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A Case Study on Avoiding Excessive Attorney’s Fees under Section 506 of the Bankruptcy Code – Michael Barnett

by Michael Barnett, Michael Barnett, PA

The amount of fees allowed to a substantially oversecured creditor, Farm Credit, in a complicated Chapter 12 case was at issue before Judge Collins in In re Kurtenback, 2020 Bankr. LEXIS 3336, Case No 18- 01607 (Bankr. N.D. Iowa, 30 Nov 2020). The Debtor had proposed five Chapter 12 plans from April 2019 until filing a liquidating plan on October 30, 2020. The plans were unusual in that they had different options depending on the occurrence of certain circumstances. Farm credit objected both to the form and the feasibility of the plans Farm credit required its counsel to allocate the billing over five different loan files, further complicating the review of the bills. There was no dispute that Farm Credit
was substantially oversecured in the case.

Judge Collins noted that the allowance of fees and costs to oversecured creditors is governed by §506 of the Bankruptcy Code. This provides that to the extent that an allowed secured claim is secured by property the value of which, after any recovery under subsection (c) of this section, is greater than the amount of such claim, there shall be allowed to the holder of such claim, interest on such claim, and any reasonable fees, costs, or charges provided for under the agreement or State statute under which such claim arose. 11 U.S.C. 506(b) (emphasis added).

Three elements are required by this section: 1) that the creditor is oversecured in excess of the fees requested; 2) that the fees are reasonable, and 3) that the agreement giving rise to the claim provides for attorney fees.1

The Court initially examined the reasonableness of the fees. Courts have broad discretion under the reasonableness standard to meet the purpose of §506(b) to prevent creditors from failing to exercise restraint in the fees and expenses incurred. Courts should look to see if the creditor is exhibiting excessive caution, overzealous advocacy, and hyperactive legal efforts.2 This requires an examination of factors including the complexity of the case, the hourly rates charged and the rates in the locality, whether the services were necessary to protect the client’s interests, whether attorneys were able to efficiently and competently provide the requires services, whether billing judgment was exercised to avoid duplicate or unnecessary services, the results obtained, and the amount charged in similar cases.

Addressing the complexity of the case, Judge Collins noted that the multiple plans added to the case’s complexity and required additional time and effort by the parties, as did difficulties involving the debtor’s participation and cooperation in the case. However, these issues appear to have caused some ‘excessive caution’ by Farm Credit, which §506 is intended to check. The court found that the hourly rates charged by Farm Credit were reasonable, and noted they were far below rates charged by Debtor’s counsel. The Court also found that the services of Farm Credit’s counsel were generally necessary to protect its $2,000,000 oversecured position. However, the Court noted a duplication of effort and lack of efficiency in the services performed. Finally, the court disallowed $6,000 for work on a motion for relief from stay which was abandoned as being unlikely to prevail given the creditor’s oversecured position.

The primary concern of Judge Collins related to efficient and competent services. While finding that counsel

were competent, indeed some of the best attorneys to appear before the Court, he found a number of issues as to efficiency. The Court looks to efficiency with an eye toward fairly preserving the value of the bankruptcy estate, thus imposing on creditor’s counsel a requirement that they exercise restraint in the fees and expenses incurred. The confirmation hearing was scheduled eight times, with only one evidentiary hearing held, requiring a one- day trial. Farm Credit did a full preparation, including a new witness and exhibit list, exhibits, witness preparation, outline of testimony, preparation of memoranda of authority, cash-flow analyses, and details on objections for each hearing, resulting in a total of 450 hours of work related to at most one full-day hearing. The time entries, such as ‘continued work on objections and exhibits for Second Amended Plan hearing in Cedar Rapids; work on lengthy objections, preparation of exhibits and exhibit list; research and briefing on status of plan objections; feasibility and other objection 2.6 hours’ and ‘work on preparation of hearing on preliminary hearing in Cedar Rapids on Third Amended Plan; work on Exhibit List, Witness List and Memorandum of Authorities; preparation for presentation’ show a pattern of repetitively billing large blocks of time for the same activities inconsistent with this efficiency requirement. As another example, between May 8, 2019 and September 4, 2020, Farm Credit’s counsel billed for preparing and reviewing witness and exhibit lists over 80 times. The same type of billing practice existed as to research and briefing feasibility objections, working on trial briefs and memoranda of authorities, and working on cash flow analyses.

Judge Collins had similar issues with the requirement to consider billing judgment and avoid duplicative services. Billing judgment requires that counsel staff a file in a manner that efficiently provides the most cost- effective representation necessary to a client’s interest without redundant, duplicative, and unnecessary services, as well as a final review of the bills to ensure they meet the requirements of §506. The court found substantial duplication of efforts in the billings submitted by Farm Credit, such as 66.1 hours in billing entries involving multiple counsel billing for reading, reviewing, drafting, and revising the same motions and documents. At the $300 hourly rate, these duplicative billings account for $19,830 of the total fee. While proofreading and reworking are an important aspect of diligent lawyering, such diligence must be reasonable under §506 given the circumstances. The Court also noted a large number of examples of billling in the five separate loan files for the exact same entry, in the amount of 335.7 hours. The court had insufficient evidence of whether these multiple-file entries were a fair allocation of reasonable time spread over multiple client files or was an improper multiplication of an otherwise reasonable single time entry.

The Court found that counsel obtained excellent results for Farm Credit, preserving the client’s oversecured position, however, they made no showing that its positions or arguments preserved estate property in any meaningful way. There was no showing of similar cases where similar amounts of fees were charged, though this was likely a unique case. Debtor’s fees for all matters in the case are anticipated to be about $160,000, thus warranting some adjustment of the Farm Credit feee application.

The Court concluded that a 30% reduction in total fees was appropriate considering the above factors above and Farm Credit’s failure to meet its burden of establishing that the full amount is reasonable under §506. The Court allowed $153,613.37, and disallowed $65,834.40 in Farm Credit’s counsel’s fees.