Related to ECF Nos. 79 & 95
BARBARA J. HOUSER, Bankruptcy Judge.
Before the Court are the (1) Order to Show Cause as to Why the Order Approving Employment of Special Counsel Nunc Pro Tunc Should Not be Set Aside as an Impermissible Fee Sharing Agreement [BC ECF No. 79]
I. JURISDICTION AND VENUE
The Court has subject matter jurisdiction under 28 U.S.C. § 1334. This matter is a core proceeding as defined under 28 U.S.C. § 157(b)(2)(A), and venue is proper in this Court under 28 U.S.C. § 1408. This matter, which the District Court has referred to this Court under its Standing Order of Reference, is a contested matter as defined under Bankruptcy Rule 9014. Thus, this Memorandum Opinion and Order contains the Court's findings of fact and conclusions of law pursuant to Federal Rules of Bankruptcy Procedure 7052 and 9014.
II. FACTUAL AND PROCEDURAL HISTORY
A. The Debtor's First Bankruptcy Case
Yvonne Harris-Nutall (the "
On August 13, 2013, Nationstar Mortgage, LLC ("
B. The Debtor's Second Bankruptcy Case and the Adversary Proceeding
On March 7, 2014, Nationstar allegedly disbursed $12,321.38 to pay past-due property taxes owing on the Debtor's homestead (the "
Allmand serves as the Debtor's general counsel in the Second Bankruptcy Case. On February 11, 2015, the Debtor filed an application [BC ECF No. 13] (the "
On September 14, 2015, the Debtor, via KB, filed the Plaintiff's Original Complaint [AP ECF No. 1] (the "
C. The Valentine Bankruptcy Case and the Co-Counsel Agreement
On July 26, 2016, KB filed an application to be employed as special counsel in the Chapter 13 case of Tammion Valentine [15-33227, ECF No. 84] (the "
Upon reviewing the Valentine Employment Application, the Court noted certain language in the proposed co-counsel agreement between KB and Ms. Valentine's bankruptcy counsel, Lee Law Firm, PLLC, (the "
Lee Law Co-Counsel Agreement at 1 (emphasis added). Clearly, the Lee Law Co-Counsel Agreement contemplates a situation where (1) Lee Law Firm, PLLC could be paid more than its standard hourly rate for work performed, and (2) KB would share a portion of its allowed fees with Lee Law Firm, PLLC. Section 504 of the Bankruptcy Code, however, appears to prohibit this type of compensation arrangement (as will be discussed in detail below).
To address its concerns, the Court held a hearing to consider the Valentine Employment Application on October 3, 2016 (the "
During the Valentine Hearing, Bartholow reminded the Court that it had previously authorized KB's employment as special counsel in the Debtor's Second Bankruptcy Case, including entry into the Co-Counsel Agreement with Allmand. Following the Valentine Hearing, the Court reviewed the Employment Application in the Debtor's Second Bankruptcy Case, finding that the Co-Counsel Agreement contained language identical to that quoted above from the Lee Law Co-Counsel Agreement.
D. The Order to Show Cause and the Fee Application Filed in the Second Bankruptcy Case
Because the terms of the Lee Law Co-Counsel Agreement and the Co-Counsel Agreement are virtually identical, the Court reasonably assumed that Bartholow's statement regarding the purpose behind the Lee Law Co-Counsel Agreement would be equally applicable to the Co-Counsel Agreement. Accordingly, on October 12, 2016, the Court issued the Order to Show Cause, directing representatives from KB and Allmand to appear before the Court on November 8, 2016 and show cause as to why the Employment Order should not be set aside as an impermissible fee sharing agreement. On October 31, 2016, Allmand filed a request [BC ECF No. 82] to continue the hearing to permit it additional time to brief the fee-sharing issue. The Court granted the continuance [BC ECF No. 83], and rescheduled the hearing on the Order to Show Cause to November 28, 2016 (the "
The Court held the OSC Hearing as rescheduled on November 28, 2016. At the conclusion of the OSC Hearing, the Court stated its intent to consider the propriety of the Co-Counsel Agreement when KB and/or Allmand requested Court approval of fees incurred in the Adversary Proceeding. KB filed its Fee Application on January 11, 2017, which was initially set for hearing on March 23, 2017. At KB's request, the Court rescheduled the hearing to May 1, 2017. As reflected in the Fee Application, Allmand does not intend to file a fee application for the services it performed in the Adversary Proceeding—
Fee Application at 2 n.1.
Nationstar filed a response to KB's Fee Application on February 6, 2017 [BC ECF No. 102] (the "
III. ANALYSIS OF THE CO-COUNSEL AGREEMENT
A. 11 U.S.C. § 504 and the General Prohibition Against Fee Sharing
Section 504(a) of Bankruptcy Code generally prohibits the sharing of compensation in bankruptcy cases—
11 U.S.C. § 504(a). The exceptions found in subsection (b) are limited and apply only to fees shared among (1) a member, partner, or regular associate in a professional association, corporation, or partnership, and (2) an attorney for a creditor that files a petition under § 303 and any other attorney contributing to the services rendered or expenses incurred by such creditor's attorney. Id. § 504(b). Accordingly, three elements must be met for there to be a violation of § 504(a): (1) a person or entity was awarded compensation under § 503(b)(2) or § 503(b)(4), (2) a person or entity shared or agreed to share in the awarded compensation, and (3) the person or entity that shared or agreed to share in the awarded compensation does not fit within one of the statutory exceptions. Id.; see In re Smith, 397 B.R. 810, 817 (Bankr. E.D. Tex. 2008).
Here, it is undisputed that the Co-Counsel Agreement meets the second and third elements. As reflected by the Co-Counsel Agreement, KB and Allmand have agreed to share in any fees awarded to KB by the Court, with Allmand receiving an amount equal to the greater of its hourly rate for services rendered or 25% of the attorneys' fees awarded to KB, net after payment of each firm's expenses, thus satisfying the second element. Co-Counsel Agreement at 1. As to the third element, the record also shows that Allmand and KB are different law firms who have agreed to share fees earned in connection with the Second Bankruptcy Case, which does not involve a petition filed under § 303, so neither exception to the prohibition against fee sharing found in § 504(b) applies.
Thus, the only element at issue here is whether KB is being awarded compensation under either § 503(b)(2) or § 503(b)(4) of the Bankruptcy Code. Taking these in reverse order, § 503(b)(4) permits "reasonable compensation for professional services rendered by an attorney or an accountant of an entity whose expense is allowable under subparagraph (A), (B), (C), (D), or (E) of paragraph (3) of this subsection." 11 U.S.C. § 503(b)(4). However, none of the situations addressed § 503(b)(3)(A)-(E) are applicable here.
In contrast, § 503(b)(2) permits an allowed administrative expense for "compensation and reimbursement awarded under section 330(a) of this title." 11 U.S.C. § 503(b)(2). As relevant here, § 330(a)(4)(B) states in part that:
11 U.S.C. § 330(a)(4)(B). Thus, for this section to apply, KB must be representing the Debtor's interests "in connection with" the Second Bankruptcy Case.
OSC Brief ¶ 23.
The OSC Brief, however, does not cite to any statute or precedent in support of its proposition that KB's fees were not incurred "in connection with the bankruptcy case." And, at the OSC Hearing, Bartholow admitted that "[a]nd unfortunately for me, my research has indicated that `in connection with the bankruptcy' is read very broadly." Hr'g Tr. (11/28/16) 48:6-8 (Bartholow). In making this admission, Bartholow was referring to the court's analysis in In re Powell, 314 B.R. 567 (Bankr. N.D. Tex. 2004) (Felsenthal, J.). In that case, Lori Powell filed for bankruptcy under Chapter 13, and the court later converted her case to Chapter 11. While the case was still pending under Chapter 13, however, Powell hired Brewer, Anthony, Middlebrook, Burley & Dunn ("
With this background in mind, we turn to the Complaint to determine whether the services rendered by KB in the Adversary Proceeding could have a conceivable effect on the Second Bankruptcy Case. The Complaint contains the following counts:
The Complaint also requested in unnumbered counts:
Although the Complaint sought various damages on the Debtor's behalf, a fundamental goal of the Adversary Proceeding was to address the alleged prepetition arrearage owing to Nationstar and to reduce the Debtor's mortgage payment to its pre-Disbursement level. This goal is reflected in the Nationstar Settlement, which fully addressed the Debtor's pre- and postpetition mortgage arrearages (which included the Disbursement) and established the allowed amount of Nationstar's claim. Indeed, determining Nationstar's claim (and the Debtor's monthly mortgage payments) was a key prerequisite to the Debtor's ability to confirm a Chapter 13 plan that permitted her to keep her home. Notably, when addressing the Johnson fee factor of "amount involved and results obtained" (discussed below), the Fee Application explains that "the results obtained were extraordinarily meaningful for Plaintiff: she got to save her house and reduce her loan principal balance by thousands of dollars, including the elimination of disputed pre-petition arrears." Fee Application at 18. Moreover, KB also filed the amended objection to Nationstar's proof of claim [BC ECF No. 58], which was consolidated with the Adversary Proceeding [BC ECF No. 60]. This type of claim-related litigation, as reflected in both the Complaint and the amended objection, is undoubtedly "in connection with" the Second Bankruptcy Case. See, e.g., 28 U.S.C. § 157(b)(2)(B) (listing the allowance or disallowance of claims as a "core" proceeding); In re Davis, 2009 WL 4856199, at *3 (Bankr. S.D. Miss. Dec. 9, 2009) (opining, "services that benefit the debtor in connection with the case are services that facilitate the successful completion of the debtor's plan").
Nonetheless, Counsel argues that, even if the elements of § 504(a) are facially met, the Co-Counsel Agreement does not violate the general prohibition against fee sharing or its underlying policy because KB's Court-approved fees will be paid by Nationstar. Because of this, and because Allmand is not seeking additional fees beyond those awarded to KB, Counsel argues that the Debtor and her creditors are unharmed because the funds are not property of the estate. Id. ¶¶ 24-26. The Court disagrees, as explained below
Courts have long recognized that fee sharing between attorneys in bankruptcy cases violates public policy. See Weil v. Neary, 278 U.S. 160 (1929) (condemning undisclosed fee sharing arrangement as taking the judicial function from the court). Indeed, fee sharing often "subjects the professional to outside influences over which the court has no control, which tends to transfer from the court some degree of power over expenditure and allowances." In re Winstar Commc'ns, Inc., 378 B.R. 756, 760 (Bankr. D. Del. 2007) (citations omitted). Fee sharing may also inflate the cost of bankruptcy by giving the professionals who are sharing the fees an incentive to inflate fees in order to maximize each attorney's ultimate share. In re Worldwide Direct, Inc., 316 B.R. 637, 649 (Bankr. D. Del. 2004). To combat these concerns, § 504 was enacted with the purpose of preserving "`the integrity of the bankruptcy process so that the professionals engaged in bankruptcy cases attend to their duty as officers of the bankruptcy court, rather than treat their interest in bankruptcy cases as matters of traffic.'" Winstar Commc'ns, Inc., 378 B.R. at 760 (quoting In re Warner, 141 B.R. 762, 766 (M.D. Fla. 1992) (citing In re Matis, 73 B.R. 228, 231 (Bankr. N.D.N.Y. 1987)).
The fact that Nationstar will ultimately pay the fees that KB seeks to share with Allmand does not alleviate these concerns. To the contrary, the record clearly reflects that: (1) KB agreed to pay Allmand a portion of its allowed fees, (2) as Bartholow previously explained to the Court, the shared fees are to encourage Allmand to refer cases to KB, and (3) the value of the services Allmand performed in relation to the Adversary Proceeding are less than the 25% fee that it seeks to collect from KB. Accepting this argument leads to a situation where fees otherwise subject to Court oversight under §§ 330(a)(4)(B) and 504 could be removed from that oversight by agreement between counsel and a third party willing to pay counsel's fees. Such an interpretation of these provisions would end-run the very protections afforded by § 504 in the first instance.
Further, virtually every document that KB has filed with the Court expressly states that any fees awarded to KB in the Adversary Proceeding, including any fees KB may share with Allmand, are subject to Court approval. See Engagement Letter § 1.04 ("Because Client is in a Chapter 13 bankruptcy proceeding, all attorneys' fees and expenses must be approved by the Bankruptcy Court before payment by the Trustee and/or client."); Employment Order at 2 (stating that any "award of compensation is subject to final approval by this Court"); Co-Counsel Agreement at 1 (discussing fees as "awarded by the Court") and 2 (stating that, in the event fees are contested, "we will each submit our respective fee applications to the Court" and "[w]e will review each other's fee applications prior to filing with the Court"); Nationstar Settlement at ¶ 3 ("Plaintiff shall file an application for approval of attorneys' fees and costs associated with the Adversary Proceeding and incurred through the date of this Agreement, as required by chapter 3 of the United States Bankruptcy Code and Federal Rule of Bankruptcy Procedure 2016(a).").
Counsel specifically represented to the Court and agreed with the Debtor, Nationstar, and among themselves that any fees awarded to KB in this case would be subject to Court review and approval, and it is § 330(a)(4)(B) that permits allowance of reasonable compensation to a Chapter 13 debtor's attorney for representing the interests of the debtor in connection with the bankruptcy case. Indeed, Counsel did not cite to, nor is the Court aware of, another provision of the Bankruptcy Code that would permit it to allow reasonable compensation to counsel representing a Chapter 13 debtor in connection with her bankruptcy case.
Thus, the Court finds and concludes that the Co-Counsel Agreement meets each of the three elements necessary to show that it is an improper fee-sharing agreement prohibited by 11 U.S.C. § 504. Specifically, (1) the compensation awarded to KB in the Adversary Proceeding is pursuant to §§ 503(b)(2) and 330(a)(4)(B), (2) KB and Allmand agreed that Allmand would share in the compensation awarded by the Court to KB, and (3) KB and Allmand do not fit within one of the statutory exceptions found in § 504(b).
B. KB's Failure to Adequately Disclose the Terms of the Co-Counsel Agreement and its Prior Connections with Allmand
Under § 329(a) of the Bankruptcy Code, an attorney representing a debtor in or in connection with a bankruptcy case must file with the court "a statement of the compensation paid or agreed to be paid, if such payment or agreement was made after one year before the date of the filing of the petition, for services rendered or to be rendered in contemplation of or in connection with the case by such attorney, and the source of such compensation." 11 U.S.C. § 329(a). The statement must also include a disclosure of whether the attorney has shared or agreed to share the compensation with any other entity, and "the particulars of any such sharing or agreement to share by the attorney, but the details of any agreement for the sharing of the compensation with a member or regular associate of the attorney's law firm shall not be required." FED. R. BANKR. P. 2016(b).
In addition to the disclosures required by § 329(a) and Bankruptcy Rule 2016(b), Bankruptcy Rule 2014(a) requires that the application of a professional seeking employment under § 327
In this regard, Bartholow's affidavit submitted in support of KB's employment [BC No. 18-1] (the "
Bartholow Affidavit ¶ 6. In the next paragraph, Bartholow discloses the existence of the Co-Counsel Agreement, which is clearly a connection between Allmand and KB. Id. ¶ 7. However, neither the Bartholow Affidavit nor the Employment Application discloses (1) the terms of the Co-Counsel Agreement, instead requiring the reader to parse through the terms of the Co-Counsel Agreement herself, or (2) the fact that KB and Allmand have entered into at least one similar agreement in the past—a connection only disclosed orally at the Fee Hearing.
Although the Court does not believe that KB (1) concealed the Co-Counsel Agreement, as it was attached to the Employment Application and was at least cryptically referenced in the Employment Application, or (2) intentionally misled the Court, its disclosures regarding the Co-Counsel Agreement were less than complete, and the disclosure of its connections with Allmand were clearly deficient. The almost certain fee sharing between KB and Allmand in the Second Bankruptcy Case should have been expressly disclosed in the body of the Employment Application and in the Bartholow Affidavit so that the Court (and other parties in interest) could properly evaluate the effect of the fee sharing provision. Moreover, KB was clearly required to disclose as a prior connection its agreement to share fees with Allmand in the In re Kristin Brunner-Halteman case, which KB failed to do.
The Court takes these failures to disclose very seriously, and so should counsel. Indeed, KB's failure in this regard is grounds for this Court to reduce (or even deny in full) its fees. See Waldron v. Adams & Reese, L.L.P. (In re Am. Int'l Refinery Inc.), 676 F.3d 455, 465-66 (5th Cir. 2012) ("Courts may deny all compensation to professionals who fail to make adequate disclosure, and `counsel who fail to disclose timely and completely their connections proceed at their own risk because failure to disclose is sufficient grounds to revoke an employment order and deny compensation.'") (quoting I.G. Petroleum v. Fenasci (In re West Delta Oil Co., Inc.), 432 F.3d 347, 355 (5th Cir. 2005)).
Given KB's failure to adequately disclose the fee-sharing arrangement and its connections with Allmand, and to acknowledge KB's entry into an improper fee-sharing agreement with Allmand in violation of 11 U.S.C. § 504, the Court concludes that a monetary sanction of some sort should be imposed upon KB. In evaluating what monetary sanction would be appropriate, the Court concludes that a 25% reduction of the fees otherwise allowable to KB for its representation of the Debtor is appropriate, as this is the amount of fees that KB agreed to share with Allmand in violation of 11 U.S.C. § 504. In other words, while KB should be paid for its services that benefitted the Debtor, it should not be rewarded for its entry into an improper fee-sharing agreement, particularly in light of its failures to adequately disclose. The Court finds that this reduction sufficiently addresses KB's failure to comply fully with the disclosure requirements imposed by the Bankruptcy Code and Rules, while also recognizing that KB provided necessary and beneficial services to the Debtor in the Adversary Proceeding. See In re Anderson, 936 F.2d 199, 204 (5th Cir. 1991) ("Under the facts and circumstances of this case [involving a violation of § 504], we would likely have affirmed a total disallowance of fees had the bankruptcy court so held. But, given the broad discretion of that court in such matters, we do not find an abuse of discretion in the grant of attorney's fees vel non or in the amount granted."). Although this ruling will result in Nationstar paying less in attorneys' fees than it would have otherwise been required to pay if KB had not entered into the Co-Counsel Agreement in the first instance, the Court believes that this is the appropriate outcome here.
C. Cancellation of the Co-Counsel Agreement Under 11 U.S.C. § 329(b)
As previously explained, § 329(a) of the Bankruptcy Code requires that an attorney representing a debtor in or in connection with a bankruptcy case file with the court a statement of the compensation paid or agreed to be paid, if such payment or agreement was made after one year prior to the petition date for services rendered or to be rendered in contemplation of or in connection with the bankruptcy case. 11 U.S.C. § 329(a); see also FED. R. BANKR. P. 2016(b). If the Court finds that such compensation exceeds the reasonable value of the services rendered, it may cancel the agreement. 11 U.S.C. § 329(b).
Notably, this disclosure requirement (as well as those discussed above) apply equally to Allmand. A review of the docket, however, shows that Allmand has only disclosed its agreement to accept $3,500 for serving as the Debtor's bankruptcy counsel in the Second Bankruptcy Case. See Disclosure of Compensation of Attorney for Debtor [BC ECF No. 1] at 42 of 56. At no point has Allmand separately disclosed the fee arrangement set forth in the Co-Counsel Agreement.
Moreover, although the Co-Counsel Agreement permitted Allmand the option to seek payment for its hourly fees, it has chosen not to do so. Instead, as explained in KB's Fee Application:
Fee Application at 2 n.1. Notably, this language is the only information in the record regarding the nature and extent of the services Allmand rendered in the Adversary Proceeding. And, based upon this language, it is clear that the value of the services Allmand rendered in the Adversary Proceeding total an amount less than the 25% fee it seeks to collect from KB. Because of this, the Court concludes that the Co-Counsel Agreement must be cancelled under the provisions of 11 U.S.C. § 329(b). Upon cancellation, the Co-Counsel Agreement shall be unenforceable and Allmand shall not be entitled to any portion of the fees awarded to KB in the Adversary Proceeding.
D. Sua Sponte Amendment of the Employment Order
Finally, in regards to its Order to Show Cause, the Court will not set aside the Employment Order. Instead, the Court sua sponte amends the Employment Order to the extent it may have impliedly authorized KB to enter into the Co-Counsel Agreement. See Baum v. Blue Moon Ventures, LLC, 513 F.3d 181 (5th Cir. 2008) (district court may sua sponte modify its order pursuant to FED. R. CIV. P. 60(b) if the modification is preceded by appropriate notice and opportunity for hearing); McDowell v. Celebrezze, 310 F.2d 43, 44 (5th Cir. 1962) (same). The terms of KB's employment under the Employment Order are otherwise unchanged.
IV. ALLOWANCE OF KB'S REASONABLE FEES AND EXPENSES
A. Standard of Review
Under § 330(a)(4)(B) of the Bankruptcy Code, the court may allow "reasonable compensation to the debtor's attorney for representing the interests of the debtor in connection with the bankruptcy case based on a consideration of the benefit and necessity of such services to the debtor and the other factors set forth in this section." 11 U.S.C. § 330(a)(4)(B).
11 U.S.C. § 330(a)(3).
In addition, the Fifth Circuit evaluates whether an award for attorneys' fees is reasonable pursuant to a "lodestar" analysis under factors provided in Johnson v. Georgia Highway Express, Inc., 488 F.2d 714 (5th Cir. 1974) (establishing what is commonly known as the "Johnson factors" for the determination of the reasonableness of an award for attorneys' fees). The Johnson factors are: (1) the time and labor required, (2) the novelty and difficulty of the questions, (3) the skill requisite to perform the legal service properly, (4) the preclusion of other employment by the attorney due to acceptance of the case, (5) the customary fee, (6) whether the fee is fixed or contingent, (7) time limitations imposed by the client or the circumstances, (8) the amount involved and the results obtained, (9) the experience, reputation, and ability of the attorneys, (10) the "undesirability" of the case, (11) the nature and length of the professional relationship with the client, and (12) awards in similar cases. Id. at 717-18.
The lodestar fee is equal to the number of hours reasonably expended multiplied by a reasonable hourly rate. Rutherford v. Harris County, Texas, 197 F.3d 173, 192 (5th Cir. 1999). The Court may then adjust the lodestar to reflect the special circumstances of the case and the Johnson factors. McClain v. Lufkin Indus., 519 F.3d 264, 268 (5th Cir. 2008) (citing Johnson, 488 F.2d at 714); In re Cahill, 428 F.3d 536, 539-40 (5th Cir. 2005) (applying the Johnson factors in the context of a bankruptcy case). Overall, the Court has broad discretion in determining the amount of reasonable attorney's fees. See Cahill, 428 F.3d at 539.
B. Nationstar's Objection
Nationstar objects to the allowance of KB's fees and expenses on multiple grounds. First, Nationstar argues that KB's fees and expenses should be disallowed in their entirety because (1) under the "American Rule" parties are to bear their own costs of litigation, (2) although KB is only seeking allowance of fees for Nationstar's alleged stay violation, it failed to segregate fees among the various categories of services it performed, and (3) KB is a party to an improper fee-sharing arrangement. The Court will address these objections in turn.
First, the Court is perplexed as to why Nationstar would argue that the Court must disallow KB's fees in full based on the "American Rule," whereby a litigant is not entitled to recover attorneys' fees in the absence of explicit statutory or contractual authority. Notably, as part of the Nationstar Settlement, the parties established a contractual mechanism for the Debtor to seek payment of KB's fees and expenses, with Nationstar agreeing to pay the amounts ultimately allowed by a final, non-appealable order. Although the Nationstar Settlement does permit Nationstar to object to the payment of KB's fees and expenses on all grounds, to now argue that the American Rule prohibits payment of fees under a settlement agreement that expressly permits such payment is specious at best. Accordingly, this objection is overruled.
Response ¶¶ 16-17. This objection is also perplexing. Notably, the Nationstar Settlement expressly permits the Plaintiff to seek all attorneys' fees and costs associated with the Adversary Proceeding incurred through the date of the settlement, and Nationstar readily admits that the Adversary Proceeding involved multiple claims and not just an alleged stay violation. Additionally, there is nothing in the Fee Application limiting the fees sought to a single cause of action. To the contrary, KB is clearly seeking allowance of all fees and costs it believes are associated with the Adversary Proceeding. Ultimately, it appears to the Court that Nationstar is relying on a few paragraphs of the Fee Application,
Next, Nationstar argues that the Court should disallow KB's fees and expenses in full because it is a party to an improper fee sharing agreement. In support of this argument, Nationstar cites to In re Egwu, 2012 WL 5193958, at *4 (Bankr. D. Md. Oct. 19, 2012). Although Egwu also involved a fee-sharing arrangement, the emphasis of the decision was not only the existence of the fee sharing agreement, but counsel's failure to disclose that agreement to the Court:
Here, as previously found, there is nothing in the record indicating that KB concealed the Co-Counsel Agreement or intentionally misled the Court. To the contrary, KB attached a copy of the Co-Counsel Agreement to the Employment Application, although the implications of that agreement were not expressly disclosed in the Employment Application and went initially unnoticed by the Court. Had the Court focused on the terms of the Co-Counsel Agreement earlier in the Second Bankruptcy Case and voiced its concerns, KB would have had the opportunity to resolve this issue prior to incurring significant fees. Moreover, in Egwu, the attorney involved in the fee-sharing agreement did a poor job representing the debtor, which appeared to be a contributing factor to the disallowance of fees. Id. ("While there were valuable services rendered, that value is clouded by the mismanagement of the Debtor's Section 341 meeting and in court representation of which the fee-sharing arrangement was part and parcel."). The record before this Court, however, clearly establishes that KB was both competent and diligent in prosecuting the Debtor's claims in the Adversary Proceeding. Although the Court will reduce KB's allowed fees for its failure to make adequate and complete disclosures in relation to the Co-Counsel Agreement (see § III.B, supra), it will not disallow KB's fees in full. Thus, the objection is partially sustained as set forth herein.
Nationstar further argues that, if KB's fees and expenses are not disallowed in full, they should be reduced by: (1) a minimum of 25%, since that is the amount KB agreed to share with Allmand, (2) amounts incurred prior to KB filing the Complaint, (3) amounts incurred after the Debtor rejected Nationstar's proposed settlement, (4) amounts incurred related to the Debtor's requests for information and notices of error, (5) amounts incurred in filing an amended claim objection, and (6) amounts incurred after the date of the Nationstar Settlement. Nationstar also objects to the allowance of KB's fees based on certain of the Johnson factors, as discussed further below.
Taking these in turn, Nationstar first alleges that KB has overstated its fees by at least 25%, which is the amount of fees it agreed to share with Allmand. The Court disagrees. As explained below in the analysis of the Johnson factors, with very limited exceptions, KB's fees are allowable under the review standards imposed by the Bankruptcy Code and Fifth Circuit precedent. The fact that KB agreed to share a portion of its fees with Allmand does not equate to KB not having earned those fees in the first instance. As previously discussed, however, the Court will reduce KB's fees by 25% in acknowledgement of its entry into the Co-Counsel Agreement and its failure to adequately disclose its connections with Allmand. See § III.B, supra.
Nationstar next argues that the Court should reduce KB's fees by $10,410 because the Debtor failed to make a "pre-suit demand" and because the 80-paragraph Complaint KB drafted was excessive under the lenient pleading standards of Federal Rule of Civil Procedure ("
Nationstar also argues that the Court should deny allowance of $31,620 in fees incurred by KB after Nationstar made an offer of judgment. According to Nationstar, on February 29, 2016, it offered to waive its claim related to the Disbursement and to pay then-outstanding attorneys' fees; however, the Debtor declined the offer and the Adversary Proceeding was litigated an additional five months before it ultimately settled (for a greater amount). Again, Nationstar cites to no statute or precedent in support of its argument. Presumably, it is referring to Federal Rule 68 titled "Offer of Judgement." That rule, however, applies to a judgment entered after a party refuses a settlement offer. FED. R. CIV. P. 68. It is not applicable to a subsequent settlement made after an initial settlement offer is refused. Id. Moreover, even if Federal Rule 68 were applicable to the facts of this case, it would still not relieve Nationstar of its obligation to pay allowed fees because the settlement was in an amount greater than Nationstar's offer. See FED. R. CIV. P. 68(d), as made applicable by FED. R. BANKR. P. 7068 ("If the judgment that the offeree finally obtains is not more favorable than the unaccepted offer, the offeree must pay the costs incurred after the offer was made."). As such, this objection is overruled.
Nationstar further argues that the Court should deny $1,635 in fees related to KB sending multiple requests for information and notices of error under RESPA because they are not related to the litigation. The Court disagrees. To the contrary, KB sent the requests for information and notices of error to investigate and potentially resolve the Debtor's claims at the pre-litigation stage. Had Nationstar provided complete information to the correct attorney, the litigation may have been avoided.
Next, Nationstar argues that the Court should deny $862.50 in fees related to KB filing an amended objection to Nationstar's claim because the objection was not "associated with" the litigation. To the contrary, on March 9, 2016, the Court entered an Order granting an agreed motion to consolidate the claim objection into the Adversary Proceeding [BC ECF No. 60]. Accordingly, the amended claim objection is clearly "associated with" the Adversary Proceeding, and Nationstar's objection is overruled.
The last of Nationstar's general objections relates to $2,560 in fees allegedly incurred by KB after the parties entered into the Nationstar Settlement, which Nationstar argues should not be allowed because KB gives no explanation of how the post-settlement fees "advanced the Debtor's claim for a stay violation, and it is difficult to discern how the post-settlement fees could have created any additional benefit." Response ¶ 31. As previously explained, however, neither the Fee Application nor the Nationstar Settlement limit the fees for which KB may seek approval to those related to Nationstar's alleged stay violation. Nonetheless, Bartholow announced at the outset of the Fee Hearing that KB would voluntarily waive its fees incurred after entry into the Nationstar Settlement on August 31, 2016,
With Nationstar's general objections resolved, the Court will now turn its attention to an analysis of KB's fees under the applicable Johnson factors and Nationstar's remaining objections related thereto.
C. Analysis of the
i. Time and Labor Required
KB requests allowance of $71,575 in fees for services rendered to the Debtor in relation to the Adversary Proceeding. This amount reflects 289.20 hours of total attorney and paralegal time, resulting in an overall blended hourly rate of approximately $247.50 per hour. Based upon its review of the Fee Application and the evidence presented at Fee Hearing, the Court finds that all but $2,200
ii. Novelty and Difficulty of Questions Involved
Although KB is experienced in handling the types of claims alleged in the Complaint, the difficulty of the Adversary Proceeding was increased by Nationstar's actions, as described above. Overall, the Court finds that the time KB spent in prosecuting the Adversary Proceeding was commensurate with the novelty and difficulty of the issues presented.
iii. Skill Requisite to Perform Services Properly
KB has significant experience in bringing the types of claims alleged in the Complaint, and it prosecuted the Adversary Proceeding with the skills required to perform its services properly.
iv. Preclusion of Other Employment
It is unknown whether KB's representation of the Debtor in the Adversary Proceeding precluded it from accepting other employment.
v. Fee Customarily Charged
The billing records reflect that the hourly rates for the attorneys who worked on the Adversary Proceeding ranged from $200 per hour for the most-junior associate to $500 per hour for the most-senior partner. Overall, the hourly rates charged by KB are within the range of those customarily charged by professionals having comparable skills and expertise in similar matters.
vi. Whether the Fee is Fixed or Contingent
As reflected in the Engagement Letter, the Debtor agreed to compensate KB at its hourly rates. In the Fee Application, however, KB alleges that, because it is unlikely that the Debtor has the resources to pay its fee, KB rendered its services in a situation akin to a contingency fee agreement, which KB argues justifies an upward adjustment of the lodestar. Nationstar objects to any upward adjustment because (1) the Engagement Letter clearly states that the Debtor employed KB on an hourly basis, and (2) if KB's fees were on a standard contingency-fee basis of 33-40%, its fees would be between $9,061.43 and $10,983. The Court agrees with Nationstar that KB's engagement was clearly on an hourly basis. Moreover, the Court finds that an upward adjustment of KB's fees is not warranted under the facts here.
vii. Time Limitations Imposed by Client or Circumstances
The time limitations imposed by the Debtor and the circumstances surrounding the Adversary Proceeding were not unusual or out of the ordinary for a lawsuit of this size and complexity.
viii. Amounts Involved and Results Obtained
Nationstar objects under this Johnson factor. According to Nationstar, it proposed a settlement to the Debtor on February 29, 2016 offering to waive its $12,321.38 claim related to the Disbursement and to pay then-outstanding attorneys' fees. The Debtor declined this offer, and the parties' ultimately reached the Nationstar Settlement whereby Nationstar agreed to waive $27,458.87 in pre- and postpetition arrearages, which included its claim related to the Disbursement, and to pay KB's allowed attorneys' fees and costs through the date of settlement. Response ¶ 36. During the intervening five months, however, KB incurred an additional $31,620 in fees. Id. Nationstar argues that the results KB obtained for the Debtor above Nationstar's initial settlement offer (approximately $15,137) are grossly outweighed by the additional attorneys' fees KB incurred during the intervening five months (approximately $31,620). The Court disagrees, as explained below.
Although this is a somewhat typical consumer lawsuit in that the amounts involved are relatively small, the results obtained were significant to the Debtor in comparison to her limited resources. Pursuant to the Nationstar Settlement, the Debtor's overall loan balance was reduced by several thousand dollars, the claim related to the Disbursement was waived, and her monthly mortgage payments were reduced. Overall, the Nationstar Settlement will permit the Debtor to keep her home, assuming she remains current on future payments. The Debtor derived substantial and meaningful benefit from the work performed by KB in the Adversary Proceeding. Thus, Nationstar's objection is overruled.
ix. Experience, Reputation, and Ability of Professional
As testified to at the Fee Hearing, both Ms. Kellett and Mr. Bartholow have substantial experience in consumer litigation, and KB has a good reputation within the community for prosecuting the types of claims alleged in the Complaint.
x. Undesirability of Case
Although KB alleges in the Fee Application that the risk of not being compensated for work performed and the inherent delay in receiving compensation made this lawsuit somewhat undesirable, it appears to the Court that such risks are standard for this type of representation.
xi. Nature and Length of Professional Relationship with the Client
This factor is not relevant here because KB had no professional relationship with the Debtor prior to its retention to pursue the Debtor's claims against Nationstar.
xii. Awards in Similar Cases
Based upon its experience, the Court finds that the compensation requested, although somewhat high, is consistent with awards in similar cases. And, to a large extent, the incremental fees incurred by KB were precipitated by Nationstar's conduct here.
D. Award of Expenses
Nationstar objects to KB's requested expenses arguing that it should not be required to pay (1) $36.88 in expenses related to mailing costs for the RESPA requests for information and notices of error, and (2) $1,350 in voluntary mediation fees because neither expense is "associated with" the Adversary Proceeding. Once again, the Court disagrees. Both expenses are clearly "associated with" the Adversary Proceeding, either as pre-litigation information requests or fees incurred in an attempt to settle the litigation. Moreover, KB incurred each expense during the relevant period and each expense was reasonable and necessary. Accordingly, Nationstar's objection is overruled.
As to overall expenses, the Court has reviewed the expense detail contained within the Fee Application and finds that the expenses KB incurred for which it seeks reimbursement were (1) reasonable, (2) necessary, and (3) "associated with" its representation of the Debtor in the Adversary Proceeding. Accordingly, the Court will allow KB's expenses in the requested amount of $1,585.
For the reasons explained above, the Court finds and concludes that:
ORDERED that any objection to the allowance of KB's fees and expenses not sustained in this Memorandum Opinion and Order is hereby overruled. It is further
ORDERED that KB is allowed $52,031.25 in reasonable and necessary fees for the services it provided for the period of November 7, 2014 through and including August 31, 2016 that were associated with the Adversary Proceeding. It is further
ORDERED that KB is allowed $1,585.00 as reimbursement of reasonable and necessary expenses it incurred for the period of November 7, 2014 through and including August 31, 2016 that were associated with the Adversary Proceeding. It is further
ORDERED that the Co-Counsel Agreement between KB and Allmand is cancelled in accordance with 11 U.S.C. § 329(b) and shall not be enforceable against KB. It is further
ORDERED that the Employment Order is hereby amended to the extent it may have impliedly authorized KB to enter into the Co-Counsel Agreement. The terms of KB's employment, however, are otherwise unchanged. It is further
ORDERED that Allmand shall share in no portion of the compensation or reimbursement of expenses allowed to KB under the terms of this Memorandum Opinion and Order. It is further
ORDERED that this Memorandum Opinion and Order is without prejudice to any fees and/or expenses that Allmand may be entitled to in its capacity as Debtor's bankruptcy counsel in the Second Bankruptcy Case based upon either the "standard fee" permitted under ¶ 21 of this Court's Standing Order Concerning All Chapter 13 Cases (General Order 2016-01) or any application that Allmand may file with the Court seeking fees based upon its standard hourly rates.
11 U.S.C. § 503(b)(3).