In my blog post from November 2020 I discussed disgorgement of debtor attorney fees under 11 U.S.C. § 329 for excessiveness. The main objective was to remind debtor attorneys that their fees are supervised by the bankruptcy court and to charge a reasonable fee. The same could be said of creditor attorneys. Though bankruptcy courts do not often review creditor attorney fees, they are subject to review if the creditor wishes to recover its attorney fees from the bankruptcy estate.
On November 30, 2020 in the case of In re Kurtenbach[1], Chief Bankruptcy Judge Thad J. Collins for the U.S. Bankruptcy Court for the Northern District of Iowa reduced the attorney fees of an oversecured creditor that were to be paid from the bankruptcy estate by 30% under 11 U.S.C. § 506(b)’s reasonableness of fees. Judge Collins held that Section 506(b) “is not a blank check for oversecured creditors to incur any amount of legal fees and have them paid by the debtor. He went on to say that under “[Section] 506(b) the Court is looking at efficiency with an eye towards fairly preserving the value of the bankruptcy estate” and that creditors’ attorneys must “exercise restraint in the attorneys’ fees and expenses they incur.”
In the Chapter 12 case of Kurtenbach the Debtor confirmed a Plan of Liquidation after submitting four plans. The creditor, Farm Credit Services of America FCLA (“Farm Credit”) had a claim for $2 million with collateral that “significantly exceeded” the amount of the claim. Under Section 506(b) if a creditor has an allowed oversecured claim, said creditor is “allowed interest on such claim, and any reasonable fees, costs, or charges provided for under the agreement or State statute under which such claim arose.” 11 U.S.C. § 506(b). Farm Credit being oversecured, filed a fee application with the Court in the amount $219,447.67 in hopes of having its attorney fees paid from the bankruptcy estate. The Debtor filed an objection to the fee application on the grounds that the fees sought were unreasonable and asserted that Farm Credit’s fees should not exceed those of Debtor’s attorney. Debtor’s attorney anticipated his fees to be around $160,000.
Judge Collins citing In re Fansteel, Inc.[2], held the following factors were to be considered in determining whether attorney fees are reasonable under Section 506(b):
the complexity of the case; the hourly rates charged and the rate in the locality; whether the services were necessary to protect the client’s interest; whether attorneys were able to efficiently and competently provide the required services; whether billing judgments were exercised to avoid duplicate or unnecessary services; the results obtained; and the amount charged in similar cases.
In applying the factors to the case at hand, Judge Collins noted that the case required “far more work than the ordinary chapter 12” and that Farm Credit’s attorneys “are some of the very best attorneys to appear before [the] Court”. The Court found that the hourly rates charged by Farm Credit was reasonable and below the rate of the Debtor’s attorney. However, Judge Collins after reviewing Farm Credit’s attorneys’ time records found that the attorneys charged fees for a motion for relief it never filed with the Court and was “concerned with the volume and repetitive nature of billing entries related to confirmation hearing preparations” and “the numerous billings related to objecting to each new plan and preparing for each rescheduled confirmation hearing”. The Debtor may have submitted four plans, however each amended plan did not provide brand new ideas for Farm Credit to consider. The amended plans were mostly variations of the previous proposals. In addition, the Court found that there was substantial duplication of services that were billed. There were 335 hours with identical time entries.
After an extensive review of Farm Credit’s times entries and in light of the circumstances, Judge Collins held that the factors “favor some reduction of the allowable fees in this case” and concluded that a 30% reduction in the total fees requested is appropriate, thereby reducing Farm Credit’s allowable attorney fees to $153,613.37.
Judge Collins said that “Section 506(b) is intended to check claims for unrestrained billing and billing based on excessive caution.” Farm Credit’s attorneys’ diligence “may very well be perfectly acceptable to a client that wants its lawyers to use excessive caution” but when an application is made under 506(b), billing judgment includes “avoiding duplication”. In view of this recent ruling by Judge Collins and my recent blog on disgorgement of debtor attorney fees, both debtor and creditor attorneys should exercise efficiency in providing legal services and always keep in mind the reasonableness of their attorney fees as they are always subject to review by the Court, opposing counsel, and the client.
***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] In re Joel Donald Kurtenbach (In re Kurtenbach), 18-01607 (Bankr. N.D. Iowa November 30, 2020)
[2] In re Fansteel Inc., 16-01823 (Bankr. S.D. Iowa May 9, 2017)