In this column on January 12, we recounted how Bankruptcy Judge Christopher G. Bradley of Austin granted practically all of a lender’s requested reimbursement of attorneys’ fees in a chapter 11 case, even though the lender’s fees were almost twice as large as the debtor’s.
From Judge Bradley’s teachings, we deduced the following rule: Don’t bust the chops of a fully secured lender who’s armed with a fee-shifting clause in the loan agreement. But as we said in this space on February 2, “For every rule, there’s an exception.”
For an exception to the rule, read a January 5 opinion by Chief Bankruptcy Judge Kimberley H. Tyson of Denver. In a chapter 12 case, she disallowed almost 60% of the fees sought by the attorneys for a fully secured lender, representing a cut of some $92,500.
The Debtor and the Lender’s Fees
The chapter 12 debtors owned a 4,300-acre farm in Colorado. Owed $3.7 million, a bank had a lien on all real and personal property. The debtor valued the land and equipment at about $7 million, meaning that the bank was fully and comfortably secured. From the outset, the debtor pursued a plan to pay the bank and everyone else in full from a sale of assets.
As a fully secured creditor, the bank was entitled to the recovery of attorneys’ fees under Section 506(b) and fee-shifting provisions in the loan agreements. The plan said that the bank would be paid whatever fees and costs the court allowed. When the case was over, the bank filed a motion seeking reimbursement for about $158,000 in attorneys’ fees.
Before analyzing the attorneys’ time records line by line, Judge Tyson discussed “a topic common across many of the categories: billing judgment and client oversight.” She said that neither the “loan documents nor applicable law provides ‘a blank check for over-secured creditors to incur any amount of legal fees and have them paid by the debtor.’” [Citations omitted.]
In the case before her, Judge Tyson found “little evidence of billing judgment exercised by the Law Firm.” She recounted how the firm “used two partner-level attorneys to appear at hearings in which there was no real dispute, and neither attorney’s time was discounted to avoid duplication.” She also said that the firm “aggressively pursued matters that had a low likelihood of success and did not discount the fees incurred to reflect the ultimate lack of success and lack of benefit to either the bankruptcy estate or the Bank.”
Regarding client oversight, Judge Tyson said that the bank “exercised no judgment when deciding whether to approve the Law Firm’s work and payment of the Law Firm’s fees . . . . The Bank is not free to abandon that review when it is passing along the costs to its customers.”
Unnecessary Work
After establishing ground rules, Judge Tyson examined the buckets of time that made up the fee request. For a category of work before the chapter 12 filing, she found the firm’s time records to be “lumped” or “blocked” and reduced the allowance by 82%, giving the firm less than $1,000.
Before filing, the firm spent 30.5 hours initiating a foreclosure action. Judge Tyson said the time was “excessive” and reduced the request by 70%.
For general bankruptcy matters, the firm wanted $55,500 for 120 hours of work. Judge Tyson described the firm as “scrutinizing every pleading and every document in an attempt to ferret out inaccuracies or other grounds to criticize or condemn Debtors.” For instance, she said that analyzing the debtors’ tax returns “did not benefit the Bank, which was at all times an over-secured creditor, with the Debtors in the process of selling parcels of land to pay the Bank in full.”
“Additionally,” Judge Tyson could not “find the services of a second partner reviewing pleadings to have been reasonable when one partner, who is thoroughly familiar with the case, [was] already reading every pleading and paper filed or exchanged.”
For general bankruptcy matters, Judge Tyson cut the fees by 50%, allowing about $27,400.
Every time the debtors sought the use of cash collateral, the bank objected, necessitating the court to hold contested hearings. In one regard, Judge Tyson found the bank’s objection to be “mystifying.” She said that the firm’s “pursuit of objections before reaching stipulations did not protect the Bank’s collateral; their only effect was to increase fees of the Bank’s counsel and Debtors’ counsel in responding to the objections.”
Regarding cash collateral, Judge Tyson cut the request by 75%, allowing about $3,000.
The bank objected to the debtor’s exemptions. Judge Tyson said the objections were “without merit” and disallowed the entire $1,300 request.
Although fully secured, the bank filed a motion for stay relief. Judge Tyson said that the “motion was not well supported in law . . . . The motion did not help the Bank protect its collateral. Its only effect was to increase fees of the Bank’s counsel and Debtors’ counsel in responding to the motion.” She allowed nothing for the stay motion.
Likewise, Judge Tyson allowed nothing for time spent objecting to the debtor’s motions to sell property. Again, she said, “The objections did not help the Bank protect its collateral. Their only effect was to increase fees of the Bank’s counsel and Debtors’ counsel in responding to the objections.”
Judge Tyson said there was a mistake in calculating the amount owed when preparing the bank’s proof of claim. When the debtor objected, the bank opposed. Judge Tyson eliminated the entire $4,000 request for responding to the objection and correcting the claim.
The bank objected to every iteration of the debtor’s plan. Judge Tyson said that the objections “needlessly complicated and delayed confirmation of Debtors’ Chapter 12 plan.” To the extent there were valid objections, she said that the bank should have negotiated instead of filing objections. In connection with confirmation, she reduced the allowance by 75%, allowing about $6,700.
In total, the firm was given an award of some $65,000, compared to a request for almost $158,000.
In this column on January 12, we recounted how Bankruptcy Judge Christopher G. Bradley of Austin granted practically all of a lender’s requested reimbursement of attorneys’ fees in a chapter 11 case, even though the lender’s fees were almost twice as large as the debtor’s.
From Judge Bradley’s teachings, we deduced the following rule: Don’t bust the chops of a fully secured lender who’s armed with a fee-shifting clause in the loan agreement. But as we said in this space on February 2, “For every rule, there’s an exception.”
For an exception to the rule, read a January 5 opinion by Chief Bankruptcy Judge Kimberley H. Tyson of Denver. In a chapter 12 case, she disallowed almost 60% of the fees sought by the attorneys for a fully secured lender, representing a cut of some $92,500.