Creditor Attorney Fees in Bankruptcy
In bankruptcy, parties fight over a limited pool of assets while fees diminish what remains in the estate. While most creditors are responsible for paying their own attorneys’ fees, oversecured creditors are entitled to attorney fees from the debtor pursuant to 11 U.S.C. § 506(b) which states:
To the extent that an allowed secured claim is secured by property the value of which, after any recovery under subsection (c) of this section, is greater than the amount of such claim, there shall be allowed to the holder of such claim … any reasonable fees … provided for under the agreement or State statute under which such claim arose.11 U.S.C. § 506(b) https://www.law.cornell.edu/uscode/text/11/506
Section 506(b) establishes three rules applied when the bankruptcy court looks at creditor attorney fees. “To recover attorneys’ fees, a creditor must establish that: (1) it is oversecured in excess of the fees requested, (2) the fees are reasonable; and (3) the agreement giving rise to the claim provides for attorneys’ fees.” In re White, 260 B.R. 870, 880 (B.A.P. 8th Cir. 2001). The most fact-intensive inquiry of this three-pronged test is the reasonableness prong, requiring the court to consider a variety of factors specific to the case at bar that would justify the proposed creditor attorneys’ fees.
In re Kurtenbach
In re Kurtenbach, a 2020 case in the Northern District of Iowa, presented the bankruptcy court with the issue of whether a creditor’s attorney fees were reasonable in this complicated Chapter 12 case. The court considered factors such as the complexity of the case, the hourly rates charged, whether the services were necessary for the client, whether the attorneys efficiently and competently provided their services, whether billing judgment was exercised, the results obtained, and amounts charged in similar cases.
Farm Credit, the oversecured creditor in this case, sought creditor attorneys’ fees amounting to $219,447.67. The debtor objected to these fees, admitting that Farm Credit was eligible for attorneys’ fees under § 506(b) but claiming the amount requested was unreasonable. Farm Credit responded by claiming that the complex case warranted a greater amount of work, especially because of the debtor’s multiple plan proposals. Through the course of the Chapter 12 case, there were four different bankruptcy plans proposed by the debtor. Farm Credit objected to each of them. Additionally, the proposed plans were “a bit out of the ordinary.” Then, confirmation hearings on these proposed plans were rescheduled repeatedly. Ultimately, the case presented far more work for debtor’s counsel and Farm Credit’s counsel than the average Chapter 12 case.
The courts have broad discussion to review attorney fee applications, including those from creditors’ attorneys. The court first looked at the complexity of the case and acknowledged that the case’s complexity supported a claim for a large fee but also said that complexity is not dispositive. The court also recognized that the hourly rate charged by Farm Credit’s attorneys was reasonable. The court then looked to whether the fees were necessary to protect Farm Credit’s interest. Farm Credit sought to recover fees for a motion for relief of stay, and the court determined that this was not necessary for the interests of Farm Credit because Farm Credit’s status as an oversecured creditor made relief of stay highly unlikely. Thus, the court reduced $6,000 worth of fees for services relating to the motion for relief of stay.
The bulk of the court’s discussion related to the efficiency of the services and whether billing judgment was exercised. The court found multiple instances of Farm Credit’s attorneys billing for services that did not meet the efficiency requirement. Farm Credit’s attorneys billed for reviewing documents, exhibits, and witness lists each time the debtor proposed a new plan, even though these items were essentially the same for each plan proposal. While the court admitted that there may be additional services that would need to be billed for each proposed plan, the court found that the extent of services rendered seemed far too great in many instances. Moreover, when the court Farm Credit’s attorneys exercised billing judgment, it found multiple instances of duplicative services. The court found examples of attorneys billing for reading, reviewing, drafting, and revising the same documents multiple times. Although the court recognized that diligence is necessary for good lawyering, the court pointed out that diligence must be reasonable. In this case that diligence was not reasonable. Because Farm Credit failed to eliminate duplicative billing entries or explain the confusion surrounding it, the court had to adjust fees accordingly.
The court recognized that Farm Credit’s attorneys had produced favorable results for their clients, which weighed in favor of a fee award, and then turned to whether the fees Farm Credit sought could be compared to any similar cases. The court pointed out that the case was unique, and the best comparison would be to compare the fees charged by Farm Credit’s attorneys to the fees charged by debtor’s counsel in this case. This point presents an interesting observation that appears to undergird the opinion. Debtor’s counsel presented the argument that Farm Credit’s attorneys’ fees should not exceed the estimated $160,000 of fees requested by debtor’s counsel in this case. The court recognized that debtor’s counsel’s fee requests were familiar to the court and the court consistently approved them. The court further states, “Debtor’s counsel’s fees provide at least a general benchmark for the amount and value of services required in this unusual case.”
The court does not appear to say that counsel for an oversecured creditor can never charge more than debtor’s counsel, but rather, in this case, the court could appropriately compare fees between the oversecured creditor’s counsel and debtor’s counsel to determine reasonableness. This is a clever approach by Chief Bankruptcy Judge Thad Collins because the court was familiar with both firms and the case was so unusual. Critics may claim that this decision penalizes the creditor’s attorneys for being diligent, but this concern is overstated. An oversecured creditor must be able to justify their attorney’s billing to the bankruptcy court just as that creditor’s attorney must be able to justify their billing to their client when the client is responsible for the bill, or as a debtor’s attorney must justify their billing to the bankruptcy court. Reasonable diligence is permitted, and the court must make the determination of reasonableness.
In sum, an oversecured creditor is just one creditor among many. They are given advantages under § 506(b) because of their status as an oversecured creditor, but this does not mean they can excessively charge attorneys’ fees at the expense of other creditors and the debtor. An oversecured creditor’s counsel must work diligently for their clients, but to be diligent is not to be unrestrained. When the debtor’s estate is responsible for paying creditor’s attorneys’ fees, the court will, in the interest of fairness, inquire into their reasonableness.
In re White, 260 B.R. 870, 880 (B.A.P. 8th Cir. 2001).
In re Kurtenbach, 2020 WL 7034405 (Bankr. N.D. Iowa 2020).