StJohns

Hedging Anticipated Contingency Fees is Deemed Impermissible Fee Sharing

By: David Bloom

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

Although a “hedging” arrangement between attorneys retained by a Chapter 7 Trustee and a lender did not appear to offend policy considerations underlying 11 U.S.C. §504, such an agreement could not be approved as a means to obtain downside protection against risks associated with an appeal.  In the case of In re Winstar Communications, Inc.,

[1]

the Trustee’s special litigation counsel and a consultant sought permission to assign part of their anticipated contingency fees to their lender.

[2]

  Under the proposed agreement, the lender agreed to pay an undisclosed fixed price to Trustee’s counsel and consultant.

[3]

  In exchange, the lender would receive the actual amount of contingency fees awarded, up to $10,000,000.00.

[4]

  If the contingency fees were to exceed $10,000,000.00, the counsel and consultant would share the fees in excess of that amount.

[5]

  Moreover, the lender agreed to waive any right to object to the Trustee’s settlement or other disposition of the adversary proceeding.

[6]

  The Court concluded that this arrangement constituted impermissible “sharing” of fees within the meaning of §504, and denied the motion to approve the transaction.

[7]

Deciding When Trustee May Waive Individual Debtors Attorney-Client Privilege

By: Rebecca Leaf

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

Adopting a middle ground approach, the Florida bankruptcy court in In re Courtney,

[1]

held that a trustee could waive an individual debtor’s attorney-client privilege based on balancing of benefits and harms.

[2]

   The court rejected the view that had been adopted in an earlier Florida bankruptcy case, that the debtor’s attorney-client privilege automatically passes, as a matter of law, from debtor to trustee in a chapter 7 bankruptcy proceeding.

[3]

  In this case, the trustee wanted the power to waive the debtor's privilege and direct the law firm representing the debtor to turn over all files that it kept in connection with its representation of the debtor in a wrongful death action brought against the debtor.

[4]

  In allowing the records to be turned over to the trustee, the court weighed the harm to the debtor against the benefits to the bankruptcy estate; rather than applying a blanket rule that all attorney client-privileged materials pass from debtor to trustee.

[5]

The Limits of Unbundling Legal Services

By: Heather Navo
St. John’s Law Student
American Bankruptcy Institute Law Review Staff

Although the Ninth Circuit barely addresses the unbundling of consumer bankruptcy services in Hale v. U.S. Trustee,[1] one of the first appellate cases on the point,[2] the court appears to require that an attorney provide, at a minimum, those services “critical and necessary” to the bankruptcy case.[3]   Tom Hale, like any other bankruptcy attorney, charged debtors to analyze their financial situation and prepare their petitions.[4]  However, unlike most other attorneys, Hale charged debtors for doing just that and nothing more; Hale referred to this practice as the “unbundling of legal services to pro se debtors.”[5]  The bankruptcy court deemed Hale’s fee disclosure inadequate, and ordered sua sponte that Hale submit an itemization to determine whether the amount was reasonable under section 329.[6]  However, after numerous opportunities, Hale never fully complied with the court’s order, but instead filed a Motion to Recuse, Vacate and Jury Trial Demand on the issue of his fee.[7]  The court scheduled a hearing, but Hale did not attend; the court set response dates, but Hale never filed a reply brief.[8]  Finally, the bankruptcy court published a decision denying both Hale’s motion for recusal as well as Hale’s request for a jury trial, finding that an attorney has no Seventh Amendment right to a jury trial regarding the reasonableness of his fees.[9]  Moreover, the court ordered Hale, a repeat “unbundler”,[10] to disgorge his fees and further penalized him with both monetary and non-monetary sanctions.[11]  On appeal, the Ninth Circuit affirmed both the jury trial determination and the imposition of sanctions.[12]  Although the appellate court’s discussion of the unbundled service is brief and intertwined with its review of the sanction award, the court appears to adopt the view that an attorney cannot limit consumer debtors to merely pre-petition advice and preparation of the petition and related papers.[13]  The attorney must sign the petition or be subject to sanctions under the bankruptcy court’s inherent power to sanction vexatious conduct, may not exclude critical and necessary services, adequately advise the client of any limitations on services and obtain the client’s informed consent to those limitations.[14]  

Failed Mitigation Requires Recalculation of Claim

By: Courtney Pasquariello
St. John’s Law Student
American Bankruptcy Institute Law Review Staff

Injecting uncertainty into the claims process, the Sixth Circuit Court of Appeals held that a lessor’s lease rejection claim must be recomputed if it fails to realize the projected mitigation amount used to compute its claim.  In Giant Eagle, Inc., v. Phar-Mor, Inc., ^[1] Giant Eagle, Inc. and Valu Eagle Associates (“GE”) entered into long-term equipment leases with Phar-Mor.  Phar-Mor filed Chapter 11 during the lease term and rejected the equipment leases.  As a result of Phar-Mor’s rejection, GE made claims for undisputed administrative expenses as well as claims for future rent minus rent recovered from mitigation.  Upon recovering the equipment from Phar-Mor, GE attempted to fulfill its duty to mitigate damages by releasing the equipment under a new agreement with Snyder’s Drugstores, Inc.  However, during Synder’s new lease term, Snyder too sought relief under Chapter 11 and rejected the equipment leases.  After recovering the equipment, GE was unable to re-let it and sought to recover additional future rental damages in the Phar-Mor bankruptcy case.[2]  Although the lower courts sided with Phar-Mor, stating that “once a lessor mitigates its damages by re-letting the equipment, the lessor cannot claim damages from the debtor for the period covered by the new lease,”[3] the Sixth Circuit disagreed.[4]  Instead, the appellate court focused on the fact that once a lease was rejected, the debtor was liable for damages resulting from the breach regardless of mitigation or attempted mitigation.[5] 

Positive Treatment for Negative Equity

By: Vitaly Libman
St. John's Law Student
American Bankruptcy Institute Law Review Staff

In the first appellate decision on point, the Eleventh Circuit Court of Appeals held in In re Graupner[1] that the anti-bifurcation protection granted to certain purchase money security interests by BAPCPA’s “hanging paragraph” applies even though the loan includes negative equity. The Second Circuit, meanwhile, opted to defer determination of this issue by certifying the question of whether negative equity is to be included in such purchase money security interests to the New York Court of Appeals.[AA]   In Graupner, the debtor traded in a vehicle with negative equity as part of his purchase of a new car.[2]  Both the purchase price of the new car and the negative equity from the earlier loan were included in the amount financed by the dealer.[3]  Rejecting the debtor’s argument that the inclusion of negative equity meant that the security interest was not a purchase money security interest, the court held that the entire unpaid balance was deemed to be a secured claim, including the negative equity.[4]