Attaching a fee sharing agreement to a retention application is insufficient, according to Bankruptcy Judge Barbara J. Houser of Dallas, who ruled that the terms of a fee sharing arrangement must be “expressly disclosed in the body” of an employment application.
A chapter 13 debtor’s bankruptcy counsel hired a law firm to serve as special counsel in the prosecution of a lawsuit against a lender. The two firms had a fee sharing agreement where bankruptcy counsel would receive the greater of 25% of special counsel’s allowed fees or bankruptcy counsel’s time charges.
Judge Houser had approved special counsel’s retention. The propriety of the fee sharing agreement did not come into focus until special counsel filed a fee application following successful prosecution of the suit against the lender.
Although the fee sharing agreement had been attached as an exhibit to the employment application, Judge Houser said in her June 9 opinion that fee sharing was only “cryptically referenced” in the application itself. Despite concluding that counsel had not “intentionally misled” the court, she said that disclosure was “less than complete,” given disclosure requirements in Section 329(a) and Bankruptcy Rules 2014(a) and 2016(b).
Judge Houser said that inadequate disclosure “is grounds for this court to reduce (or even deny in full) its fees.” Although she decided that “a monetary sanction of some sort should be imposed,” Judge Houser let special counsel off the hook by reducing that firm’s fees by only 25%, the amount the firm had agreed to share in violation of the fee sharing prohibition in Section 504.
Section 504(a) bars the sharing of fees with someone else, apart from exceptions in Section 504(b) and (c) that were not applicable in this case. Special counsel contended that Section 504 was inapplicable because the settlement agreement with the lender required the lender to pay the court-approved attorneys’ fees.
Even though the bank would pay the fees, Judge Houser concluded that Section 504 was nonetheless applicable, since courts “have long recognized that fee sharing between attorneys in bankruptcy cases violates public policy.” Otherwise, she said, lawyers could evade Section 504 by having fees paid by third parties.
Judge Houser cancelled the fee sharing agreement, finding that it was prohibited by Section 504(a). She therefore precluded bankruptcy counsel from sharing any of the fees allowed to special counsel.