The Fifth Circuit’s Riley Opinion: Requesting Reimbursement of Advanced Fees Under a No-Look Rule

A debtor’s attorney may be compensated or reimbursed from the estate if his fees or costs constitute an administrative expense under § 503(a). Fees and costs in a chapter 13 generally constitute an administrative expense if they are either necessary expenses to preserve the estate or are “reasonable compensation.”[1] Debtor’s attorneys can file a detailed application to show the services rendered and expenses advanced. The bankruptcy court reviews the fee application to grant priority to the compensation deemed reasonable. Most bankruptcy courts also have a local “no-look” rule, by which fees and costs, if under a dollar threshold, are presumed reasonable and thus payable as an administrative expense under §§ 503(b)(2) and 330(a). No-look rules ease the administrative burdens related to the approval of payment for routine fees and costs, and eliminate the need to prepare and review a detailed fee statement.

Recently, in In the Matter of Riley,[2] the Fifth Circuit considered whether pre-filing costs for certain fees advanced by a chapter 13 debtor’s attorney could be reimbursed under the no-look rule of the Western District of Louisiana. Before its revision, that district’s no-look rule had included a provision that did not allow for reimbursement of pre-petition expense advancements beyond the threshold. But in February 2017, the rule was amended to remove that provision. Under the amended rule, the attorney in Riley agreed to represent the debtor for no money down, and the debtor agreed, pre-petition, to pay from the estate $2,150 for legal services and $367 in costs for fees advanced by the attorney for the case filing, credit counseling and credit report. The attorney then sought, as part of his no-look application, reimbursement for these advanced fees, separate from and in addition to the no-look threshold. The Riley bankruptcy court held that the fees were not separately reimbursable under its no-look rule, but that “[i]f the debtor’s attorney seeks any amount over the no-look fee, the current standing order requires a formal fee application setting forth both compensation and expenses requested.”[3] The court also held that, even if the reimbursement request had been made under a formal fee application, it would not have been reimbursable under § 330(a). The district court affirmed.

The Fifth Circuit addressed three issues. First, it concluded that the bankruptcy court’s interpretation of its local rule was correct. The rule’s silence on pre-petition expenses, regardless of prior versions, did not invite reimbursement of these expenses separately and in addition to the threshold. The Fifth Circuit observed: “The no-look fee option is ... designed to quickly identify a level of debtor’s counsel compensation that is presumptively reasonable and easy to administer. Given that purpose, it seems intuitive that silence on a given expense (particularly a routine expense) means that expense is supposed to be accounted for under the pre-approved no-look fee amount.”[4]

Second, the Fifth Circuit considered whether the fees advanced by the attorney were reimbursable as an administrative expense for “actual, necessary costs and expenses of preserving the estate” under § 503(b)(1). It used the two-prong test for determining whether a cost or expense is an “administrative expense”: (1) such expense must arise from a post-petition transaction with the estate, not a personal transaction with the debtor; and (2) the goods or services received in exchange for the debt must directly benefit the estate. The Fifth Circuit ruled that a filing fee is not a post-petition transaction, even when paid in installments throughout the case. The credit-counseling fee and credit report also were not post-petition, as required by the test. As to the second prong, the Circuit ruled that none of the fees benefitted the estate.

But the Fifth Circuit reversed the bankruptcy court’s holding that it lacked the discretion to ever award a reimbursement under § 330(a) for fee advancements. It cited § 330(a)(4)(B), which provides that “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.” Although the Fifth Circuit dismissed the argument that § 330(a)(4)(B) compels the conclusion that counsel is entitled to an award of such fees, it also held that the statute does not prohibit such an award. The court also rejected In re Marotta,[5] which held that “compensation” can never include “reimbursement.”

The Fifth Circuit identified a textual distinction between §§ 503(b)(1) and 330(a)(4)(B), observing that while “[§] 503(b)(1) is limited to ‘expenses of preserving the estate[,]’ ... [§] 330(a)(4)(B) says courts may allow compensation ‘for representing the interest of the debt in connection with the bankruptcy case[.]’”[6] It held that the Riley fees “are, by any ordinary understanding of the words, ‘interests of the debtors in connection with a bankruptcy case,’”[7] and that approving reimbursement is within the discretion of the court under § 330(a).          

Riley reiterates the purpose of a no-look rule: to simplify the approval of routine fee applications. Fee requests that are separate from and in addition to the threshold likely are not properly made in a no-look application. No-look means just that: no looking required. If the application requires the court to look beyond whether the threshold is exceeded, the purpose of the rule is undermined. But Riley also illuminates a possible path for reimbursement of advanced fees under § 330(a)(4)(B). However, the Fifth Circuit did not suggest that bankruptcy courts should exercise discretion under § 330(a)(4)(B) to authorize the reimbursement of these pre-petition advances — and other case law suggests that obtaining approval of an ordinary fee request that exceeds the no-look threshold may be a difficult hill to climb. As the Ninth Circuit explained in In re Eliapo:

We emphasize that the no-look guidelines establish only presumptive fees. If a Chapter 13 practitioner does not wish to apply for fees under the no-look guidelines, he or she is free not to do so and to submit instead a detailed fee application using the lodestar method. Or, if the practitioner has already submitted a no-look application and received presumptive fees, he or she is free to seek additional fees using the lodestar method if the presumptive fees have not provided fair compensation for the time spent on the case. Of course, a practitioner who chooses the latter approach must accept the possibility that the bankruptcy court may take a fresh look at his entire fee application, not just that portion of the application relating to “additional” fees.[8]

Attorneys may be well-served to play their cards conservatively with no-look rules. If an attorney’s business model offers fee advancements to facilitate no-money-down cases, the attorney should be aware of how reimbursements for fee advancements are treated under the local rules, and be prepared to file (and defend) a formal fee application. Riley may be a call to districts to consider this issue within their own local rules. With the growing market for no-money-down cases, the issue of how these fees may (or may not) be requested is not going away.