Allowing Attorney Fee Applications, Or Not, in Bankruptcy (In re H.T.O. & In re Sylvester)

By: Donald L Swanson

Question: What gets an attorney’s fee application allowed—or rejected—in bankruptcy? 

Short answer: The services, (i) must be “necessary,” and (ii) must require legal expertise.

Two Recent Opinions

Two recent opinions address this question:

• In re H.T.O. Architect, PLLC, Case No. 19-10915, SDNY Bankruptcy Court (issued February 3, 2022, Doc. 160, Not for Publication); and
• Sylvester v. Chaffe McCall, L.L.P. (In re Sylvester), Case No 21-30186, Fifth Circuit (issued January 14, 2022).

Each of these opinions deals with a fee application by an attorney for a bankruptcy trustee.  One opinion allows the fee application (In re H.T.O. Architect), while the other does not (In re Sylvester).

What follows is an summary of each opinion and the facts and rationale for allowing (or not) the fee application filed by the trustee’s attorney. The two opinions, together, provide a path for attorneys to follow.

In re H.T.O. Architect

Debtor initially files a Chapter 11 petition, then converts to Chapter 7, and the Trustee hires a court-approved attorney.

The Trustee collects funds totaling $359,633.73, of which $290,000 comes from avoided transfers.  Such amount will not provide a distribution to unsecured creditors, but:

• Debtor’s estate would have been administratively insolvent, absent the successful efforts of Trustee’s attorney.

The attorney applies for $133,566.00 fees and $3,827.97 costs.  An unsecured creditor objects.

The Bankruptcy Court allows the requested fees.  Here is its rationale.

–Legal Standard (Necessity)

Under § 330, legal services and costs must be “necessary,” which is determined from the perspective of the time services were rendered.

The “necessary” test is whether services provided were “reasonably likely to benefit the estate.”  This is an objective test that asks: What services would a reasonable lawyer have performed in these circumstances?

The court may reduce or disallow requested fees when, (i) “the underlying services conferred no real benefit on the estate,” or (ii) “the request is based on incomplete or inaccurate time records.”

Time spent in preparing fee applications is compensable—there is “no clear-cut cap on the permissible amount charged for the preparation of fee applications,” but the range of 3–5% is a “useful metric.”

Fee applications must also satisfy Fed.R.Bankr.P. 2016 requirements, including:

• “a detailed statement of, (1) the services rendered, time expended and expenses incurred, and (2) the amounts requested”; and
• disclosure of, (i) prior payments to applicant, (ii) any compensation agreement between applicant and client, and (iii) any sharing of compensation.

–Ruling & Findings

The attorney’s application is allowed.  Here are reasons why:

• Attorneys voluntarily reduce their fees for preparing the application to $5,000, which amount is 3.74% of the overall fees requested;
• Attorneys agree to not charge for various services; and
• $91,164.50 of the $133,566.00 application is for litigation services, with the rest for case administration, asset analysis, recovery and disposition, etc.

In re Sylvester

–Fifth Circuit’s Summary

Sharon Sylvester files bankruptcy.  At the end of her case, the Bankruptcy Court orders her to pay certain fees to her Chapter 7 trustee’s attorney.

Sylvester argues that the Bankruptcy Court applied the wrong legal standard. We agree and vacate the award.

–Background: Fees Allowed Below

Sharon Sylvester’s bankruptcy goes well: all claims are paid in full, and funds are being returned to Sylvester.

Trustee’s attorney files a $16,185 fee application.  Sylvester objects, arguing that the services performed are within the Trustee’s statutory duties and do not require legal expertise.

The Bankruptcy Court overrules Sylvester’s objection and grants the attorney’s application, even though the Court acknowledges:

• A trustee’s attorney may not be paid for services coinciding or overlapping with the trustee’s duties delineated in § 704, except when complexity or difficulty require legal expertise; and
• The attorney’s time entries show that “some of the tasks could fall into the broad categories identified as § 704(a) trustee duties.”

The Bankruptcy Court explains:

• The “demarcation between” tasks a trustee must perform and tasks that can be delegated to an attorney “is often not black and white”;
• This bankruptcy is “particularly successful,” with creditors paid in full and a return of money to Debtor; and so
• Some “leeway” is granted in favor of the attorney’s application.

Sylvester appeals.  The district court affirms under “substantially the same reasoning as the bankruptcy court” and “giving particular emphasis to ‘the successful result.’”

–Fifth Circuit Reverses and Remands

Fifth Circuit Court of Appeals holds: the Bankruptcy Court did not apply the proper legal standard.

The Bankruptcy Code provides that an attorney may be compensated under § 330(a) only for legal services—i.e., only for “activities requiring legal expertise that a trustee would not generally be expected to perform without an attorney’s assistance.”

Operative statutes include:

• § 704 directs a trustee to “collect and reduce to money the property of the estate,” “be accountable for all property received,” and “investigate the financial affairs of the debtor”;
• § 327 allows the trustee to employ attorneys to help;
• § 330(a) allows “reasonable compensation for actual, necessary services rendered” (emphasis added)—“necessary” means services requiring an attorney’s expertise;
• § 326 limits a Chapter 7 trustee’s compensation to a percentage of funds distributed, which limitation “may not be evaded by hiring others to perform the trustee’s duties”; and
• § 328 allows a trustee “to serve as an attorney . . . for the estate” and to be compensated only for services that require “the assistance of an attorney.”

Case precedents include:

• Fourth Circuit says, “courts may not compensate an attorney for services statutorily required by the trustee,” except when unique difficulties require legal expertise;
• Ninth Circuit says, only “legal services” can be allowed in a § 330(a) fee application; and
• Bankruptcy courts agree.

The Bankruptcy Court in this case did not apply the proper legal standard:

• It merely assumed that tasks identified in the attorney’s application “required legal expertise,” without making such a determination;
• Such an assumption becomes improper by a combination of, (i) finding that “some” of the tasks identified in the application might not require legal expertise, and (ii) not even trying to identify and disallow non-compensable services;
• Distinguishing legal from non-legal services is difficult—but the court must at least make the attempt;
• A successful result is not a valid reason for compensating non-legal services; and
• It is the attorney’s burden to justify the compensability of services, and the Bankruptcy Court allows fees without proof that the services required legal expertise.

Conclusion

Attorneys employed by a bankruptcy estate want to be paid for their services [so says Captain Obvious].

The two opinions described above provide collective guidance on what is required for allowance and what can get parts of an application denied.

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