Recently, in In re Dynamic Drywall,[1] the U.S. Bankruptcy Court for the District of Kansas denied an attorney’s application for quantum meruit hourly compensation, stating that when an agreement for employment based on a contingency fee is approved by the court, that agreement can only be altered in very unusual circumstances. An attorney who was employed to work on two separate matters for the same client filed an application to receive quantum meruit hourly compensation for work done on one of the matters. The attorney, who had a contingency agreement approved by the court, claimed he was terminated and thus thwarted from securing a recovery for his client that he would have shared. The court found that the client had not terminated the attorney and that under 11 U.S.C. § 328, because the attorney’s employment was approved as a contingency fee arrangement, the engagement could not be changed to a quantum meruit hourly fee arrangement.[2]
Facts
Debtors employed an attorney as special counsel to pursue a variety of construction-related actions on behalf of a bankruptcy estate. The attorney was to be paid an hourly rate for almost all of the work. The debtor separately employed the attorney to pursue a breach of contract claim against a construction company and their insurer. In connection with the latter engagement, the debtor filed an application for approval of counsel’s employment. The motion described a 40% contingent fee, with the attorney receiving 40% of any recovery on the claims described by the scope of representation of the Attorney-Client Agreement. The court approved the employment.[3]
When the debtor fired its lead bankruptcy counsel, the aforementioned special counsel, believing he too was being fired, attempted to negotiate a revised contingency fee agreement. This proposed new agreement contained an additional provision assuring that counsel would recover a quantum meruit hourly fee compensation if certain events transpired. The debtor refused to agree to the new terms, and the attorney moved to withdraw.[4]
The attorney then filed an application to recover the value of his time and expenses up to the withdrawal date as an administrative expense on the basis that he was thwarted from successfully pursuing a meritorious claim for the debtor.[5]
Discussion
The court explained that an attorney who is working for a stipulated fee and is discharged can claim the value of his services as quantum meruit. However, when the fee has been approved by the bankruptcy court under 11 U.S.C. § 328, it can only be altered if it proves improvident in light of a development incapable of being anticipated at the time the agreement was approved.[6] The attorney argued since he was terminated, he was denied the chance at securing any recovery. The court disagreed, finding that being terminated as counsel is a development that should be anticipated by any contingent fee lawyer.[7]
The attorney stated that the fired lead counsel from the bankruptcy case had informed him that they had both been fired from that case. The attorney had asked the debtor if he had been fired along with the lead counsel, but the debtor did not give a clear answer. Therefore, the attorney argued that he believed that he had been fired from that case, and that gave him the need to restructure his contingency fee agreement.[8] However, in later interactions, the attorney learned he had never been fired and that his attempt at restructuring the contingency fee was denied by the debtor.[9]
The court concluded that the debtor never terminated the attorney, and because the attorney’s employment was approved as a contingency fee arrangement, it could only be changed if it proved “improvident” in light of developments incapable of being anticipated at the time it was approved. Even though the court found that the attorney had not been fired, the court stated that being terminated should be anticipated by any contingent fee lawyer, and is thus not a reason to alter a fee agreement that has been approved by the court.[10]
Conclusion
Since the court found that there was no basis for varying the terms of the contingency fee agreement under 11 U.S.C. § 328, the attorney’s application for quantum meruit compensation on the breach of contract matter was denied. However, because the original agreement provided for the attorney to be reimbursed for expenses, former counsel was allowed to recover $2,400 for storing 41 boxes of documents in his home office. Further, the court also allowed former counsel to be compensated for work done on the original bankruptcy case for which it was agreed he would be paid hourly.[11]
[1] In re Dynamic Drywall, Inc., Case No. 14-11131 (Bankr. KS Nov. 2, 2016) (hereafter “Dynamic Drywall”).
[2] Id. at 3.
[3] Id. at 2.
[4] Id. at 3.
[5] Id. at 11.
[6] Id. at 1, 11.
[7] Id. at 9-11; see e.g., ASARCO, L.L.C. v. Barclays Capital, Inc. (In re ASARCO, L.L.C.), 702 F.3d 250 (5th Cir. 2012) (reversing bankruptcy court’s enhancement of contingent fee for financial advisor because the advisor provided significantly more extensive services than expected; this was insufficient to satisfy the improvidence exception under § 328); In re Reimers, 972 F.2d 1127 (9th Cir. 1992) (special counsel’s preapproved 40% contingent fee under § 328 to pursue state law fraud claim for bankruptcy estate could not be reviewed for reasonableness under § 330; bankruptcy court erred in reducing fee after examination of special counsel’s time records.).
[8] Dynamic Drywall at 9-11.
[9] Id. at 10.
[10] Id. at 16; In re Yablon, 136 B.R. 88 (Bankr. S.D.N.Y. 1992) (Special counsel for chapter 11 debtor employed to pursue RICO action against accountants under a contingent fee agreement sought quantum meruit payment for services rendered to date; noting that “[c]ourts have rarely altered the terms and conditions of a professional’s employment” on the grounds of improvidence.).
[11] In re Dynamic Drywall at 17.