The Difference Between Bankruptcy & Receivership Payment of Legal Fees to Defend Fee Applications

by Ervin Cohen & Jessup LLP

QUESTION: I was appointed receiver for an apartment building. I operated the property for six months, then the defendant filed bankruptcy. I filed a claim, as a superseded custodian, under 11 U.S.C. § 543. The debtor objected to my fees and made various other crazy objections. I had to hire counsel to defend my fees and to deal with all the objections. Debtor’s counsel now claims my counsel and I are not entitled to be paid for having to defend my fee request. Is that correct?

ANSWER: The Supreme Court has held that fees incurred in defending fee applications in bankruptcy cases are not compensable from a bankruptcy estate. However, that restriction does not apply to a receiver or his counsel, who have to defend the receiver’s compensation when the receiver seeks to be paid as a superseded custodian. This was explained recently by the bankruptcy court in In re 29 Brooklyn Avenue LLC, 548 B.R. 642 (Bankr. E.D.N.Y. 2016). In the case, a bank started a foreclosure and had a receiver appointed. Fifteen months later, the borrower filed Chapter 11. The receiver filed a claim for his pre-petition fees and expenses as well as his fees for preparing and filing his final report with the bankruptcy court, as required under 11 U.S.C. § 543(b). The debtor objected to the receiver’s fees and report. Extensive discovery took place, and there was an eight day trial. The bankruptcy court allowed the receiver’s claim for $72,223.86, only disallowing $225.49 of the receiver’s claim. The receiver then filed a motion for allowance of his attorney’s fees for defending the objection to his claim. The receiver sought $355,953.25. The court stated that whether the fee application could be granted depended on whether the services the receiver’s counsel rendered were compensable under the Bankruptcy Code and whether the amount sought was reasonable.

In deciding these issues, the court first noted that custodians, such as a superseded receiver, are entitled to be reimbursed for their fees and expenses from the bankruptcy estate. Id. at 645. 11 U.S.C. § 543(c)(2) states in part: The court “shall…provide for payment of reasonable compensation for services rendered and costs and expenses incurred by such custodian.” This compensation is entitled to an administrative priority under § 503(b)(3)(E), which provides for an allowed administrative expense for “the actual, necessary expenses…incurred by…a custodian superseded under §543 of this title, and compensation for the services of such custodian.”

In addition to allowing expenses and compensation for the receiver, § 503(b)(4) grants an allowed administrative expense for “reasonable compensation for professional services rendered by an attorney or an accountant of an entity whose expenses allowed under subparagraph (A), (B), (C), (D), or (E) of paragraph (3) of this subsection.” The court concluded that the attorney’s fees requested by the receiver’s counsel could be allowed to the extent they fell under the ambit of § 503(b)(4). The court stated there was no question that the receiver’s counsel was entitled to fees for services directly related to the process of turning over property of the estate in the receiver’s control and providing the required accounting. It further noted it was not necessary for the receiver to obtain approval for retention of counsel from the bankruptcy court as a prerequisite to seeking a fee under § 503(d)(4). Id. at 646.

The debtor argued, however, that given the Supreme Court’s decision in Baker Botts LLP v. ASARCO LLC, 135 S. Ct. 2158(2015) (“ASARCO”), which bars the payment of fees for defending fee applications, the receiver’s counsel should not receive compensation for defending the receiver’s fee application. The court rejected that argument pointing out that ASARCO was distinguishable on a number of grounds. Id. at 647. First, in ASARCO it was the debtor who was objecting to its former counsel’s fees. The Supreme Court in the case held that litigating against one’s own client did not fall within what the court considered “actual, necessary services rendered” under § 330(a). In the current case, however, the services were rendered for the client. The work was performed by the receiver’s counsel in defending the receiver.

The more basic distinction, however, was that the code section involved was § 503(b)(4) of the Bankruptcy Code not § 330(a) which was involved in ASARCO. The court indicated this was a completely different fee shifting statute. The court stated § 503(b)(4) constitutes an explicit fee shifting statute under the standards articulated in ASARCO. Section 503(b)(4) specifically provides for attorney’s fees for the prevailing party – in this case, an entity whose expenses have been determined to be allowable under § 503(b)(3)(A) – (E). The court, therefore, held that the receiver’s counsel was entitled to reasonable compensation for services rendered to the receiver. Id. at 647-48. The court stated the standard for reasonableness under § 503(b)(4) are “the time, the nature, the extent and the value of such services, and the costs of comparable services under this title.” Id. at 652. Because some of the counsels’ time descriptions were vague and contained lumped entries, and because of what the court felt were some duplicate services, the court reduced the fee request, but it still awarded the receiver’s counsel $234,206.25 in fees. Id. at 654.

So debtor’s counsel in your case is incorrect. If you need to have counsel defend your fee request, your counsel is entitled to be paid from the bankruptcy estate, so long as your defense is successful.

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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