Bankruptcy in the Northern District of Texas and Attorneys’ Fees

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In re Shayne Allan Steen and Tracie Melissa Cole, Case No. 20-50042 (Bankr. N.D. Tex, July 7, 2021) deals with a debtor’s attorneys’ fees incurred in defending the debtor in a non-dischargeability adversary proceeding filed after the debtors filed their chapter 13 bankruptcy case. Subsequent to the bankruptcy filing, Shayne Steen’s (“Shayne”) ex-wife filed an adversary proceeding against him claiming that the debt Shayne owed to her was non-dischargeable under 11 U.S.C. §523(a)(4). With the assistance of his counsel, Sam Gregory, Shayne successfully dismissed the adversary proceeding. Subsequently, Gregory sought application for compensation for his services rendered in his representation of Shayne in the adversary. Robert Wilson, the standing chapter 13 trustee (“Trustee”), objected to the application, claiming that the bankruptcy estate should not have to pay Gregory’s fees.

The Trustee’s objection was not to the amount or reasonableness of Gregory’s fees, but to payment of the fees from his disbursements. The Trustee argued that unsecured creditors should not, in effect have to bear the burden of the work done on Shayne’s behalf. The Trustee further argued that the American Rule – which provides that parties involved in civil litigation are generally responsible for paying their own attorney’s fees, absent some statutory provision providing for fee-shifting – prevents Gregory’s fees from being paid out of the chapter 13 estate. Finally, the Trustee contended that the services rendered by Gregory did not benefit the estate and thus the estate should not bear the burden of paying for his services.

The Court first analyzed §330(a)(4)(B) and noted that the statute allows attorney’s fees when services rendered provide a benefit and are necessary to the debtor; there is no requirement in a chapter 13 case that counsel’s services benefit the estate. Section 330(a)(4)(B), therefore, creates an exception to the general rule that fees are compensable from the estate only if the services benefit the estate. The Code creates an exception in § 330(a)(4)(B) for debtor-individuals under chapters 12 and 13 because a debtor’s earning ability is typically the primary asset of the estate—the debtor’s income funds the plan. The Court cited to cases finding that services that benefit the debtor in connection with the case facilitate the successful completion of the debtor’s plan. For example, the Court noted, a debtor’s litigation of the dischargeability of a particular debt, or defense against a motion for relief from the stay may determine whether the debtor will continue with the chapter 13 case. The Court thereby concluded that a Chapter 13 debtor’s counsel is entitled to an administrative expense for compensation for work that is beneficial and necessary to the debtor without proof of benefit or necessity to the Chapter 13 estate or the creditors.

With that framework, the Court looked first to determine if Gregory’s services benefitted the debtor or the estate. The Court easily concluded that Gregory’s services benefited the debtors by defending Shayne in a dispute over the dischargeability of a debt to his ex-wife. Having determined a clear benefit, the Court turned to the issue of whether Gregory’s services were necessary to the completion of the bankruptcy case, and again it easily determined that they were, finding that a dischargeability complaint is a core bankruptcy matter that challenges the most basic benefit sought by individuals in bankruptcy. Finally, the Court turned the reasonableness of the fees. Using the twelve factors enumerated in the Johnson v. Ga. Highway Express, Inc., 488 F.2d 714 (5th Cir. 1974) – the so-called “Johnson factors” – the Court concluded that Gregory’s services were reasonable.

Finally, the Court addressed a novel argument put forth by the Trustee that the American Rule precluded payment for Gregory’s services because it essentially requires the creditors to pay for the debtor’s attorneys’ fees. Citing Family Snacks, Inc. v. Andrews & Kurth, L.L.P. (In re Pro-Snax Distribs., Inc.), 212 B.R. 834, 836-37 (N.D. Tex. 1997), the Court found that Section 503 of the Bankruptcy Code creates an exception to the American Rule in bankruptcy cases by shifting certain expenses of litigation to the general creditors. This is done by permitting such expenses (including attorney fees) to be paid—as an “administrative expense” from the assets of the bankruptcy estate—ahead of the general creditors. The Court therefore found the Trustee’s reliance on the American Rule misguided because there is an explicit statutory provided that creates an exception to the American Rule that is applicable in this situation. The American Rule does not bar a fee application for attorney’s fees for services rendered on behalf of the debtor.

Having concluded that Gregory’s services were beneficial, necessary, and reasonable, the Court granted Gregory’s request for fees, holding that such fees are entitled to administrative expense priority under § 503(b)(2).

Application

Bankruptcy attorneys are all too familiar with the notion that it is often difficult to get paid in a bankruptcy case. This case offers a clear example of the proper way to be compensated for services related to a Chapter 13 bankruptcy case.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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