In light of the Third Circuit’s recent decision in In re Prosser, bankruptcy practitioners in the Third Circuit (which includes the highly trafficked District of Delaware) should have a heightened awareness of the line between zealous advocacy and abusive and vexatious conduct.
For consumer debtor attorneys, getting paid has become quite a challenge. A debtor’s attorney must either get paid pre-petition in a chapter 7, diminishing what would otherwise be nonexempt property of the debtor, or get paid out of “projected disposable income” in a chapter 13.
On March 13, 2015, on remand from the Fifth Circuit, the U.S. Bankruptcy Court for the Western District of Texas allowed a trustee’s claim for a foreclosure commission under 11 U.S.C. § 502, but the court denied the mortgagee’s § 502 attorneys’ fees claim. Both claims had previously been found unreasonable under § 506.
Bankruptcy professionals work in an area that, by its very nature, makes the fee process lengthily transparent, subject to rigorous oversight and, in some cases, highly contentious. Even if fees are awarded, collecting them can be difficult. In a few (thankfully) rare cases, even after fees have been awarded and paid on an interim basis, the bankruptcy case becomes administratively insolvent and the professionals may have to disgorge their previously paid fees.
In a recent decision, the U.S. Bankruptcy Court for the Northern District of California granted an adversary proceeding for the defendant’s motion for allowance and payment of a secured claim for attorneys’ fees incurred defending the adversary proceeding. While this may be just an isolated case, the decision could mark the start of a new wave of defendants prophylactically crafting contracts with attorneys’ fees provisions related to adversary proceedings, and attempting to enforce them.
In the U.S. and in most developed countries, adherence to ethical standards is the accepted business practice. This is not the case in many developing markets, however. Consequently, ethical dilemmas can arise between conflicting standards. It is therefore important to educate clients and their stakeholders about the long-term financial benefits of avoiding ethical pitfalls in their international business dealings.
At times, it is necessary to hire special or co-counsel in a bankruptcy case when the case involves matters that are beyond the expertise of debtor’s counsel, such as tax law or personal-injury litigation. These employments can run afoul of the Bankruptcy Code if the applications to hire and payment of attorney fees are not handled in an appropriate manner.
Rule 1.1 of the Model Rules of Professional Conduct requires that all lawyers provide “competent representation to a client.” In August 2012, the ABA added new language to Model Rule 1.1, comment 8:
To maintain the requisite knowledge and skill, a lawyer should keep abreast of changes in the law and its practice, including the benefits and risks associated with relevant technology, engage in continuing study and education and comply with all continuing legal education requirements to which the lawyer is subject. (new language in italics).
Two recent opinions — one from the Lehman Brothers case and the other from the Spansion case — provide new guidance on whether individual committee members and unofficial committees may request attorneys’ fees on the basis of substantial contribution.
Section 330 of the Bankruptcy Code permits a court to authorize reasonable compensation for actual and necessary services. Courts within the Fifth Circuit are bound by In re Pro-Snax Distributors Inc., which held that services are compensable under § 330, but only if the applicant proves that the services resulted in a benefit to the bankruptcy estate. A recent decision by a panel of the Fifth Circuit demonstrates that Pro-Snax continues to be binding precedent, but the panel took the extraordinary step of unanimously recommending that the Fifth Circuit revisit Pro-Snax en banc.
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