Contributed by Blaire Cahn
The recent decision by the United States Court of Appeals for the Ninth Circuit in Montana Department of Revenue v. Duncan, No. 09-36062, 2010 WL 4903952 (9th Cir. Dec. 2, 2010) serves as a reminder that courts examine requests for payment of professional fees carefully and will not require debtors to reimburse fees for duplicative or unnecessary work.
As an oversecured creditor in the chapter 7 case of Gregory and Laurie Duncan, the Montana Department of Revenue made a request pursuant to section 506(b) of the Bankruptcy Code for payment by the debtors of certain attorneys’ fees. The attorneys’ fees in question related to work performed by outside counsel. The chapter 7 trustee and the debtors objected to the fee request arguing that the attorneys’ fees were not reasonable under section 506(b) of the Bankruptcy Code.
Section 506(b) provides, under certain circumstances, for payment to secured creditors of “reasonable fees, costs, or charges provided for under the agreement or State statute under which such claim arose.” The relevant Montana statutes echo this reasonableness requirement.
The central inquiry in evaluating the fee request was the “reasonableness” of the outside counsel’s fees as the parties agreed that the other elements of section 506(b) were satisfied. In re Duncan, Case No. 07-61053-7 (Bankr. D. Mont. June 8, 2009).
The bankruptcy court determined that the outside counsel’s fees were not reasonable, observing that the Montana Department of Revenue already was represented by three special assistant attorneys general, the proofs of claim for the Montana Department of Revenue were prepared by one of its bankruptcy specialists who possessed several years of experience, and the claim filed by the Montana Department of Revenue was unchallenged. The bankruptcy court also pointed out that there was no evidence that the outside counsel had changed the outcome of the case for the Montana Department of Revenue and stated, “If a creditor’s claim is not in jeopardy then overworking the case for fees is not reasonable.”
The Montana Department of Revenue appealed the bankruptcy court’s decision arguing that the bankruptcy court created a per se rule that attorneys’ fees are not available to a creditor in cases where the creditor’s claim is unchallenged. Montana Department of Revenue v. U.S. Trustee (In re Duncan), Case No. CV 09-94-M-DWM (D. Mont. Oct. 30, 2009). Both the district court and the Ninth Circuit determined that no per se rule was created because the bankruptcy court had considered multiple factors in determining that the attorneys’ fees were not reasonable, citing the bankruptcy court’s consideration of the excessive number of attorneys representing the Montana Department of Revenue, the time billed by the outside counsel, and the failure by the Montana Department of Revenue to prove what benefit, if any, resulted from the outside counsel’s work.
Professionals take note: fee requests are not rubber-stamped for approval. While, as the Ninth Circuit stated, there is no per se rule disallowing attorneys’ fees requested by a creditor whose claim is unchallenged, the Duncan case is an important reminder that courts carefully vet professional fees before requiring that they be paid by a debtor. Creditors who anticipate requesting reimbursement of their fees pursuant to section 506(b) should be careful to avoid duplicative and unnecessary professional services and should bear in mind when incurring the fees that their request for reimbursement may be denied.