There has been much discussion in the media in the past year about the massive amount of professional fees that have been wracked up during the City of Detroit's Chapter 9 bankruptcy. There is always great interest - and debate - about such fees due to the nature of the process: insolvent individuals or companies with no place left to turn file for bankruptcy, creditors take a "haircut" on their claims, and the lawyers get paid. Or so the story goes. As with any complex process, though, there is plenty of nuance that gets lost in the wash, and often is more to the story.

Bankruptcy is complex, and requires skilled counsel to guide parties through what is an adversarial process. And fees are subject to court approval. Section 330 of the Bankruptcy Code provides that bankruptcy courts may award "reasonable compensation for actual, necessary services."

Bankruptcy courts take this oversight role seriously, and often reduce or completely disallow fees that are determined to be unreasonable or unnecessary. As colorfully explained by the United States Bankruptcy Court for the Southern District of Texas in the In re Energy Partners, Ltd. case, "At some time [the] Court must draw the line as to what is reasonable and what is not…when a pig becomes a hog it is slaughtered."

A recent Amended Opinion and Order issued by Judge Dales and Judge Boyd in the United States Bankruptcy Court for the Western District of Michigan ("Bankruptcy Court") dealt with fees being requested by a bankruptcy attorney for his firm's work representing individuals in Chapter 13 bankruptcy cases.[1]

The attorney filed applications requesting approval of his firm's fees and expenses in 14 Chapter 13 cases. The Chapter 13 trustee ("Trustee") filed nearly identical objections to each application. Because of the similar nature of the applications, and objections thereto, the Bankruptcy Court consolidated the matters for argument.

HOW FEES ARE PAID

In Chapter 7 cases, attorneys are paid by the debtor/client. But in Chapter 13 cases, attorneys have the right to request payment of their fees as an administrative claim (a claim entitled to high priority), paid from estate assets. Attorneys must persuade the court that they are entitled to the fees under section 330 of the Bankruptcy Code. This is done by preparing and filing a fee application setting forth the basis of the requested fee award.

Under section 330(a) of the Bankruptcy Code, the court may award "reasonable compensation to the debtor's attorney for representing the interests of the debtor in connection with the bankruptcy case based on a consideration of the benefit and necessity of such services to the debtor and the other factors set forth in this section." "Other factors" include such things as the time spent, the rates charged, and the skill and experience of the professional, to name a few.

The Bankruptcy Court has published guidelines regarding fee compensation and expense reimbursement. The guidelines address "no-look" fees in Chapter 13 cases, which are flat fees, adopted within a district by local rule or custom, that allow counsel in Chapter 13 cases to receive a specific fee for a defined bundle of services without the need to maintain hourly records and file fee applications. In the Western District, the no-look fee increases depending on the continuing education and certifications attained by the attorney.        

THE APPLICATIONS AT ISSUE

In these cases, the attorney did not seek the no-look fee, but rather filed applications which contained itemized time entries by him and members of his firm for which he sought compensation. The Trustee objected to particular time entries in each application that related to time spent monitoring and preparing status reports for each Chapter 13 case.

In each case, a staff attorney would spend between six and twelve minutes preparing a "case status review" and the principal attorney would spend six minutes reviewing his associate's review. The Bankruptcy Court noted that over a sixty month plan, this monitoring activity would cost each estate $2,820.

The Trustee lodged various objections, the crux of which were that this type of monitoring activity is "unreasonably expensive, unnecessary, and not likely to benefit the debtors."

First, the Trustee argued that the monthly monitoring charges, if permitted, would amount to a de facto increase in the no-look fee. The Bankruptcy Court dismissed this argument, explaining that the only way for an attorney to receive more than the no-look fee is to file a fee application and persuade the court that the charges are proper. In other words, once an itemized application is filed, the no-look fee no longer applies.

The Trustee also argued that the monitoring fees should not be allowed because they amounted to duplication of efforts. The Bankruptcy Court agreed with this argument, explaining that if one competent attorney performs a task such as reviewing the status of a case, there should be no need for another attorney to further review it. This point was apparently conceded by the attorney seeking the fees.

However, the Bankruptcy Court went further, raising its concern about charging attorney time for the preparation of monthly status reports in the first instance. The Bankruptcy Court explained that the "case status review" done was in essence "an information gathering exercise which did not require the skill of an attorney and, if performed by an attorney, should not be billed at an attorney's rate. These charges, therefore "do not reflect appropriate staffing (or charging) decisions." The Bankruptcy Court also disallowed charges billed at an attorney's rate for filing certificates of service and objection, explaining that such charges for what is a clerical task also do not reflect appropriate staffing decisions.

Finally, the Bankruptcy Court addressed a broader issue raised by the Trustee's objection and the Chapter 13 attorney's counter-arguments - namely whether monthly monitoring by debtor's counsel is ever necessary (and thus should be compensated).

The Trustee argued that monthly monitoring is never necessary. The Chapter 13 attorney asserted it always is. The Bankruptcy Court's analysis was more nuanced, finding that the one-size-fits-all approaches urged by the parties were inappropriate. The proper approach, the Bankruptcy Court explained, is to evaluate each fee request for tasks like monitoring and review on a case-by-case basis to determine whether the activity is reasonable and bestows a benefit on the debtor.

Ultimately, the Bankruptcy Court decided that monitoring activities may be reasonable in some cases, but because no case-specific information had been presented in these cases, the monitoring fees at issue would not be allowed. The attorney was granted leave to file a supplemental request for fees that explains why the monitoring activity was necessary and beneficial to the debtors.