Under Bankruptcy Code § 329(a) and Federal Rule of Bankruptcy Procedure 2016(b), debtor’s counsel must file a compensation disclosure (a Rule 2016(b) Statement) that details legal fees charged and unpaid balances due. The local rules of the Bankruptcy Court for the Northern District of California also prescribe a “Rights and Responsibilities Statement of Chapter 13 Debtors and Their Attorneys” (the Rights and Responsibilities Statement) that details the fee arrangements between debtor and counsel. A supplemental application for additional compensation to be paid in a bankruptcy case may be presented by debtor’s counsel. Section 330 of the Bankruptcy Code provides that an application must demonstrate that “fees are reasonable compensation for actual and necessary services rendered.”
A decision from a chapter 13 case in the Northern District of California provides certain practical warnings to practitioners in that court.[1] In the Rule 2016(b) Statement, debtor’s counsel stated that she agreed to accept a "no look" fee of $4,800 for legal services for filing a chapter 13 bankruptcy case. The Rights and Responsibilities Statement provided that the $4,800 fee was an initial fee that was anticipated to cover various listed services, and that debtor’s counsel could apply for additional fees to be paid through the plan unless otherwise ordered. Debtor's counsel subsequently filed an application for $3,412.50 for fees incurred in dealing with the unexpected claims that arose from the Internal Revenue Service and the state of California.
The chapter 13 trustee objected to the application on two grounds: (1) the legal fees were for services covered by the description in the Rights and Responsibilities Statement; and (2) an additional fee payment would threaten the debtor’s ability to fund the chapter 13 plan.
The court recognized that debtor’s counsel encountered unexplained and complex issues related to these claims, and in doing so took steps to value a lien on the debtor’s real property. The court also noted that a Rights and Responsibilities Statement provided for “risk”-sharing between debtor and his counsel when agreeing to a “no look” fee. The court observed that counsel should not undertake representation on a “no look” basis if he/she is concerned about the reasonableness of the fee.
While the court acknowledged the trustee’s concerns, it held that the Rights and Responsibilities Statement in effect in 2009 did not expressly limit the amount of legal fees that could be sought in the case. The court also found that the application met the standards under § 330 and noted that the trustee had not objected on this basis. The court also concluded that a failure to have a plan funded as expected, after allowing for supplemental fees, would not constitute legal grounds to disallow an application that met § 330.
The court observed that the outcome might have been different under the current form of the Rights and Responsibilities Statement adopted in August 2013. The current form restricts additional legal fees to those that are substantial and unforeseen. The court commented that holding chapter 13 counsel to a “no look” arrangement is fair because in some cases the fee will not be fully earned, while in other case the fee may be insufficient.
Another caution in unintended consequences appears in this decision. The court highlighted a colloquy with counsel during the hearing on the Application wherein counsel stated that legal fees would be paid by the debtor outside of the plan. The court found that counsel’s statement posed “great concern” since it demonstrated a “profound misunderstanding of the fee award process and the purpose of the discharge.” The court also noted that under § 1328(a) of the Bankruptcy Code, any payment of a discharged debt upon successful completion of a plan would be improper and a severe impact to the integrity of the bankruptcy process. The court ordered counsel to provide a copy of its memorandum decision to the debtor.
[1] See Memorandum Decision After Hearing on Application for Compensation by Attorney for Debtor - Supplemental, In re Kathleen Diane Robb, Case No. 09-42851 (Bankr. N.D. Cal. Jan. 6, 2014) [Docket No. 93].