A district judge in Denver upheld Bankruptcy Judge Michael E. Romero by ruling that failure to file a final fee application by the deadline properly resulted in denial of a tardy final fee application and disgorgement of interim fees already paid.
In his April 18 opinion, District Judge Lewis T. Babcock also held that denial of receipt of a notice in contravention of an affidavit of service does not create a disputed issue of fact precluding summary judgment in a bankruptcy case.
The lesson to be learned: Special counsel who are not bankruptcy lawyers are not excused from following the rules on fee allowances.
The Special Counsel’s Retention and Fees
In a chapter 11 case, Judge Romero entered orders with typical procedures on fee allowances: Retained counsel could be paid 75% of their fees every month by the debtor but were required to file periodic interim applications and an eventual final fee application.
Ten months after filing, the debtor obtained court approval to employ special counsel for involvement in a foreclosure proceeding in another state. The retention order had the usual provisions requiring court approval for payment of fees according to the previously established fee procedures.
One year after retention, special counsel filed an interim application for allowance of some $35,000 in fees. The court approved the interim fee application. It later turned out that the $35,000 was only the 25% that the firm had not been paid monthly.
After the interim allowance, the debtor filed a chapter 11 plan, which provided that professionals must file final fee applications not more than 60 days after the plan became effective. In bold letters, the plan also said that administrative claims not filed by the bar date would be disallowed.
A certificate of service said that the plan and related documents had been mailed to special counsel at the lawyers’ correct address.
The plan confirmation order said that all professional fees were subject to final allowance but did not specify a date for filing. The bankruptcy noticing center sent the confirmation order to special counsel.
Special counsel did not file a final fee application by the administrative bar date. Six months after confirmation and four months after the bar date, the debtor filed a motion for special counsel to disgorge fees it had been paid.
Special counsel objected to the disgorgement motion and filed a final fee application at the same time seeking some $150,000, including the $35,000 already paid. Special counsel also filed a motion to permit the tardy filing of the fee application. The lawyers claimed they had not received the plan documents with its deadlines for fee allowances.
On summary judgment, Bankruptcy Judge Romero denied special counsel’s motion to allow a late filing and directed the lawyers to disgorge the fees they had been paid monthly by the debtor. The lawyers appealed to Judge Babcock but lost.
The Presumption of Receipt
Principally, special counsel argued on appeal that denial of receipt of notice about the fee deadline raised disputed issues of fact that the bankruptcy court should not have resolved on summary judgment. Judge Babcock responded by laying out the so-called mailbox rule, where a properly addressed piece of mail is presumed to have been delivered.
Judge Babcock went on to say that rebutting the presumption in a bankruptcy case requires “more than mere denial of receipt.” There must be “objective evidence,” such as showing that other intended recipients did not receive the mailing or that mail was returned undelivered.
Judge Babcock saw “no question” that the presumption of receipt “was activated.” In addition, special counsel had no rebuttal evidence aside from the lawyers’ denial of receipt.
In a bankruptcy case, Judge Babcock cited authorities for the proposition that “mere denial [is] insufficient to rebut the presumption of receipt.” Consequently, the lawyers’ mere denial of receipt did not create a credibility issue or raise disputed material facts precluding summary judgment. Even assuming the denial was true, it was “simply insufficient” to rebut the presumption, Judge Babcock said.
Next, Judge Babcock considered the issue of excusable neglect to decide whether Judge Romero abused his discretion in ordering disgorgement.
Judge Babcock noted how special counsel had received final fee applications from other firms but failed to file a final application of their own. “On balance,” he said, “there was no excusable neglect sufficient to excuse the Firm’s untimely Final Fee Application.”
Absent a final fee application, Judge Babcock said there were no fees to award, and it was proper to order disgorgement.
Affirming Judge Romero, Judge Babcock summed up his holdings as follows:
The [special counsel] knew, or should have known, of the requirement to file a final fee application. Even if it was unaware of the Bar Date deadline, it was inexcusable for [special counsel] to not follow up. I agree with the Bankruptcy Court that rules and deadlines are meant to be followed. The Firm’s failure to read the documents and its lack of diligence in informing itself of the relevant rules, requirements, and deadlines, and instead relying on other professionals, was, as the Bankruptcy Court noted, inexcusable and done at its own peril.
A district judge in Denver upheld Bankruptcy Judge Michael E. Romero by ruling that failure to file a final fee application by the deadline properly resulted in denial of a tardy final fee application and disgorgement of interim fees already paid.
In his April 18 opinion, District Judge Lewis T. Babcock also held that denial of receipt of a notice in contravention of an affidavit of service does not create a disputed issue of fact precluding summary judgment in a bankruptcy case.
The lesson to be learned: Special counsel who are not bankruptcy lawyers are not excused from following the rules on fee allowances.