Bankruptcy Judge Gregory L. Taddonio has a way with words. “Sometimes,” he said, “even the most settled legal principles need to be repeated.” For example, “strict rules” exist “governing the engagement and compensation of all professionals who represent a debtor, regardless of whether they know their client is a debtor or ever set foot in the bankruptcy court.”
Lawyers in the chapter 13 case waited two years before filing an application to represent the debtor in filing a class action claim. Judge Taddonio barred the lawyers from receiving their cut when the debtor’s claim was allowed in the class action.
The debtor filed a chapter 13 petition in late 2018 and confirmed a 60-month plan. A year later, the debtor learned that she might have a personal injury claim arising from an implanted medical device. The debtor hired a lawyer and signed a retention agreement short of two years after filing. The lawyers filed a claim in the class action.
Although not mentioned in Judge Taddonio’s November 15 opinion, the lawyers settled the claim for $40,000. After paying the lawyer’s 40% contingency fee plus costs and expenses, the debtor would have received almost $20,000, an amount less than the exemption under Section 522(d)(11)(D). In other words, there would be nothing for creditors if the P.I. lawyers’ contingency fee were allowed.
Alongside the chapter 13 trustee’s motion for approval of the settlement of the P.I. claim, the debtor’s P.I. lawyers filed an application for retroactive approval of their retention. The retention application came two years after the lawyers had signed up the debtor as a client.
The chapter 13 trustee opposed retroactive retention to the extent it would prejudice unsecured creditors by depriving them of settlement proceeds in excess of the debtor’s exemption.
Regarding the P.I. lawyers’ tardy retention application, Judge Taddonio said, “Although there is no express requirement that retention be approved by the court before the services are rendered, courts generally read this requirement into the statute.” Not only that, he said that the “penalty for noncompliance is severe,” because a professional runs the risk of “losing compensation.”
On the other hand, Judge Taddonio said that bankruptcy courts have a reservoir of equity to grant retroactive approval of retention to “avoid inequitable consequences.” In the Third Circuit, the professional must show that the professionals were eligible for retention and that “the particular circumstances presented are so extraordinary as to warrant retroactive approval.”
On the facts, the lawyers’ retention application contained “some problematic inconsistencies,” Judge Taddonio said. Although the lawyers said they did not know the client was in chapter 13, the P.I. counsel admitted that the debtor had filled out an intake form indicating that she was in bankruptcy. Judge Taddonio deduced that the lawyers had “actual notice” about the client’s bankruptcy but “decided to proceed without further protective action.”
Regarding prudent rules for lawyers to follow when signing up a new client, Judge Taddonio said that “a PACER search should be part of every counsel’s basic due diligence when taking on a new client.”
Applying the facts to the law, Judge Taddonio said, “Poor judgment is not an extraordinary circumstance that would warrant retroactive relief, especially when the current predicament could have been so easily avoided.”
Judge Taddonio said it was “also worth” noting that granting two years of retroactive compensation “would prejudice general unsecured creditors” because the entire settlement of $40,000 would not be exempted were the contingency fee disallowed.
On the bottom line, Judge Taddonio declined to approve retention retroactively. Instead, he approved retention as of early August 2022, when counsel filed the belated application. From the record, it appears as though P.I. counsel will be entitled to compensation for time spent after settlement of the claim. Unsecured creditors evidently will share proceeds from the claim in excess of the debtor’s exemption.
Bankruptcy Judge Gregory L. Taddonio has a way with words. “Sometimes,” he said, “even the most settled legal principles need to be repeated.” For example, “strict rules” exist “governing the engagement and compensation of all professionals who represent a debtor, regardless of whether they know their client is a debtor or ever set foot in the bankruptcy court.”
Lawyers in the chapter 13 case waited two years before filing an application to represent the debtor in filing a class action claim. Judge Taddonio barred the lawyers from receiving their cut when the debtor’s claim was allowed in the class action.
The debtor filed a chapter 13 petition in late 2018 and confirmed a 60-month plan. A year later, the debtor learned that she might have a personal injury claim arising from an implanted medical device. The debtor hired a lawyer and signed a retention agreement short of two years after filing. The lawyers filed a claim in the class action.
Although not mentioned in Judge Taddonio’s November 15 opinion, the lawyers settled the claim for $40,000. After paying the lawyer’s 40% contingency fee plus costs and expenses, the debtor would have received almost $20,000, an amount less than the exemption under Section 522(d)(11)(D). In other words, there would be nothing for creditors if the P.I. lawyers’ contingency fee were allowed.