Summary of a Recent
Judicial Development in
Bankruptcy

Reasonableness of Attorney's Fees in Bankruptcy

Walt McCarter
National AgLaw Center Research Associate

Summary of Decision

In In re Michels, Ch. 13 Bankr. No. 01-01415, Ch. 12 Bankr. No. 03-00316, 2004 Bankr. LEXIS 1016 (Bankr. N.D. Iowa May 10, 2004), the United States Bankruptcy Court for the Northern District of Iowa held that a law firm's requested attorney's fees were not reasonable or allowable under the Bankruptcy Code, and sanctioned the firm for withdrawing funds from the client's trust account as compensation.

Background

After dismissal of a debtor's bankruptcy cases (see In re Michels, 301 B.R. 9 (Bankr. N.D. Iowa 2003), and Michels v. Maynard Sav. Bank. (In re Michels), 305 B.R. 868 (B.A.P. 8th Cir. 2004)), the bankruptcy court ordered the debtor's attorneys to file a final application for compensation and accounting of fees received in connection with his Chapter 12 and Chapter 13 cases. Id. at *2-3. The trustee objected to the requested fees as unreasonable. Id. at *3. The law firm had also withdrawn legal fees from the client's retainer held in a trust account without court approval. Id. at *11.

Arguments

The trustee argued that the law firm was required to demonstrate that it exercised reasonable billing judgment and that the compensation was reasonable in light of the results obtained. Id. at *4.

The law firm argued that it spent considerable time attempting to convince the debtor of the best courses of action, and his refusal to follow their advice on important matters lead to the dismissal of his cases with no payment to his unsecured creditors; therefore, they were entitled to withdraw their fees from the retainer held in a trust account. Id. at *6-7.

Analysis and Holdings

The court noted that it had had "too many opportunities" to examine fees charged by this particular law firm, citing a number of decisions involving the same firm that were applicable to this case. Id. at *7. The court explained that attorney's fees may be paid to a debtor's counsel only if approved by the court, and that time spent reassuring debtors, or on matters which do not require attorney services, are not compensable at an attorney's regular hourly rates. Id. at *9-10. The court also expressed concern about the firm's withdrawal of the debtor's retainer from its trust account without court approval. Id. at *11. The court stated that it was the law firm's duty to properly supervise the debtor's conduct and ensure that said behavior conformed to the Bankruptcy Code, basically saying that the firm's explanation that the client's conduct made his representation more difficult was not a valid excuse for the fees charged. Id. at *12-13. The court concluded that a significant portion of the law firm's requested fees were not reasonable or allowable under the Bankruptcy Code, and sanctioned the firm $8,500 for withdrawing funds from the trust account without court approval. Id. at *13-14.

The case was decided on May 10, 2004.