As the COVID-19 pandemic takes its toll on the economy, businesses and individuals alike will need legal services and will be looking to attorneys for help. As attorneys we have an ethical duty and professional responsibility to charge and collect a reasonable fee. Charging a reasonable fee is in the public’s interest and safeguards our profession. We have to be cognizant of how attorney fees directly affect access to justice and the public’s confidence in the integrity of attorneys. I recently became involved in a Chapter 7 Bankruptcy case in which the debtor’s attorney is charging a fee that is 10 times what is customary in the State of Nebraska. The case has not been more complicated than a typical Chapter 7 case. In actuality, the legal services have been subpar, as the debtor’s attorney made numerous errors, omissions, and failed disclosures in the bankruptcy schedules. As a result, the Trustee is claiming some of the debtor’s assets. Due to the quality of legal services and the excessive fee I was compelled to ask the Court to review the debtor’s attorney fee under 11 U.S.C. § 329 (the “Bankruptcy Code”).
Bankruptcy attorneys need to be aware of Section 329 of the Bankruptcy Code. Section 329 entitled “Debtor’s transactions with attorneys”, authorizes the Court to determine whether a debtor’s attorney’s compensation in connection with services rendered in a bankruptcy case exceeds the reasonable value of his/her work and to order a return of any excessive fees to the debtor or bankruptcy estate, if the property transferred would have been property of the bankruptcy estate. Most often if the fee is paid pre-petition it will be considered property of the bankruptcy estate.
Federal Rules of Bankruptcy Procedure 2017(a) implements Section 329 by providing that the court on its own initiative or any party in interest can motion the court to review the debtor’s attorney fees for excessiveness. Congress enacted these sections in recognition of the fact that “[p]ayments to a debtor's attorney provide serious potential for evasion of creditor protection provisions of the bankruptcy laws, and serious potential for overreaching by the debtor's attorney, and should be subject to careful scrutiny”[1].
Once the court on its own initiative or party interest raises the question of the reasonableness of the attorney fees under Section 329, the debtor’s attorney bears the burden of proving his/her fee is reasonable. The factors used to evaluate the reasonableness of the compensation are set forth in Section 330(a)(3) of the Bankruptcy Code and require a court to "consider the nature, extent, and value of such services, taking into account all relevant factors", including the time spent on the services, rates charged; whether the services were necessary to the administration of or were beneficial to a case; whether the services were performed in a reasonable amount of time; and the customary compensation of comparably skilled attorneys in other cases. When reviewing the time spent on services and rates charged, Courts often will apply the “Lodestar” method. The Lodestar method is calculated as the number of hours reasonably expended multiplied by a reasonable hourly rate.[2] What constitutes reasonableness? Courts will look to time spent and rates charged in similar cases by comparably skilled attorneys[3]. Unless there is something special about the benefits conferred on the debtor for having selected the attorney, as compared to the quality of service he/she might have received from any other competent debtor’s attorney, there is no justification for charging 10 times the going rate.
The main objective here is to remind bankruptcy attorneys to realize that their fees are supervised, and their conduct is supervised. A review may come from the Court or a party in interest pursuant to Section 329 of the Bankruptcy Code or it could be from the Nebraska Counsel for Discipline that also has oversight over attorneys, the fees they charge and the way they handle their cases before the court. Fellow attorneys, please continue to do honorable, prudent, and honest work. You provide a disservice to our profession by overcharging clients, especially during a time of need.
The Bankruptcy Code can be hard to navigate. If you need assistance understanding how to safely proceed in Bankruptcy Court or out of court workouts, contact the experienced litigation attorneys at Goosmann Law in our Sioux City, Sioux Falls, and Omaha offices.
[1] S.Rep. No. 989, 95th Cong., 2d Sess. 39 (1978).
[2] Stalnaker v. DLC Ltd., 376 F.3d 819, 825 (8th Cir. 2004)
[3] In re Atwell, 148 B.R. 483, 488 (Bankr. W.D. Ky. 1993)
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