In a single-asset chapter 11 case where the debtor put the secured lender’s feet to the fire, Bankruptcy Judge Christopher G. Bradley of Austin granted practically all of the lender’s requested reimbursement of attorneys’ fees, even though the lender’s fees were almost twice as large as the debtor’s.
As Judge Bradley said in his January 3 opinion, the “Lender had to stay on its toes or risk losing its rights.” He added that “a considerable portion of these fees were prompted by the Debtor’s own actions” and that “the Lender’s timely and firm action had significant effects on its treatment in the case.”
Lesson learned: Don’t bust the chops of a fully secured lender who’s armed with a fee-shifting clause in the loan agreement.
The Two-Party Case
The chapter 11 debtor was the owner of single-asset real estate. Judge Bradley said that the case was “largely” a two-party dispute.
The lender was fully secured by value in the collateral, entitling the lender to recover its “reasonable” fees and costs under Section 506(b).
The loan agreement had two clauses shifting fees to the debtor-borrower. One required the borrower to pay all of the lender’s “reasonable expenses” in connection with the loan agreement, and the second called on the borrower to pay “all costs and expenses,” including attorneys’ fees, in “any action” to enforce the lender’s rights following default.
After the debtor confirmed a plan, the time came for fee allowances. Not including expenses, the debtor’s counsel sought some $36,000 for attorney’s fees, while the equivalent request by the lender was more than $62,000. Judge Bradley said that the “discrepancy would raise an eyebrow in most cases.” However, “the point is less striking in this case,” he said.
The debtor objected to allowance of the lender’s higher attorneys’ fees, but Judge Bradley explained that a “significant portion” of the lenders’ attorneys’ fees was “prompted by the debtor’s own actions.” For example, the debtor’s first plan proposed paying the lender at the lower contract rate, rather than the higher default. After objection by the lender, the plan paid the higher default rate.
Judge Bradley said that the lender shouldered the burden of showing that its fees were “reasonable” under the 12 Johnson factors required by the Fifth Circuit. Applying the factors, he said that the lender’s fees were both “reasonable and necessary” and that some of the lender’s fees “might not have been necessary” had the debtor taken “a more collaborative posture.”
The case was not one where the lender had taken positions to no avail. Judge Bradley said that the lender “was forced to take an active role, and there is no doubt that it did so very effectively.”
With regard to hourly rates, the debtor’s top charge was $485 an hour. For the lender, the highest hourly rate was $590. To determine the proper hourly rate, Judge Bradley surveyed the “community or marketplace” to decide what a lender would pay out of its own pocket.
Judge Bradley said that the lender had “credibly established that the rates charged were within the range of reasonableness for professionals in the Austin-San Antonio market for comparable levels of experience and skill,” even though they were “somewhat higher on the higher end of the local scale.”
Significantly, though, Judge Bradley said that he was “not certain that the analysis should be restricted to the Austin-San Antonio legal market alone.” However, the judge said he was “spared” from deciding whether “major-market big-firm rates” for more than double local rates “would have been compensable,” because the “rates at issue here are well within the range of reasonableness for a case like this one and under these circumstances, whether the relevant market is defined narrowly or more broadly.”
Looking at individual time entries, Judge Bradley decided that time spent on a lift-stay motion was permissible because it served a “valuable purpose,” even though the stay remained in place. Likewise, opposing approval of the disclosure statement “resulted in a substantial amendment to the Plan,” making the time charges “necessary and reasonable.”
The debtor objected to time spent by the lender attempting to enforce a guarantee given by the debtor’s principal. Judge Bradley allowed the time charges, because they fell within the loan agreement’s “fairly broad reimbursement of fees and expenses.”
The debtor also took issue with “interoffice conferences.” Judge Bradley said they “can be an ‘easy’ way for multiple attorneys to drive up their billable hours” and that “intraoffice conferences are prone to abuse.” On the other hand, he said that “intraoffice conferences are a vital tool” in “appropriate matters.”
Recognizing how law is practiced in firms where attorneys have differing levels of expertise, Judge Bradley said that interoffice conferences can be “an important part of a high-quality practice of law to discuss important matters over with colleagues.”
The lender did lose reimbursement for a few hours as a result of redactions taken in time records to cover work product. Judge Bradley said that “the best practice is to draft time entries in such a way as not to need redactions,” because it “is usually possible to describe tasks with enough detail to permit review of fees without revealing client confidences or attorney work product.” [Emphasis in original.]
Because the court and debtor’s counsel “had to spend time reviewing and objecting to the unnecessarily redacted time sheets,” Judge Bradley chopped down the fee award by about $2,700. He also cut the allowance by another $2,400, because the redactions had necessitated a second hearing on fees.
In a single-asset chapter 11 case where the debtor put the secured lender’s feet to the fire, Bankruptcy Judge Christopher G. Bradley of Austin granted practically all of the lender’s requested reimbursement of attorneys’ fees, even though the lender’s fees were almost twice as large as the debtor’s.
As Judge Bradley said in his January 3 opinion, the “Lender had to stay on its toes or risk losing its rights.” He added that “a considerable portion of these fees were prompted by the Debtor’s own actions” and that “the Lender’s timely and firm action had significant effects on its treatment in the case.”
Lesson learned: Don’t bust the chops of a fully secured lender who’s armed with a fee-shifting clause in the loan agreement.