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Contingency fee can be reduced

What the court held

Case: In re: Susan L. Gilbertson, No. 04-37868-svk

Issue: When an attorney is retained by a trustee to recover assets for a bankruptcy estate pursuant to a contingency fee agreement, can the fee be reduced if the recovery is obtained "unexpectedly early"?

Holding: Yes. If the fee is unreasonable in light of the hours expended and risk incurred, the fee may be reduced.

A bankruptcy judge can reduce the contingency fee of an attorney retained to recover assets belonging to the estate, if the fee is unreasonable.

In reaching that holding on Mar. 29, U.S. Bankruptcy Judge Susan V. Kelley concluded that an unexpected ease in recovery was a development not capable of being anticipated at the time he was retained.

Susan L. Gilbertson filed for bankruptcy, and the Trustee attempted to recover an alleged fraudulent transfer by Gilbertson to an Appleton attorney. When he received no response, he applied to employ attorney William A. Rinehart to recover the money.

The order authorizing the Trustee to employ Rinehart provided for a 33 1/3 percent contingency fee. Rinehart recovered $10,000, while incurring only 2.7 billable hours. He then filed his application for compensation, seeking the agreed upon $3,333.34 (if paid, the fee would have translated to $1,235 per hour).

The Trustee sought approval, but Judge Kelley held, in a written ruling that she had authority to reduce the fee, and did so, to $1,890.

11 U.S.C. 328(a) provides that a trustee, with the court’s approval may employ an attorney on a contingent fee basis.

However, the statute also provides, “Notwithstanding such terms and conditions, the court may allow compensation different from the compensation provided under such terms and conditions after the conclusion of such employment, if such terms and conditions prove to have been improvident in light of developments not capable of being anticipated at the time of the fixing of such terms and conditions.”

Section 330 states that, “subject to” sec. 328, a bankruptcy court may award “reasonable compensation” to a professional employed by the trustee.

Judge Kelley acknowledged that some courts have held that, once a court has approved a contingency fee under sec. 328(a), the court has no discretion to adjust the compensation at the conclusion of the engagement based on “reasonableness.” Nischwitz v. Airspect Air, Inc., 288 B.R. 464 (B.A.P. 6th Cir. 2003), reversed on other grounds, 385 F.3d 915 (6th Cir. 2004); Daniels v. Barron, 325 F.3d 690 (5th Cir. 2003).

However, the court found that the Seventh Circuit does not accept that position. In In re Lytton’s, 832 F.2d 395 (7th Cir. 1987), a creditor appealed an order appointing counsel. The Seventh Circuit held that the order was not a final order, and was thus, not appealable.

In support of its decision, the Seventh Circuit wrote, “Section 328 read in conjunction with section 330 contemplates that an attorney seeking a contingent fee payment still must apply to the bankruptcy court and that the language of section expressly allows setting a rate of payment at the beginning of an attorney’s employment that may later be changed.” Lytton, 832 F.2d at 400.

The Seventh Circuit cited, with approval, In re General Oil Distributors, Inc., 51 B.R. 794 (Bankr.E.D.N.Y.1985), in which an attorney’s fee was reduced by ten percent for lack of success in litigation.

Relying on Lytton’s, and In re Churchfield Management & Investment Corp., 98 B.R. 893 (Bankr. N.D.Ill.1989), Judge Kelley concluded that she had authority to reduce a contingency fee if the amount is unreasonable relative to the amount of work performed.

Kelley explained, “If a sec. 328(a) appointment forecloses a court from reviewing the reasonableness of compensation under sec. 330, there would be no need to require an applicant to submit detailed fee applications giving the hours worked and services rendered and no point in the ‘notice and hearing’ provisions noted by the Seventh Circuit Court of Appeals in Lytton’s.”

Ultimately, however, Kelley did not decide the case based on “reasonableness”; instead, she held that she could reduce the fee because the arrangement proved “improvident in light of the unexpectedly early and easy resolution of this matter.”

Kelley cited the following passage from Seiler v. First National Bank of Babbitt, 72 B.R. 44 (D.Minn.1987), in which the district court reversed the bankruptcy court for reducing a contingency fee without specific findings of unforeseeable and unexpected circumstances.

The court there wrote, “three is no finding of fact by the bankruptcy judge that appellants’ representation of debtor … was inadequate, that the dispute with the state was resolved at an unexpectedly early moment of the proceedings, that the results obtained were disappointing, or that the property escalated in value due to forces outside counsel’s control (emphasis added by Judge Kelley).” Seiler, 72 B.R. at 48-49.

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Case Analysis

Distinguishing Seiler on its facts, but adopting its rationale, Judge Kelley wrote, “In our case, the court finds that the dispute with the Transferee was resolved at an unexpectedly early moment of the proceedings; it took precisely one letter and two telephone calls to obtain a refund of the Debtor’s transfer. Such an early and easy result could not have been foreseen by the Trustee when he applied to employ the Applicant; otherwise the application to employ counsel never would have been approved in the first place (emphasis in original).”

Judge Kelley also distinguished the case of In re Merry-Go-Round Enterprises, Inc., 244 B.R. 327 (Bankr.D.Md.2000), in which the court upheld a contingency fee almost 20 times greater than the fee would be if calculated on a purely hourly basis. In that case, however, the attorneys advanced $2 million in litigation expenses, and the case involved “hard-fought litigation that settled on the eve of trial.”

Judge Kelley concluded, “Unlike in Merry-Go-Round, applying the reasonableness factors in the instant case compels the conclusion that the Applicant’s fee should be reduced because the fee is not justified by the time and labor expended or the novelty and difficulty of the issue.”

Applying reasonableness standards, the court found that the Applicant’s regular rate is $225 per hour, but he has charged as much as $500 per hour. Finding also that the speed with which the results were obtained warranted an enhanced hourly rate, the court selected $700 per hour as reasonable. Multiplying by 2.7 hours, the court ordered that $1,890 in fees be awarded to Rinehart.

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David Ziemer can be reached by email.

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