Bankruptcy Court Overrules Chapter 12 Debtors’ Objection to Counsel Fees

In In re Cummings,[1] the chapter 12 debtors, who successfully confirmed their chapter 12 plan of reorganization, objected to their attorneys’ application for compensation and reimbursement of expenses. The bankruptcy court found that the nature of the services, the time spent and the rates charged by counsel were all reasonable in light of the circumstances of the case. Accordingly, the court granted the application for compensation.

The debtors proposed several plans that were vigorously disputed by major creditors and that required several court hearings. After a plan was confirmed, counsel filed an application seeking approval, and payment through the plan, of a total of $21,429. The amount consisted of $24,532.50 in fees and $1,482.22 in expenses, minus a courtesy discount of $4,585.72. Counsel attached a comprehensive affidavit detailing the description of services provided. The affidavit showed that counsel charged $170 per hour for attorney time and $75 per hour for paralegal time, and expended a total of 180.9 hours on the case. Counsel then filed a motion to withdraw, noting that the debtors had requested that it terminate its representation. The debtors responded to the motion and contested the application for compensation, arguing that counsel was not diligent and failed to communicate effectively with them; they also questioned the quality of his counseling and advice concerning the case. In addition, they contended that counsel’s fees should not exceed $7,000. The court held a hearing, after which it allowed counsel to withdraw. The court then considered the application for compensation.

The court began by looking to § 330(a)(4)(B) of the Bankruptcy Code, which provides:

In a chapter 12 ... case in which the debtor is an individual, the court may allow reasonable compensation to the debtor’s attorney for representing the interests of the debtor in connection with the bankruptcy case based on a consideration of the benefit and necessity of such services to the debtor and the other factors set forth in this section.

The section further provides that a court should consider other factors, including: (1) the nature, extent and value of the attorneys’ services; (2) the time spent; (3) the rates charged; (4) whether the services were necessary; and (5) whether the amount sought is reasonable compared to the facts of the case and in comparison to amounts charged by comparably skilled practitioners in nonbankruptcy cases.[2] Debtors’ attorneys may also receive reimbursement for actual, necessary expenses.[3] The court noted that a bankruptcy court has broad discretion in measuring the reasonableness of an estate professional’s compensation request.

Turning to the case before it, the court noted that the debtors’ efforts to reorganize under chapter 12 presented some serious challenges. Counsel labored to help the debtors confirm a plan that allowed them additional time to sell their land while staying creditors from collection and to successfully liquidate a portion of their land holdings. The court said it was “an extremely positive outcome” for the debtors.

The court also noted that the amount of time counsel spent confirming the plan was solidly within the range of reasonableness. Moreover, counsel’s hourly rates were extremely low. The court noted that other attorneys frequently charged over $300 per hour to represent chapter 12 debtors; it could not recall an attorney charging rates lower than those charged in this case. In sum, the court found that counsel’s compensation and expenses, totaling less than $25,000, were eminently reasonable and that the debtors’ complaints about their relationship with counsel did not justify reducing what was already a modest figure. Accordingly, the court granted the application.

The case provides a review of the standard courts use to review applications for professional compensation in chapter 12 cases. It also demonstrates that grievances that may serve as a basis for severing an attorney/client relationship do not necessarily justify reducing counsel’s fees, particularly when the fees are already low. Thus, even if a debtor is unhappy with counsel, it does not mean that a court will disallow counsel’s fees.