Summary of a Recent
Judicial Development in
Bankruptcy

Post-Confirmation Attorney Fees in
Chapter 12 Case Denied

Joshua T. Crain
National AgLaw Center Graduate Assistant

Summary of Decision

In In re Nilges, 301 B.R. 321 (Bankr. N.D. Iowa 2003), the United States Bankruptcy Court for the Northern District of Iowa held that a law firm that represented Chapter 12 debtors was not entitled to collect certain post-confirmation attorney fees.

Background

Bruce and Deanna Nilges were hog farmers and Chapter 12 debtors. See id. On the advice of the law firm, the debtors changed their hog operation post-confirmation from a breeding program to a feeder program without obtaining approval from the court or giving notice to the bank that held a security interest in the debtors' breeding stock. See id. As a result, the bank sought relief from the automatic stay. See id. An agreement was subsequently reached between the debtors and the bank. See id. Consequently, the law firm sought court approval for fees incurred, in part, from services rendered in connection with the bank's motion. See id. The bankruptcy trustee questioned the reasonableness of the fees and the court set a hearing on its own motion. See id.

Analysis and Holdings

The court explained that it may award attorney fees only for actual and necessary services and that the fees requested by the law firm were problematic. See id. The court also explained that creditors are "entitled to notice and a hearing prior to a debtor's use, sale or lease of estate property other than in the ordinary course of business." Id. at 325. The court noted that the debtors had given such notice or obtained court approval in the past, but that upon the advice of their attorneys they did not provide such notice when they modified their operation. See id.

The court held that the law firm could not collect, and the debtors nor the bankruptcy estate could pay, most of the fees requested by the law firm. See id. Addressing what it termed "unnecessary services at the whim of their clients" that the law firm was trying to recover, the court held that the law firm was entitled to only a portion of the fees it sought to recover. See id. The court noted that had the debtors sought prior court approval, or given notice to the bank concerning their desire to undergo an operational change, the attorney fees may not have been incurred because the desire of the debtors may have been granted. See id. It further noted that because the law firm advised the debtors not to seek court approval or give notice to the bank, the attorney fees incurred were due to their bad advice. See id. Therefore, the court held that the law firm could not collect all of its requested fees. See id.

The case was decided on September 15, 2003; this summary was posted Oct. 25, 2004.