluded that Gregory’s services benefited debtors by defending Shayne in a dispute over the discharge of a debt owed to his ex-wife. After determining a clear benefit, the Court turned to whether Gregory’s services were necessary for the completion of the bankruptcy case, and again, it easily determined that they did. were, finding that a discharge complaint is a fundamental bankruptcy issue which benefit sought by bankrupt people. Finally, the Court considered the reasonableness of the fees. Using the twelve factors listed in the Johnson v. Ga. Highway Express, Inc., 488 F.2d 714 (5e Cir. 1974) – the so-called “Johnson factors ”- the Court found Gregory’s services to be reasonable.
Finally, the court addressed a new argument put forward by the trustee that the US rule prohibited payment for Gregory’s services because it essentially requires creditors to pay the debtor’s attorney fees. Citing Family Snacks, Inc. v Andrews & Kurth, LLP (In re Pro-Snax Distribs., Inc.), 212 BR 834, 836-37 (ND Tex. 1997), the Court concluded that section 503 of the Bankruptcy Code creates an exception to the American rule in bankruptcy cases by transferring certain litigation expenses to general creditors. This is done by authorizing the payment of these expenses (including attorney’s fees) – as “administrative expenses” out of the assets of the bankruptcy estate – before general creditors. The Court therefore concluded that the trustee’s invocation of the American rule was erroneous, as there is an express statutory provision which creates an exception to the American rule which applies in this situation. US rule does not prohibit a claim for attorney fees for services rendered on behalf of the debtor.
Having found that Gregory’s services were beneficial, necessary and reasonable, the Court granted Gregory’s claim for fees, finding that such fees are entitled to priority over administrative expenses under § 503 (b) (2) .
Bankruptcy lawyers are all too familiar with the idea that it is often difficult to get paid in a bankruptcy case. This case provides a clear example of the appropriate way to be compensated for services related to a Chapter 13 bankruptcy case.