In In re Halloum,[1] the Ninth Circuit Bankruptcy Appellate Panel reversed an order granting a fee expense award in excess of $116,000 based on the failure of the bankruptcy court to make supporting findings of fact. While the decision lends little support to the debtor’s claim that counsel agreed to handle the entire case for a flat fee of $40,000, the BAP held that the total absence of findings by the bankruptcy court left it with no basis for evaluating whether the court abused its discretion in making the award, and remanded for required findings.
Background
Pre-petition, Halloum incurred checking account overdrafts to the predecessor of Midwest Bank N.A., and defaulted on secured loans. After almost a year of promises to remedy overdrafts, the bank gave Halloum 10 days to move his accounts and advised that no further overdrafts would be approved after the deadline. “During this ten-day cautionary period, debtor took advantage of Bank’s accommodation to boost the overdrafts from approximately $190,000 to $297,372.49.”[2] On the eve of the foreclosure sale resulting from his default on the real property secured loans, Halloum filed for bankruptcy.
The debtor’s bankruptcy counsel, McCormick, Barstow, Sheppard, Wayte & Carruth LLP (the “law firm”), filed an application for employment that was granted pursuant to an order that provided that “[c]ompensation will be the ‘lodestar rate’ at the time that services are rendered.”[3] Five interim fee applications were filed and approved, each reflecting billings at an hourly rate and each accompanied by the debtor’s declaration that he had reviewed the application and approved the fees and expenses. Thereafter, the debtor refused to approve further applications, claiming that the law firm had agreed to represent him in the chapter 11 case for a flat fee of $40,000. The debtor pointed to the initial Disclosure of Compensation of Attorney for Debtor, which stated:
For legal services, I have agreed to accept $38,954.
Prior to the filing of this statement I have received $38,954.
…
I have agreed to render legal service for all aspects of the bankruptcy case, including: representation of the debtor in adversary proceedings and other contested bankruptcy matters.[4]
A trustee was appointed, and ultimately the case was converted to a chapter 7. Prior to conversion, the trustee made several statements supporting the payment of fees to the law firm, including that counsel “has done an extraordinary job of representing the Debtor in this case….”
The Application
The law firm filed a final fee application seeking an award of fees in the amount of $114,004.50 and expenses of $2,892.56. The debtor opposed, arguing that the law firm agreed to a flat fee of $40,000; that under California law, the law firm was required to have a written contract if the total fee is over $1,000; and that the law firm had caused the conversion of the case and the loss of the debtor’s business. The debtor requested that the court hold an evidentiary hearing on his counterclaim for recoupment of fees.
In response, the law firm asserted that the debtor had no standing to oppose the motion or pursue disgorgement, asserting that such rights vested wholly in the trustee. The law firm denied any flat fee arrangement and pointed out that the debtor had signed multiple declarations approving the hourly rate fees that were well in excess of $40,000. Finally, the law firm argued that even if California law required a written contract, the firm was entitled to an award of fees on a quantum meruit basis.[5]
The debtor claimed that the hourly rate billing began approximately three months after the filing and asserted that when he protested, the firm threatened to withdraw. The “Debtor maintained that he ‘had no choice’ but to pay [the law firm] to avoid losing his business.”
The bankruptcy court heard and granted the application, but neither the transcript nor the order reflected any findings or conclusions upon which the decision was based, other than the notation in the order that the amount requested was appropriate.
The Decision
The BAP noted that the award would be reviewed under an abuse-of-discretion standard, which requires reversal when the bankruptcy court “fails to identify and apply ‘the correct legal rule to the relief requested’ … or if its application of the correct standard was ‘(1) illogical, (2) implausible, or (3) without support in inferences that may be drawn from the facts in the record.’”[6]
Fed. R. Bankr. P. 9014(c), incorporating Fed. R. Civ. P. 52, mandates that in a contested matter, the bankruptcy court is required to make findings of fact, either orally on the record or in a written decision.[7] The findings must give the appellate court a clear understanding of the basis for the decision, and disclose the grounds upon which the decision was reached. The debtor’s allegations “raised a factual question which the bankruptcy court would resolve presumably by weighing the conflicting evidence and making credibility determinations.”[8] The BAP complained that at the hearing, “the bankruptcy court did not articulate any findings or conclusions on the record regarding the alleged agreement, nor did it say that it was awarding the fees under § 330 or some other theory such as quantum meruit.”[9] It added that “the order on appeal provides no inkling of how the bankruptcy court resolved the factual dispute regarding the flat fee agreement or why it determined that the fees requested were reasonable.”[10] Under these circumstances, the BAP had “no basis for evaluating whether the bankruptcy court abused its discretion in awarding [the law firm] the full amount requested in its final fee application.”[11]
Takeaway
It is common to shortcut the requirements of entry of separate findings and conclusions, or at least a recitation of such findings and conclusions on the record by the bankruptcy court. In this case, the shortcut led to the extensive expense of an appeal, which the law firm lost. The fees for defending the award are not themselves compensable under the recent decision in Baker Botts LLP v. ASARCO LLC.[12] Thus, even a victory on remand will leave the law firm with significant fees for which there will be no compensation.
[1] 2015 WL 2386554 (May 19, 2015) (unpublished decision).
[2] Id. at *3.
[3] Id. at *4.
[4] Id. at *3.
[5] See West’s Ann. Cal. Bus. & Prof. Code § 6148, which sets forth the requirements of written contracts when it is reasonably foreseeable that attorney’s fees and expenses will exceed $1,000, but provides that upon failure to comply, the client has the option of voiding the agreement and paying a reasonable fee).
[6] Id. at *9, quoting United States v. Hinkson, 585 F.2d 1247, 1262-63 (9th Cir. 2009).
[7] See Fed. R. Civ. P. 52(a)(1), requiring that “the court must find the facts specially and state its conclusions of law separately.”
[8] Halloum, 2015 WL 2386554 *10.
[9] Id. at *11.
[10] Id.
[11] Id. The BAP failed to address the debtor’s standing with respect to the disgorgement request.
[12] __ U.S. ___, 135 S.Ct. 2158 (2015).