No-Look Fees May Limit Ch. 13 Resources In COVID-19 Era

By George Vogl and Xiaoming Wu
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Law360 (December 3, 2020, 6:07 PM EST) --
George Vogl
Xiaoming Wu
With the potential for a surge in new consumer bankruptcy filings in the coming months due to the COVID-19 crisis, bankruptcy attorneys and trustees are expected to be busier than ever.

To ease the burden on courts, no-look Chapter 13 fees can provide a streamlined approach for judges to approve debtor attorney fees without the need to review them individually.

Under local rules/standing orders, these provisions generally allow that:

[If] the attorney charges no more than a given amount, the fee sought will be deemed presumptively reasonable under Section 330 with no need to provide time records.

However, across many jurisdictions with no-look fees, there is a wide variation in whether debtor attorneys are permitted to recover additional out-of-pocket expenses, and in some instances, they are completely prohibited from doing so.

An Uneven Playing Field

Under the U.S. Bankruptcy Code, debtor attorneys are to be provided adequate compensation for their services equitably regardless of the type of bankruptcy matter at hand.

However, many believe Chapter 13 attorneys are held to a different standard from other chapters of the Bankruptcy Code when it comes to their ability to recover case-specific expenses incurred during the course of the bankruptcy proceedings.

Within the Chapter 11 process, debtor attorneys are retained and compensated as an administrative expense of the bankruptcy estate, ensuring their expenses will be paid throughout the case.

In large-scale corporate bankruptcies, a claims agent is retained as an agent of the court under Title 28 of the U.S. Code to alleviate the debtor and its professionals from the administrative burdens of claims and noticing, and the cost is paid out of the estate.

Debtor attorneys within Chapter 9, 12 and 15 cases are equitably compensated. Yet, under Chapter 13, expenses incurred by debtor attorneys are often expected to be covered as part of their no-look fees which precludes them from recovering these out-of-pocket costs.

For a typical Chapter 13 case, there is no rhyme or reason from jurisdiction to jurisdiction regarding the fee structure and how the debtor attorney can go about requesting additional fees to cover their time and expenses. In fact, even within the same state, there is often substantial variation across jurisdictions in their fee structures.

When the volume of cases becomes multiplied due to the COVID-19 pandemic which many believe will lead to a surge in new Chapter 13 filings, these debtor attorneys may face significant, and in some cases, insurmountable, challenges in meeting the demand if they cannot be adequately compensated for their services.

A Brief Overview of No-Look Fees

Generally speaking, no-look fees are intended to cover the routine tasks of counsel to the debtor for the duration of the case. Some jurisdictions will vary the amount of the no-look fee based on the expected level of complexity involved in the case or the level of expertise provided by the attorney.

At the onset of the case at the time of the Rule 2016(b) disclosure, debtor attorneys can elect to accept the no-look fee that is in place, or they can choose to submit an itemized fee application.

If the no-look fee is elected, debtor attorneys either do not have to file a fee application or they file a standardized fee application without a time itemization.

If the debtor attorneys elect to itemize, then the lodestar compensation model is generally applied, whereby compensation is calculated by the attorney's time billed at a reasonable hourly rate.

Case-specific expenses are generally allowed as part of the lodestar method so long as the court finds them reasonable. Most courts will not permit counsel to convert the fee structure once the fee disclosures are filed.

While there are multiple variations of no-look fees in effect across the jurisdictions, two general structures are most common.

The first common structure allows for a flat fee to be presumptively allowed for the duration of the case, from filing through discharge. In these jurisdictions, there is great disparity as to whether debtor's counsel is permitted to seek reimbursement of case-specific allowable expense in addition to the no-look fee.

Several require a full itemization to be submitted proving to the court the full fee has been exhausted before awarding any additional fees or expenses, obviating the time-saving benefits of the no-look fee for debtor attorneys.

In other jurisdictions, there is no set standard, with expenses only being allowed for specific actions or only by specific judges. Many jurisdictions simply believe that case-specific expenses are accounted for in the no-look fee and cannot be sought by debtor attorneys at all.

The second common fee structure allows for a flat fee to be presumptively allowed from filing through case confirmation.

In these jurisdictions, debtor's counsel can generally recover additional legal fees for post-confirmation work either by filing a fee application detailing the amount of time spent on the action or through utilization of menu fees, wherein a presumptive fee amount is set for each post-confirmation activity.

In many of the jurisdictions that allow for additional fees post-confirmation, debtor's counsel must again first provide an itemization to prove that the entirety of the no-look fee has been earned, which is a significant burden. Recovery of case-specific expenses in either structure is still tenuous in many of these jurisdictions.

Across the United States, jurisdictions have used differing approaches to try and address the issue of expenses.

In some, attorneys are able to file a motion to recoup expenses. In others, debtor attorneys are permitted to request a one-time allowance to cover all case-specific expenses in addition to the no-look legal fee. In yet others, debtor attorneys are permitted to detail specific expenses, such as postage costs, in their notices and they are presumed allowed.

One unique approach applied by the U.S. District Court for the Eastern District of Virginia, where the court operates with a no-look fee structure which includes expenses, ties the fee to the consumer price index so that it increases on a regular basis to stay consistent with the rising cost of goods and services.

Firm Overhead vs. Expenses

Another issue surrounding the fee structure for Chapter 13 debtor attorneys arises from the differentiation, or perceived lack thereof, between overhead and case-specific expenses.

In many cases, the presiding judge will assume that the no-look fees incorporate all of the expenses of the firm, and that additional case-specific expenses cannot be recovered.

However, it is not always clear and simple as to what constitutes overhead vs. recoverable expense.

For example, most would agree that expenses such as law firm marketing, rents and salaries are overhead and would not be recoverable expense, yet if a firm requires outsourced legal noticing services in the context of a Chapter 13 case, would that not be considered an allowable additional cost to be recovered?

One would be hard pressed to find a fee application in a Chapter 9, 11 or 12 case that did not include recoverable expenses for printing, copying and noticing, yet these expenses that would not have been incurred but for the case in question are often not recoverable by Chapter 13 debtor attorneys.

Section 330(a)(4)(B) provides:

In a Chapter 12 or Chapter 13 case in which the debtor is an individual, 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.

Section 330(a)(1)(B) allows the court to award "reimbursement for actual, necessary expenses" incurred by professionals. Since the court no longer serves an amended Chapter 13 plan on creditors, the burden falls on the filers of those plans, namely the debtor's attorneys.

In a case involving dozens of creditors or more and several amended plans, the cost of serving the plan and various motions throughout the case easily add to hundreds of dollars, which erodes the flat fee awarded by the court.

This raises the question as to why the cost of serving a plan and motion is not an actual, necessary expense that can be reimbursed, especially in light of the fact such cost is considered an "actual, necessary expense that can be reimbursed" in Chapter 11 cases.

While there has been discussion of creating a more uniform approach across jurisdictions and states for the recovery of fees and expenses for debtor attorneys, it has not been a high priority focus when compared to other issues facing the consumer bankruptcy system.

However, with the impending wave of consumer bankruptcy filings, industry professionals are questioning whether this system that often limits compensation for debtor attorneys will ultimately hurt consumer debtors.

Many feel the uneven playing field of no-look fees and expense recoveries can significantly limit the resources that debtor attorneys can allocate toward successful representation in each case. With less staff and resources, some argue that we may even see a greater number of cases getting dismissed from the bankruptcy courts.

Furthermore, if debtor attorneys are not able to recover expenses, some fear they may not incur these expenses rather than reduce their profitability, which may raise ethical issues.

As the COVID-19 pandemic continues, the fortitude of the bankruptcy system and its professionals is critical to the success of the process.

While there are many questions as to how best prepare for what may be a tsunami of bankruptcy filings, the compensation models within Chapter 13 continue to raise questions and concerns among debtor attorneys, and hope that these will lead to a more uniform approach to fee structures in the future.

George Vogl is director at Stretto.            

Xiaoming Wu is a partner at Billbusters Borges & Wu

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

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