Summary of a Recent
Judicial Development in
Bankruptcy

Reduction In Bankruptcy Attorney's
Hourly Rate Upheld

John D. Mead
National AgLaw Center Graduate Assistant

In In re Miller, 288 B.R. 879 (10th Cir. BAP 2003), two Chapter 12 debtors appealed a bankruptcy court's decision to reduce the amount of attorney fees to be paid to their attorney, as well as the court's decision to allow the attorney fees to be paid through the bankruptcy plan as administrative expenses, instead of being paid outside the plan directly to the attorney. In re Miller, 288 B.R. at 882. The Bankruptcy Appellate Panel ("BAP") for the Tenth Circuit held that the bankruptcy court correctly applied the law in determining the reasonableness of the requested attorney fees, that the evidence supported the bankruptcy court's decision to reduce attorney fees, and that it correctly determined that the attorney fees should be paid through the plan, rather than outside the plan and directly to the attorney. See id. at 881-83.

Robert and Mitzi Miller, debtors, were engaged in farming and ranching operations and operated a flying service. See id. at 881. They filed a Chapter 12 bankruptcy petition in May, 1998. See id. The debtors' original attorney withdrew from the case, and they contracted with J.D. Behles & Associates, P.C., to represent them in their bankruptcy case. See id. The contract "included a fee schedule, which listed specific hourly rates for attorneys and staff at the Behles firm." Id. The senior attorney at the firm, Jennie Behles ("Behles"), was listed at rate of $225.00 per hour. See id. The contract also provided that attorney fees would be subject to court approval. See id.

On November 17, 1999, the bankruptcy court entered an Order of Confirmation of the debtors' Chapter 12 plan. See id. The Order of Confirmation provided that the secured creditors would be paid directly by the debtors and that Behles "would be paid four payments each year upon application and approval of the fees by the court." Id.

Behles filed her first application for attorney fees on June 1, 2000, seeking "$73,512.50 for legal service provided, state taxes of $4,251.92, and expenses of $2,481.88, for a total of $80,246.30." Id. Behles also requested that "all fees and expenses be paid as administrative expenses pursuant to 11 U.S.C. § 503, and that Debtors pay all fees, costs and expenses in accordance with the confirmed plan." Id.

At an evidentiary hearing regarding Behles' request for fees, the bankruptcy court calculated the appropriate hourly rate for an attorney of Behles' experience in her locale at $200.00. See id. The bankruptcy court also disallowed some of the work claimed by Behles as unreasonable. See id. It awarded attorney fees of $68,902.50, plus taxes and expenses in the amount of $2,481.88. See id. The bankruptcy court also examined the Order of Confirmation and determined that any payment of attorney fees should be made through the plan, rather than as administrative expenses. See id.

The debtors filed a Motion for Reconsideration with the bankruptcy court. See id. at 881-82. The bankruptcy court denied this motion, and the debtors appealed the bankruptcy court's decision to the BAP for the Tenth Circuit. See id. The bankruptcy trustee filed a cross-appeal arguing that the amount of fees should have been reduced even further. See id. at 882.

The BAP first examined the debtors' argument that the bankruptcy court applied an erroneous legal standard when it reduced Behles' hourly rate. See id. The BAP explained that "[a] bankruptcy court may award ‘reasonable compensation for actual, necessary services rendered . . . ." Id. (quoting 11 U.S.C. § 330(a)(1)(A)). The BAP also explained that to determine what is "reasonable," a court must consider the nature, extent, and value of the services rendered by the attorney by considering the following factors listed under Bankruptcy Code § 330(a)(3):

(A) the time spent on such services;
(B) the rates charged for such services;
(C) whether the services were necessary to the administration of, or beneficial at the time at which the service was rendered toward the completion of, a case under this title;
(D) whether the services were performed within a reasonable amount of time commensurate with the complexity, importance, and nature of the problem, issue, or task addressed; and
(E) whether the compensation is reasonable, based on the customary compensation charged by comparably skilled practitioners in cases other than cases under this title.

Id.

The debtors asserted that "the bankruptcy court should have focused on the hourly rate charged by non-bankruptcy attorneys as required by 11 U.S.C. § 330(a)(3)(E)." Id. The BAP rejected this argument, stating that the hourly rate charged by non-bankruptcy attorneys is only one factor to be considered in determining what is reasonable compensation. See id.

The BAP stated that the bankruptcy court correctly applied the law because it relied on the Tenth Circuit's decision in Ramos v. Lamm, 713 F.2d 546 (10th Cir. 1983), to determine "the reasonableness of the fee by comparing it to hourly rates in the local area." Id. (citation omitted). In Ramos, the Tenth Circuit ruled that "fee rates of the local area should be applied to lawyers from other areas seeking fees except in unusual circumstances." Id. (citing Ramos, 713 F.2d at 555). The BAP also stated that the bankruptcy court correctly relied upon the factors enumerated in Bankruptcy Code § 330(a)(3). See id. Thus, the BAP concluded that "the bankruptcy court correctly applied the law in determining the reasonableness of the fees requested." Id.

The bankruptcy trustee and the debtors argued that the bankruptcy court's decision regarding attorney fees was not supported by the evidence. See id. The debtors argued that the bankruptcy court "erred in its factual finding that Behle's hourly rate should be reduced from $225.00 to $200.00 an hour and its further findings that some fees should be disallowed." Id. The trustee asserted that the evidence supported a more significant reduction in attorney fees. See id. at 883.

The BAP explained that it could reverse findings of fact by the bankruptcy court only if they were clearly erroneous. See id. It concluded that

[T]he bankruptcy court was presented with sufficient evidence that justified its reduction of Behle's hourly rate. It considered the hourly rates of bankruptcy attorneys in its jurisdiction and adjusted for Behle's experience. As for the total amount of fees approved, the bankruptcy court reviewed the time records submitted and gave logical explanations for the amounts it disallowed . . . . Its decision regarding the reasonableness of the hours is not clearly erroneous and is supported by the evidence.

Id.

Next, the BAP considered "whether payment of the attorney fees was properly ordered to be made through the plan as an administrative expense as opposed to being paid outside the plan and directly to Behles." Id. The BAP noted that the bankruptcy court reviewed the Confirmation Order "and made reference to the plan in deciding this issue." It also noted that the Confirmation Order specifically provided that secured creditors would be paid directly by the debtors, rather than through the plan, "but there was no such language regarding payment of attorney fees." Id. The BAP stated that "[t]he absence in the Confirmation Order of a specific provision for payment of attorney fees outside the plan led the court to determine that attorney fees were to be paid through the plan." Id. The BAP also stated that the plan provided that professional fees, including attorney fees, were to be paid as administrative expenses through the plan." Id.

Thus, the BAP concluded that the bankruptcy court's decision to allow attorney fees to be paid through the plan, rather than outside the plan, was supported by the evidence. See id. The BAP also concluded that the bankruptcy court's decision was supported by case law, "which holds that administrative expense payments should be monitored by the trustee as part of his statutorily-imposed duties and, therefore, should be made through the plan." Id. (citations omitted).

The case was decided on February 3, 2003; this summary was posted March 2003