Contingency
fee can be reduced
By
David Ziemer
Wisconsin Law Journal
April
12, 2006
| What
the court held Case:
In re: Susan L. Gilbertson, No. 04-37868-svk Issue:
When an attorney is retained by a trustee to recover assets for a bankruptcy estate
pursuant to a contingency fee agreement, can the fee be reduced if the recovery
is obtained "unexpectedly early"? Holding:
Yes. If the fee is unreasonable in light of the hours expended and risk incurred,
the fee may be reduced. |
A
bankruptcy judge can reduce the contingency fee of an attorney retained to recover
assets belonging to the estate, if the fee is unreasonable.
In
reaching that holding on Mar. 29, U.S. Bankruptcy Judge Susan V. Kelley concluded
that an unexpected ease in recovery was a development not capable of being anticipated
at the time he was retained.
Susan
L. Gilbertson filed for bankruptcy, and the Trustee attempted to recover an alleged
fraudulent transfer by Gilbertson to an Appleton attorney. When he received no
response, he applied to employ attorney William A. Rinehart to recover the money.
The
order authorizing the Trustee to employ Rinehart provided for a 33 1/3 percent
contingency fee. Rinehart recovered $10,000, while incurring only 2.7 billable
hours. He then filed his application for compensation, seeking the agreed upon
$3,333.34 (if paid, the fee would have translated to $1,235 per hour).
The
Trustee sought approval, but Judge Kelley held, in a written ruling that she had
authority to reduce the fee, and did so, to $1,890.
11
U.S.C. 328(a) provides that a trustee, with the court’s approval may employ
an attorney on a contingent fee basis.
However,
the statute also provides, “Notwithstanding such terms and conditions, the
court may allow compensation different from the compensation provided under such
terms and conditions after the conclusion of such employment, if such terms and
conditions prove to have been improvident in light of developments not capable
of being anticipated at the time of the fixing of such terms and conditions.”
Section
330 states that, “subject to” sec. 328, a bankruptcy court may award
“reasonable compensation” to a professional employed by the trustee.
Judge
Kelley acknowledged that some courts have held that, once a court has approved
a contingency fee under sec. 328(a), the court has no discretion to adjust the
compensation at the conclusion of the engagement based on “reasonableness.”
Nischwitz v. Airspect Air, Inc., 288 B.R. 464 (B.A.P. 6th Cir. 2003), reversed
on other grounds, 385 F.3d 915 (6th Cir. 2004); Daniels v. Barron, 325 F.3d 690
(5th Cir. 2003).
However,
the court found that the Seventh Circuit does not accept that position. In In
re Lytton’s, 832 F.2d 395 (7th Cir. 1987), a creditor appealed an order appointing
counsel. The Seventh Circuit held that the order was not a final order, and was
thus, not appealable.
In
support of its decision, the Seventh Circuit wrote, “Section 328 read in
conjunction with section 330 contemplates that an attorney seeking a contingent
fee payment still must apply to the bankruptcy court and that the language of
section expressly allows setting a rate of payment at the beginning of an attorney’s
employment that may later be changed.” Lytton, 832 F.2d at 400.
The
Seventh Circuit cited, with approval, In re General Oil Distributors, Inc., 51
B.R. 794 (Bankr.E.D.N.Y.1985), in which an attorney’s fee was reduced by
ten percent for lack of success in litigation.
Relying
on Lytton’s, and In re Churchfield Management & Investment Corp., 98
B.R. 893 (Bankr. N.D.Ill.1989), Judge Kelley concluded that she had authority
to reduce a contingency fee if the amount is unreasonable relative to the amount
of work performed.
Kelley
explained, “If a sec. 328(a) appointment forecloses a court from reviewing
the reasonableness of compensation under sec. 330, there would be no need to require
an applicant to submit detailed fee applications giving the hours worked and services
rendered and no point in the ‘notice and hearing’ provisions noted by
the Seventh Circuit Court of Appeals in Lytton’s.”
Ultimately,
however, Kelley did not decide the case based on “reasonableness”; instead,
she held that she could reduce the fee because the arrangement proved “improvident
in light of the unexpectedly early and easy resolution of this matter.”
Kelley
cited the following passage from Seiler v. First National Bank of Babbitt, 72
B.R. 44 (D.Minn.1987), in which the district court reversed the bankruptcy court
for reducing a contingency fee without specific findings of unforeseeable and
unexpected circumstances.
The
court there wrote, “three is no finding of fact by the bankruptcy judge that
appellants’ representation of debtor … was inadequate, that the dispute
with the state was resolved at an unexpectedly early moment of the proceedings,
that the results obtained were disappointing, or that the property escalated in
value due to forces outside counsel’s control (emphasis added by Judge Kelley).”
Seiler, 72 B.R. at 48-49.
Distinguishing
Seiler on its facts, but adopting its rationale, Judge Kelley wrote, “In
our case, the court finds that the dispute with the Transferee was resolved at
an unexpectedly early moment of the proceedings; it took precisely one letter
and two telephone calls to obtain a refund of the Debtor’s transfer. Such
an early and easy result could not have been foreseen by the Trustee when he applied
to employ the Applicant; otherwise the application to employ counsel never would
have been approved in the first place (emphasis in original).”
Judge
Kelley also distinguished the case of In re Merry-Go-Round Enterprises, Inc.,
244 B.R. 327 (Bankr.D.Md.2000), in which the court upheld a contingency fee almost
20 times greater than the fee would be if calculated on a purely hourly basis.
In that case, however, the attorneys advanced $2 million in litigation expenses,
and the case involved “hard-fought litigation that settled on the eve of
trial.”
Judge
Kelley concluded, “Unlike in Merry-Go-Round, applying the reasonableness
factors in the instant case compels the conclusion that the Applicant’s fee
should be reduced because the fee is not justified by the time and labor expended
or the novelty and difficulty of the issue.”
Applying
reasonableness standards, the court found that the Applicant’s regular rate
is $225 per hour, but he has charged as much as $500 per hour. Finding also that
the speed with which the results were obtained warranted an enhanced hourly rate,
the court selected $700 per hour as reasonable. Multiplying by 2.7 hours, the
court ordered that $1,890 in fees be awarded to Rinehart.
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David
Ziemer can be reached by email.
