Three Recent Supreme Court Cases--None Concerning Jurisdiction

By Louis S. Robin

Law Offices of Louis S. Robin

Longmeadow, MA 

As we return from our summer respites (if any of us consider the few moments we may be able to steal as a summer respite), some discussion of three recent Supreme Court cases might quicken our return to our the struggles we endure in our legal practices.  They may have some effect on our practices.  I will also provide some suggestions and comments.

Harris v. Viegelahn

            This case provides guidance regarding payments (usually based upon earnings) to a Chapter 13 trustee for the plan but not yet distributed, followed by the Chapter 13 case being converted to Chapter 7.  I would suggest similar guidance applies to Chapter 13 cases which have been dismissed (a circumstance that is unfortunately common). 

            Prior to the Supreme Court's decision, there was a split in authority.  Some courts said that the funds should be distributed to creditors.  Others said that the funds should be returned to the debtor.  The Supreme Court had no such split – all nine Justices said that the funds should be returned to the debtor.  The Court initially found support for returning these funds to the debtor under Section 348(f), whose “most sensible reading” supported a definition of the estate which returned these funds to the debtor.  But the Court then found further support in Section 348(e), which provides “Conversion [from Chapter 13 to Chapter 7] terminates the service of [the Chapter 13] trustee.”  The only obligation of a trustee upon conversion is to (i) turn over records and assets to the Chapter 7 trustee and (ii) file a report with the U.S. Trustee. Bankruptcy Rules 1019(4) and 1019(5)(B)(ii).   

            It is this last reference by the Court which affects counsel, at least debtors' counsel.  Many Bankruptcy Courts, upon dismissal or conversion, permit debtor's counsel, after filing of a motion, to receive unpaid legal fees from any funds that the Chapter 13 trustee was holding upon conversion or dismissal.  Although these funds are not extreme by any description, they certainly provide some relief to counsel which routinely provide services that are not compensated  (in my district, counsel are limited to a fee of $4,000 without further court review or approval; while some attorneys will require the full amount prior to filing, others like myself will accept a retainer with the balance to be paid under the plan).  However, the courts are limited by the Court's reference to limiting the Chapter 13 trustee's ability to provide compensation to counsel.  And, I might add,  the courts and trustees are frustrated by this since they benefit because debtors are better served when represented by compensated counsel, which in turn provides a better course for the Courts and trustees.  At the risk of sounding self serving, consumer debtor's counsel do not get “big fees”, often take sympathy with debtors that are faced with an impending foreclosure, accept minimal retainers, and, when compensated for a successful case, probably still receive compensation which represents a recovery of less than half of their time expended.  Receiving some compensation in a failed case is some consolation. 

            To be candid, policy decisions regarding compensation is not the Supreme Court's concern.  But that doesn't mean that the consequences of such decisions shouldn't be recognized.  If counsel can not expect compensation on some real basis, competent attorneys will leave the consumer bankruptcy forum because they can be compensated elsewhere.  Similarly, some counsel may require full compensation up front (in my district, $4,000 plus filing fees and other costs).  The former leaves debtors with counsel not truly competent or, at least, not experienced, and the later leaves debtors with no other choice but proceeding pro bono, an option that is fraught with failure.  I would suggest that an honest appraisal of a consumer attorney's time and recovery of fees might result in a 50% conclusion, and some recovery in failed cases is real. That is why debtors' counsel, the courts and trustees are frustrated.

              The alternative?  I recently was in Court when this issue came to the Court's attention.  It was suggested that any conversion or dismissal should be conditioned upon, or delayed until counsel is paid by the Chapter 13 trustee. Perhaps another would be an agreement, approved by the Court, where the debtor would agree that, in the circumstance of conversion or dismissal, that counsel would be authorized to receive any funds from the trustee, and be permitted to deduct remaining fees from the funds before forwarding the remainder to the debtor (although this type of agreement may be compared to the agreements that are criticized in the next case discussion, I would suggest that there are real differences). I would encourage any debtor's counsel to be proactive.  

Baker Botts LLP v. Asarco LLC

            This Supreme Court case concerned whether debtor's counsel was entitled to receive compensation for defending a fee application.  The underlying fee application was approximately $120 million in legal fees, a $4.1 million dollar “enhancement” fee, and $6 million for the defense of the fee application, all of which were approved by the Bankruptcy Court.  The Supreme Court, in a 6 – 3 decision, said legal fees for defense of a fee application were not compensable, stating that 11 U.S.C. Sec. 330(a)(1)'s  grant of reasonable compensation does not embrace defense of legal fees, while 11 U.S.C. Sec. 330(a)(6) only includes compensation for the actual “preparation of the fee application”.  The minority believed the later section implied compensation for the defense of the fee application. 

            Since the decision, at least one firm added a provision into its fee agreement to provide that these fees will be compensable, and requested court approval as part of the initial employment request submitted to the bankruptcy court.  Such a provision has been met with skepticism, although this situation concerned a creditors' committee's representation.

            In the meantime, some attorneys have argued that the Supreme Court's decision has been met with pessimism by bankruptcy professionals who say it will likely make Chapter 11 cases more costly and cumbersome (according to an article in Law360).

            To this concern I have one word: “really?”  I mean, you receive $120 million dollars, plus $4.1 million as a bonus, and then you complain you had to spend time defending your fee.  And that means that the entire bankruptcy system is going to become “cumbersome”.  Ironically, other creditors find themselves who are unpaid for services and goods provided must commence legal action, and pay for legal services without certainty of receiving the underlying claim, and none of this jeopardizes the basic elements of commerce.  And consumer attorneys often (as described in the first decision) are not fully compensated, but the vast majority of such attorneys remain committed to making the bankruptcy forum work (let us not forget that 80% of attorneys are in firms of five or less, and that 50% of attorneys are sole practitioners).  Further, shouldn't we, as officers of the court, take pride in defending our charges? - I have in the few times that my fees have been questioned.

            And let's remember that the defense expenses in Baker Botts amounted to less than 5% of the entire fee.  If I (and I suspect nearly every attorney) only received 95% of all the time charges, I (and nearly all other attorneys) would be very wealthy.

            Now, I believe attorneys should be paid for their time.  And I understand that the practice of law has significant carrying costs, particularly with larger firms.  And I understand, from some discussions with trustees, that Chapter 7 trustees face objections from parties, and, without compensation for defense, they face sizable uncompensated time and expense.  But we, as attorneys, have a responsibility to be measured in our responses and remedies.

            One such remedy might be to assert Rule 9011 – in the Baker Botts case, the party objecting to the fee application was the parent of the debtor, which, due to the able legal representation of the debtor, was the subject of a fraudulent transfer action which was resolved by their funding, at least in part, a 100% plan.  Their position, I speculate, was based upon retribution, rather than a justifiable concern.  Assertion of Rule 9011 might have been effective.  And similar assertions against creditors of Chapter 7 estates that are more frustrated with their lack of payment that legitimate fee than real concerns of the reasonableness of legal fees might be useful.

            Further, merely increasing one's legal fees might be effective.  If we are speaking about a 5% issue, then a similar increase might well be justified, particularly if attorneys are persuaded to leave the bankruptcy field because their fees might be questioned.

            I apologize if any of my statements seem uncaring or facetious. Legal fees should be compensated fully.  But there are risks that all must respect, and lawyers are not immune from these risks.

Bank of America v. Caulkett

            This case follows the many cases that state that, in Chapter 13, a wholly unsecured mortgage lien on a principal residence may be voided in full.  Instead, in this case, the question was whether a wholly unsecured lien on a principal residence in a Chapter 7 may be voided.  Justice Thomas, in a brief decision relying upon the Court's prior decision in  Dewsnup, dispatched the argument of the debtor with a succinctly: “Unfortunately for the debtors, this Court has already adopted a construction of the term “secured claim” in §506(d) that forecloses this textual analysis. See Dewsnup v. Timm, 502 U. S. 410 (1992).”

            One may wonder if this decision will cause courts to revisit lien stripping in Chapter 13, in part because Justice Thomas relied upon the rule that "identical words used in different parts of the same act are intended to have the same meaning".  However, Justice Thomas, in rejecting the debtor's reference to Nobleman, characterized Nobleman as "address[ing] the interaction between the meaning of the term “secured claim” in §506(a) and an entirely separate provision, §1322(b)(2)."  Perhaps this means that the rulings of the various Courts of Appeals that have ruled on this issue will remain  (Without the time to do an exact count, I believe that at least ten Circuit Courts of Appeal have so ruled).

            Personally, I believe that the proponents of voiding liens in Chapter 7 were reaching too high.  There is good rationale in permitting Chapter 13 debtors to void a mortgage wholly unsecured, as this is a reorganization Chapter, as opposed to Chapter 7 which is not a reorganization Chapter.  Yes, allowing a debtor to void a lien in Chapter 7 would be cheaper, but the expense of a Chapter 13 is not excessive, particularly when compared to the benefit of voiding a second mortgage (which, in most cases, I speculate, is probably between $25,000 to $50,000).  And there is an irony in this, at least for me - I wrote, at least 15 years ago, that one should not be able to void a wholly unsecured mortgage on a principal residence in Chapter 13.