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In In re Nortel Networks, Inc.,[1] the Delaware Bankruptcy Court concluded that noteholder objections to the Indenture Trustee’s attorney fees must be made “on a timely, not hindsight basis.” The court’s decision serves as sound guidance to indenture trustees that, as long as any attorney’s fees charged were reasonable and prudent when incurred, they need not worry about a court reviewing their work with the clear perspective of hindsight.
[1]In a recent unanimous decision delivered by Justice Kagan,[2] the Supreme Court has made clear that federal courts, when awarding sanctions for bad faith conduct through the use of their inherent powers (not derived from rule or statute), must limit such sanctions to only compensatory damages that have a causal connection to the misconduct.
On Sept. 29, 2016, the Ninth Circuit Court of Appeals affirmed[1] the district court’s decision upholding the bankruptcy court’s denial of a post-discharge motion for attorneys’ fees. The underlying motion stemmed from pre-petition state court litigation brought by creditor against debtor. While the ruling was against the creditor, debtors should be keenly aware of the applicable law, as the Ninth Circuit’s detailed opinion makes it clear that the “fair contemplation” test can cut both ways.
[1]Most practitioners are aware of the risks that petitioning creditors face when filing an involuntary petition against an alleged debtor.[2] If the court determines that the filing was improper or done in bad faith, penalties can be assessed against the petitioning creditors under 11 U.S.C. § 303(i), which can include requiring petitioning creditors to pay legal fees and costs as well as compensatory and punitive damages to the alleged debtor.[3]
Debtor’s counsel must be a “disinterested person” pursuant to § 327(a) of the Bankruptcy Code for a court to approve its retention or to award debtor’s counsel compensation for its services.[1] As defined in the Bankruptcy Code, a disinterested person means, among other things, a person who is not a creditor of the debtor on the petition date.[2] This can be problematic for counsel who finds themselves in the undesirable position of having to file a bankruptcy petition before a client has paid for all
Recently, in In re Dynamic Drywall,[1] the U.S. Bankruptcy Court for the District of Kansas denied an attorney’s application for quantum meruit hourly compensation, stating that when an agreement for employment based on a contingency fee is approved by the court, that agreement can only be altered in very unusual circumstances. An attorney who was employed to work on two separate matters for the same client filed an application to receive quantum meruit hourly compensation for work done on one of the matters.
A debtor cannot recover sanctions or attorneys’ fees under 11 U.S.C. § 362(k) when the debtor admits to having suffered no actual damages and the filing of a motion for sanctions was not necessary to remedy a stay violation.[1] Denying the debtor’s motion for sanctions, the U.S. Bankruptcy Court for the Western District of New York reached this conclusion and, in its opinion, colorfully addressed the potential for encouraging wasteful litigation that would arise from a contrary conclusion.[2]
