Update on Business Bankruptcy Legal Fees and Professionalism

“The ‘staggering’ legal fees in the Boy Scouts bankruptcy case. So read the headline of a New York Times article from May 11, 2021. According to the reporter, a “lawyer negotiating a multi-billion dollar bankruptcy resolution filed by the Boy Scouts of America billed $ 267,435 in one one month. Another billed $ 1,725 ​​for every hour worked. New lawyers fresh out of law school bill at an hourly rate of over $ 600. “The bankruptcy judge presiding over the case called the total “fall” charges, the reporter said. On the same day, May 11, another bankruptcy judge in the Southern District of New York reduced the attorney’s fees for a putative debtor from $ 524,051 to $ 40,798, a reduction of over 90%. See, In re Navient Solutions, LLC, 2021 WL 1885915 (Bankr. SDNY May 11, 2021).

Are these recent developments new? Topical? Unique? They are none of the above. A review of recent cases shows that poor billing judgment and unreasonable billing have been with us for decades.

Bad billing judgment

The lawyer for a putative debtor who succeeded in pushing back an involuntary bankruptcy petition against his client has asked the bankruptcy court for his fees and expenses in the Navient case. Applying Bankruptcy Code 303 (i) (1), which allows for the recovery of “reasonable attorney’s fees”, the court found that “the amount of legal fees and expenses [the debtor] seeks to recover from the work of [its two law firms] is not reasonable. Id. At 2. First, the court said, “the debtor’s motion to dismiss the involuntary petition was overstaffed with too many lawyers and paralegals from two law firms. 2021 WL 1885915, at 8. “[One firm] endowed this business with five associates, four associates and a paralegal ”, with the“ five associates [having] billed nearly 200 hours over a month. Id. Second, the court found a “duplication of services between” the two law firms. “Six lawyers on [one firm’s] (including four partners) and the three lawyers of [another firm’s] (comprising a partner and a counsel) attended “the hearing on the motion to dismiss. Further, the court explained,” the service descriptions “of both firms were” insufficiently detailed. “Id. One firm omitted “lawyers” and paralegal titles, ”without“ summary of expense categories. ”Id.“ Critically, there is [were] numerous cases of ineligible bulk billing and excessive hours spent on certain services, including conference calls. [One firm] billed en bloc 446 hours totaling $ 441,235.00, or approximately 84% of the total charges requested. Id. In conclusion, the court concluded that it could reduce fees “as a practical means of removing the fat from a fee claim”, finding that a reduction was appropriate “for vagueness, inconsistencies and other gaps in the [bills]. “Id. In short, the court reduced the costs” for many waves [time] Id. See also, Zolfo, Cooper & Co. v. Sunbeam Oster Co., 50 F.3d 253, 259-62 (3d Cir. 1995) (reduced fee claim due to “overbilling” to “high end”, “duplication of effort, … too much high-level staff and… an incomplete expense claim. ”).

The founding case of churning is Taxman Clothing Co., 49 F.3d 310 (7th Cir. 1995). In that case, the special counsel for a bankruptcy trustee was ordered to reimburse approximately $ 78,000 in interim fees for breaching his fiduciary duty to his client. According to the court, the lawyer pursued a litigation which any reasonable lawyer would have known was not profitable. The lawyer for the trustee, “as part of his fiduciary duty”, must exercise “care, diligence and skill in deciding which allegations to pursue and to what extent”. Identifier. at 315. The lawyer here had received a total of $ 85,000 in fees but only recovered $ 44,000 for the debtor’s estate before having to return $ 78,000 “under fiduciary principles”. 49 F.3d at 312, 316.

The Eastern District of New York recently dismissed an appeal from a bankruptcy court order that ordered the debtor’s lawyer to reimburse the fees paid for a second Chapter 13 filing failed because the fees were unreasonable. In re Pugh, 2020 WL 2836823 (EDNY May 31, 2020). According to the court, Bankruptcy Code 329 (b) (judicial review of the reasonableness of pre-bankruptcy fees) gave the bankruptcy court the “ability to prevent over-demanding lawyers from taking advantage of desperate debtors.” The bankruptcy court had not abused its discretion, the district court said, because there was “little, if any, reason to believe that a second ‘bankruptcy’ attempt would be successful.” Moreover, even the debtor’s “alleged satisfaction” with the lawyer’s services did not preclude judicial “review”.

The Tenth Circuit, earlier this year, upheld the reduction in bankruptcy court fees requested by a Chapter 7 trustee’s lawyer. According to the court, the trustee and the lawyer failed to do so. evidence of “good billing judgment” including “unnecessary, redundant and excessive” service requests. In Reynolds, 835 Fed. Approx. 395, 397, 400 (10th Cir. January 6, 2021). The trustee and the lawyer “were not reasonably diligent in the assessment [property] before incurring substantial expense in trying to sell [it]. “Much of the attorney’s service” was not reasonably likely to benefit the estate under … 330 (a) (4) (A). “According to the district court in the case, a” normal client would not … pay for services he deemed unnecessary, duplicative, unreasonable or of no benefit. 2019 WL 4645385 (D. Utah, September 24, 2019).

Appeals courts usually review compensation awarded by the bankruptcy court “for abuse of discretion” by the bankruptcy court, the Tenth Circuit explained. This review is generally “very respectful”, however, because the bankruptcy judge is “in the best position to … make the delicate decisions”. Identifier. at 398. In this case, the Court of Appeal refused to “substitute” its “judgment” for that of the bankruptcy court. “Estate mismanagement” must be taken into account in determining the reasonableness of legal fees. “[O]the worm-lawyering of an elementary Chapter 7 case … made the estate [here] administratively insolvent. “Id. at 400.

Poor judgment

The Fifth Circuit overturned and remanded the lower court’s dismissal of a client’s suit against his lawyer for “breach of fiduciary duty” by distorting the lawyer’s share of the proceeds of the settlement.

In re ABC Dentistry PA, 978 F.3d 323 (5th Cir. 28 October 2020). At a hearing on the approval of a settlement by the court, the client could not have known that “his lawyer lied to him” about the distribution of the fees, prompting him “not to oppose or to appeal. [the] bankruptcy proposal [fee] attributions. “Id. at 326. The argument of exclusion of the claim or of the res judicata authority of the lawyer could not have applied to this claimant because it is” only ‘after the hearing … that [the client] could have discovered ”the lies of his lawyer. Id. According to the fifth circuit: “Because, not myself. It is the sworn duty of every member of the legal profession – to subordinate his own interests to those of his clients … [Counsel denied any fraud.] In the interest of the reputation of the legal profession (as it is), we hope this will be the case. [after trial]. “Id. At 324, 326.

Conclusion

Cynics will attribute these blatant cases to sheer greed. They might quote convicted felon Ivan Boesky’s opening speech: “Greed is okay… Greed is healthy. You can be greedy and still feel good about yourself. Opening address, Berkeley, Calif., May 18, 1986.

They can also take the word of a successful corporate bankruptcy accountant that major reorganization cases are an “LBO – a great billing opportunity.”

Greed may have caused some of the lawyers’ problems in these cases. But the biggest problem is that of judgment.

The lead advocate for any engagement must assume the client’s position. Only then would active and participating lawyers appear at a court hearing for billing purposes. If the lead lawyer wants junior lawyers to observe the hearing for training purposes, the client should not be charged for the training of that lawyer. This does not mean, however, that a junior lawyer cannot have any beneficial role. A junior lawyer can, and often does, add value to the client by assisting a senior lawyer with evidentiary and substantive issues during a hearing or trial. But that help should be backed up by time records. The record-breaking “court hearing” will surely fail any test.

What the courts have done to reduce legal fees is a reflection of what savvy clients have done in recent years. They may not mind paying $ 1,500 an hour for the services of an efficient and experienced senior lawyer. Charging for the training of an inexperienced lawyer who does not add value to the engagement no longer works, however. Neither overstaffing nor unnecessary duplication of services.

The legal criticism of the overcharging of lawyers is not new. See, for example, Taxman Clothing; Zolfo Cooper, above. In the interests of fairness, bankruptcy judges should advise lawyers of their opinions in advance, either at the start of a case, or in court rules or published decisions. See, e.g., In re Bank of New England Corp., 134 BR 450 (Bankr. D. Mass. 1991). (“As a guide for professionals … this review will describe … the basic rules [to] be followed in the treatment of [fee] applications. “).

Professionalism – subordinating your interests to those of the client – must remain the lawyer’s standard. We have always known, or should have known, that the “lucrative” visions of our profession have been around for decades. But maybe as we work our way through temptation we will find that we can change that perception.

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