Court Orders Disgorgement of Counsel Fees as Unreasonable

In a recent ruling by the U.S. Bankruptcy Court for the Eastern District of New York, the court ordered the disgorgement of fees paid to the debtors’ counsel, finding that while “no counsel can guarantee success of a case when it is undertaken … the fee allowed must be reasonable for the services actually rendered as they were rendered”.[1] The debtors in Bennett filed chapter 13 petitions in 2016 represented by a partner at the law firm of Tirelli & Wallshein (the debtors’ counsel). The debtors’ counsel disclosed that its “usual rate” for such work was $6,500 and that it had received $5,500 prior to the petition date (contrary to the debtors’ Statement of Financial Affairs, which reflected a $4,000 pre-petition payment to debtors’ counsel).

Over the course of the next several months, the debtors, through their counsel, appeared at numerous hearings, proposed amended chapter 13 plans and fielded objections by creditors and/or the chapter 13 trustee concerning, among other things, the confirmability of their proposed plans and/or their compliance with various extant document requests by and payment and reporting obligations to the chapter 13 trustee. The various hearings were, at times, attended by different attorneys at the debtors’ counsel’s firm, who were at times not entirely knowledgeable about the debtors’ case or whether the debtors were in compliance with payment obligations to or document requests by the chapter 13 trustee. After the debtors expressed dissatisfaction with their counsel, the court issued an order to show cause, directing the debtors’ counsel to file a detailed billing statement of its fees in the case and explain to the court why its fees were reasonable under the circumstances.

Examining the fees for reasonableness under 11 U.S.C. §§ 329 and 330, Fed. R. Bankr. P. 2016(b) and applicable local rules, the court found the amounts paid to debtors’ counsel to be unreasonable and, citing its authority under Fed. R. Bankr. P. 2017, ordered a portion of them to be disgorged. In so ruling, the court found that “an attorney’s billing practice is not limited to writing down how much time was spent on each given task; ‘when the issues are not complex and the process is straightforward, an attorney is expected to exercise ‘billing judgment,’ and is encouraged to reduce its customary fees in appropriate circumstances to reflect a less substantial expenditure of the attorney’s time.’”[2]

The court found that “three primary problems” created issues with the reasonableness of debtors’ counsel’s fees: (1) sending an attorney not familiar with the debtors’ cases to a hearing; (2) lawyers spending excessive time on accounting matters; and (3) debtors’ counsel filing income and expense schedules that did not match their understanding of the debtors’ actual income and expenses. The court took particular issue with lawyers spending excessive amounts of time on accounting tasks. The primary issue in the debtors’ cases was not their ability to fund a chapter 13 plan (they had sufficient income to do so) but rather their repeated preparation and revision of inconsistent income and expense schedules. The court found that these tasks would more appropriately and efficiently have been done by an accountant and fell outside the scope of debtors’ counsel’s retention. Furthermore, even if debtors’ counsel’s engagement letter contemplated such services, they failed to demonstrate that the hourly rate of $500 was reasonable.

The court additionally expressed concern with debtors’ counsel’s fee structure. The debtors’ engagement letter with debtors’ counsel entitled it to a “base rate” of $6,500 for matters specifically outlined in the engagement letter, then listed extensive “non-base” matters such as “defending motions for relief from stay, defense of motions to dismiss post confirmation, objections to claims, and ‘all motion practices[]’” that would be billed hourly at the rate of $500 per hour.[3] While this fee structure did not technically violate applicable local rules, the court found the $6,500 fee for “base services” in a case uncomplicated from the beginning to be “on the high end of rates,” and because the debtors’ cases largely turned on the need for accounting services not of a legal nature, the “non-base” fee of $500 per hour was found to be unreasonable.

Ultimately, based on the totality of the circumstances, the court awarded debtors’ counsel $4,000 as a “reasonable fee” and ordered disgorgement of the $1,500 balance paid by the debtors, finding that disgorgement is not just a remedy limited to an attorney’s willful misconduct, but “‘may be proper even though the failure … resulted … from negligence or inadvertence.’”[4]