COMPENSATION OF DEBTORS' ATTORNEYS
IN CONSUMER BANKRUPTCY CASES
THE FAILURE OF PUBLIC POLICY
IN ACTUAL PRACTICE
AND SUGGESTIONS FOR REFORM
Morgan D. King, J.D.
Of the California Bar
© MORGAN D. KING 1996
Norton's Annual Survey Of Bankruptcy Law
II. Public policy and legislative intent
a. Prior law
1. The regulation of bankruptcy fees
2. Economy of the estate
3. Crying evils
4. Sordid chapters
5. Reluctant acquiescence
6. No justification for regulation of fees in consumer cases
7. The effect of "economy of the estate
b. Economy of the estate discarded
1. 1978 Congressional reforms
2. Sufficient economic incentive
3. The "Lodestar" formula
4. "Market rate.
5. Bankruptcy Reform Act of 1994
III. Present Reality
- Inadequate compensation
a. American Bankruptcy Institute Report - 1991
1. Travel time
2. Compensation for fee applications
3. Intra-office conferences
4. Maximum fees and fee caps
b. The Altman Weil Pensa Economic Surveys
c. Consumer bankruptcy attorneys convention - 1994
d. The NACBA survey of chapter 13 compensation
e. The 1995 Behles-Giddens Report for the A.B.I.
f. The experience of practicing attorneys
IV. Causes of inadequate compensation
a. Arbitrary discounting of fees
b. Local rules and guidelines
c. Trustee's schedules of payment
d. Inadequate expense reimbursement
e. Failure to assure actual collection of fees.
f. Delay in payment of compensation
g. No compensation for delay
h. Disregard of market rates and practices
i. Unnecessarily severe sanctions
j. Over-burdensome fee application requirements.
V. The effects of inadequate compensation on the law firm
a. Bankruptcy of bankruptcy lawyers
2. No library or computerized research
3. Minimal continuing education
4. Curtailment of legal services
5. Abandonment of appellate work
6. Penny pinching
7. Avoidance of challenging or complicated cases
8. Reliance on volume to make a profit
ii. Unsuitable debtors pushed into bankruptcy
VI. Effects of inadequate compensation on the bankruptcy system.
a. Cost to the estate.
b. Flight of qualified bankruptcy specialists
c. Wasted time
d. Impaired legal services
e. Funnelling cases into chapter 7
f. Lack of malpractice insurance
g. The "Where's Waldo? "game.
h. Clogging the courts with sloppy work product
i. Less distribution to the creditors
j. Debtors' fraud
VII. Suggestions for reform
a. What lawyers can do.
b. What judges can do.
c. What Congress can do.
For a private attorney today, the fastest way to go bankrupt is to practice consumer bankruptcy law. Even though present public policy provides that private attorneys representing consumer debtors in the bankruptcy system are entitled to be compensated on a level commensurate with their non-bankruptcy colleagues doing comparable work, the empirical evidence clearly establishes that this is not happening. The reason debtors' attorneys are under-compensated is due primarily to the way bankruptcy court judges and trustees regulate the compensation of professionals in bankruptcy ... regulate, in fact, to the point of financial strangulation. This article explores the origins of the public policy behind compensation of debtors' attorneys in bankruptcy, the historical justification for such policies, the lack of empirical documentation to support such policies, the present unacceptable state of affairs as they pertain to the economic reality of debtors' bankruptcy practice, and recommendations for reform.
The conclusions are that the justifications for bankruptcy court supervision of debtors' attorneys' compensation in consumer cases are based on myths, and that such supervision is severely damaging the ability of the private bar to deliver quality legal services on behalf of consumer debtors in bankruptcy.
Only an economically successful law firm, with sufficient (i.e. attractive) compensation to professionals, is able to provide quality legal services. A firm that can't collect its fees is not going to be able to fund the staffing, equipment, training, research, insurance and other resources necessary to provide quality professional services.
According to insurance industry statistics, bankruptcy has one of the highest levels of incidence of legal malpractice. In our view, the reason is that too many debtors' lawyers are forced to operate on a shoe-string. The results are devastating to the bankruptcy bar and to debtors. Bankruptcy judges and trustees across the board must change the manner in which they monitor and regulate attorneys' fees in consumer cases.
.c.II. Public policy and .i.legislative intent;
.c. a. Prior law
.c. 1. The regulation of bankruptcy fees
Bankruptcy practice is one of only a few areas of law for which attorney compensation is strictly regulated. Under the Bankruptcy Act the Bankruptcy courts were given jurisdiction to monitor and regulate compensation paid to professionals in connection with bankruptcy cases. This authority was carried over into the Bankruptcy Code of 1978. Cases have consistently recognized that the regulation of attorneys' fees in bankruptcy cases is a "uniquely" bankruptcy task.
.c. 2. .i.Economy of the estate
Prior to 1978 the fundamental guiding policy for setting professional compensation in bankruptcy cases was a concept frequently called the "economy of the estate." Ostensibly, this concept was developed to counter what was perceived as a practice of fee gouging by professionals in bankruptcy cases. "Extravagant allowance of fees and other costs of administration in bankruptcy estates have long been denounced as 'crying evils.'" The evil which was sought to be prevented was the unseemly depletion of assets of the estate to pay fees of professionals engaged in the administration of the case. Reforms were adopted which " ... had as one of its purposes the establishment of more effective control over reorganization fees and expenses [cites] in recognition of the effect which a depletion of the cash resources of the estate may have on both the fairness and feasibility of the plan of reorganization." And although many of the cases frequently cited were cases in which trustees, rather than attorneys, sought court approval of fees, the notion developed that such concepts should be applied with equal force to private attorneys' fee applications, as well.
.c. 3. .i.Crying evils
With regard to debtors' attorneys, a look at bankruptcy literature reveals scant evidence of the crying evils against which fee regulations were supposed to protect. The legal authority most of the crying evils cases cited may be traced back to what may be called the grandfather crying evils case from 1935 ; ironically, this case dealt not with any crying evils arising out of attorneys' fees but rather bankruptcy referees' fees. This opinion, in turn, cites several .i.Congressional documents; as the sources of the crying evils concept, one of which dates back to 1898. As the Realty Assocs opinion points out, however, the legislative enactments arising from these Congressional complaints were adopted "... to fix a limit for expenses growing out of the services of referees and receivers."
In fact, neither of the two ancient Congressional documents cited by Realty Assocs. mentions either crying evils or sordid chapters, and neither gives any examples of fee abuses by debtors' lawyers.
The earlier document, .i.House of Representatives Report No. 65;, 55th Congress, 2nd Session, 1897 is a lengthy analysis of a proposed enactment of a ".i.Uniform System of Bankruptcy;." The 50-page report, originating out of the Committee on the Judiciary, sets out a basic legal structure and procedure for bankruptcy, the principal features of which are clearly recognizable in today's Bankruptcy laws. The report is virtually void of any analysis of fees in bankruptcy and makes only one short reference to the problem of "expenses" in the administration of the estate. Says the report;
One of the chief sources of discontent with the last bankruptcy law was the enormous expenses of administering estates under its provisions. Not only were large amounts paid from estates to officers, but these amounts were paid in a way that encouraged delays in the enforcement of the law.
No examples of "enormous expenses" were given, and no examples of large amounts paid to officers. It is noteworthy, however, that this brief mention refers to payments to officers, and not lawyers. While lawyers may in today's bankruptcy framework be deemed officers of the court, it does not appear that lawyers were included in the meaning of officers within the language of the House Report of 1897; virtually all of the documented references to abuses in expenses of administration of the estate have to do with abuses by referees, trustees and trustees' attorneys, not debtors' attorneys. In modern usage the Chapter 11 debtor-in-possession (who is also ordinarily the debtor) is considered the trustee, and such "trustee" ordinarily selects his own attorney who is in effect the debtor's attorney. While one might infer, therefore, from the modern vocabulary of a reorganization case that ancient complaints against trustees' fees were in reality complaints about debtors' lawyers, such does not appear to be the case, because in the early years of enactment of bankruptcy laws in the United States the individual referred to as the trustee was not the debtor-in-possession who typically retains an attorney to represent the estate, as he is today, but was rather a separate individual elected and paid by the creditors.
The second document referenced in Realty Assocs. is .i.Senate Document No. 65;, 72d Congress, 1st Session. This document, subtitled Message From the President of the United States Recommending The Strengthening of Procedure In The Judicial System, provides a lengthy history of bankruptcy laws as they were inherited from .i.England;, and modified and developed in the Nineteenth and Twentieth centuries in the United States. This document contains a revealing complaint;
The administrative machinery of the act of 1867 caused much dissatisfaction and led speedily to repeal. The act had provided that the election of a trustee by the creditors was subject to the approval of the judge and that the judge might appoint trustees in addition to the trustee or trustees elected by the creditors. This power of appointment was apparently abused in certain districts. Of far more importance was the fee system. The referees were compensated in each case by an elaborate schedule of fees, the effect of which was that the more they multiplied the steps in any proceeding the larger were their emoluments, and these fees had to be paid by the persons for whom the services were rendered.
So great was the administrative confusion which these provisions caused and such was the outcry against the fees and expenses that in 1874 an amendment was passed cutting all fees in half.
Thus, the abuses identified in the "message from the President" were committed by referees, not by debtors' lawyers.
This report cited, as support, a number of complaints heard on the floors of Congress. Typical among these was the following;
Dishonest and designing men prepared the way to avail themselves of its provisions and, without furnishing assets to pay anything to creditors and hardly sufficient to satisfy the fees of officers, obtained discharges from their debts, however colossal they might be, without any apparent change in their pecuniary affairs.
It is remarkable that this complaint apparently observed that the officers, presumably the trustees, receivers and their attorneys, often went without being adequately comeensated. This would appear to be the very opposite of fee gouging by such officers. The actual thrust of the complaint was that the debtors appeared to be evading debts without having to suffer sufficiently.
Senate Document No. 65 traced the history of these problems to similar problems with the administration of bankruptcy cases in .i.England;. Like the American, the English experience with compensation of trustees and trustees' lawyers included a history of abuse ... but not by debtors' lawyers. In 1876 a committee appointed by the .i.House of Lords; reported that solicitors (lawyers) were in effect buying up the claims of the creditors and exercising such creditors' rights throughout the proceedings by proxy. This was described as a great evil. The remainder of the report was devoted to the requirement that creditors should have a vote in granting a discharge, and finally to "... the great expense of administration due to the excessive employment of attorneys by the trustees." (emphasis added)
.c. 4. .i.Sordid chapters
Senate remarks made during deliberations for the adoption of 11 U.S.C. § 330 in 1978 includes the observation, "One of the major .i.reforms of 1938;, especially for reorganization cases, was centralized control over fees in the bankruptcy courts. [cites] It was intended to guard against a recurrence of "the many sordid chapters" in "the history of fees in corporate reorganizations."
Of the three cases cited in the Senate remarks, two give no examples of ostensible sordid chapters. The third, Leiman v. Guttman, describes .i.abuses; in the administration of corporate reorganizations by reorganization committees during the era prior to government regulation of business and the securities industry in the early 1930's. The court cited several reports which cited statistics on the number of reorganization committees that had entered into private fee contracts with shareholders. Observed the court;
The practice had been to fix them [professionals' fees] by private arrangement outside of court. The deposit agreement under which committees commonly functioned was viewed as a private contract, which granted the committee a lien on the deposited securities for its fees and expenses. By terms of the agreement the committee was normally the sole judge of their amount. This gave rise to serious abuses. There was the spectacle of fiduciaries fixing the worth of their own services and exacting fees which often had no relation to the value of services rendered. The result was that the effective amount received by creditors and stockholders under the plan was determined not by the court but by reorganization managers and committees.
One's first reaction to such remarks is, what relevance does "sordid chapters" pertaining to fees in corporate reorganizations have to the vast majority of bankruptcy cases which are ordinary consumer bankruptcies and which do not involve corporations? One's second reaction is to ask, what, exactly, are the so-called sordid chapters in relation to fees? Is, in fact, the notion of sordid chapters merely another chimera in the mythology of crying evils?
Scrutiny of the ostensibly empirical documentation of "serious abuses" in this opinion discloses no examples of actual abuses. While the government data cited in the opinion indeed showed that many hundreds of reorganization committees had set up private agreements for compensation which were unmonitored by any independent agency, and strongly hinted that such a situation was an invitation for abuse, not a single actual example of abuse was given. And, the opinion was the subject of a strong dissent by Justice Jackson, who observed that the concern over depletion of the estate was irrelevant in this case, since the fund for the fees had been put up privately by shareholders from other than estate assets in order to keep the lawyers from withdrawing from the case due to the poor likelihood of being compensated. Justice Jackson observed that "It seems to me that the Court is converting a provision of the Bankruptcy Act designed to prevent lawyers from overreaching stockholders into an authority for stockholders to swindle lawyers."
The empirical information referenced in the Leiman opinion, while interesting, is quite academic and irrelevant to the regulation of compensation of debtors' attorneys because, first, the abuses described in that opinion were not committed by debtors' attorneys; and second, because the vast majority of bankruptcy cases has, for all practical purposes, no estate to deplete in the first place.
As with crying evils, one finds scant historical documentation of fee abuses amounting to sordid chapters by debtors' attorneys. Once again, the abuses appear to have arisen within the context of creditors' committees and their legal counsel, and trustees and their attorneys sacking the estate in business reorganization cases or asset chapter 7 cases. This is ancient bankruptcy history. Ironically, however, even in present times cases of serious fee gouging in bankruptcy cases are more likely to involve, not consumer debtor attorneys, but trustees and their attorneys. A recent panel discussion sponsored by the American Bankruptcy Institute, involving five judges and a number of bankruptcy practitioners, identified fee abuses by trustees' attorneys as a more serious problem than consumer debtor attorneys. Observed Hon. Judge Polly S. HIGDON:
My immediate focus was on the trustees' attorneys. The debtors' attorneys that we have, generally speaking, are not overcharging their clients except possibly in Chapter 13, and we do have some problems with that. But the trustees' attorneys tend to, on occasion -- not always, in fact in the minority of cases -- milk the estate for as much as they can get out of it because they do not use what the Ninth Circuit has now required in Unsec'd Creditors' Comm. v. Puget Sound Plywood, and that is "billing judgment."
And it is ironic that it is usually these same trustees and their attorneys who self-righteously hassle the consumer debtor attorney over his fees.
It would appear that passing references to complaints about the expenses of administration of the estates found in ancient legislative reports somehow became, by a process of judicial poetic license first appearing in the Realty Assocs. opinion, crying evils. Then, other opinions picked up on this colorful language and made an intuitive, but mistaken leap ... arriving at the incorrect conclusion that the crying evils must, of course, refer to greedy debtors' attorneys gouging their clients and sacking the estates, and that there must have been a sordid history of such abuses. Picturesque phrases like sordid chapters and crying evils appear to have been picked up, like burrs on a dog's hide, and trotted along into published opinions in the erroneous justification of squeezing debtors' attorneys out of their compensation. This mythology was, in turn, handed down to subsequent congresses and subsequent appellate opinions, each quoting the other without scrutinizing the basis for such assumptions. Thus, one finds the following typical legislative slander against the integrity of debtors' attorneys in Senate Report 95-989, referring to Bankruptcy Code § 329 (Debtor's transactions with attorneys):
Payments to a debtor's attorney provide serious potential for evasion of creditor protection provisions of the bankruptcy laws, and serious potential for overreaching by the debtor's attorney, and should be subject to careful scrutiny.
Such melodramatic remarks are picked up and unthinkingly incorporated into subsequent literature and case opinions. Even as recent as 1993 cases are still quoting this language verbatim.
And again, in the Advisory Committee Note pertaining to Bankruptcy Rule 2017 (Examination of Debtor's Transactions With Debtor's Attorney) appears this undocumented remark:
Section 60d was enacted in recognition of "the temptation of a failing debtor to deal too liberally with his property in employing counsel to protect him in view of financial reverses and probable failure." In re Wood & Henderson, 210 U.S. 246 (1908). This rule ... is premised on the need for and appropriateness of judicial scrutiny of arrangements between a debtor and his attorney to protect the creditors of the .i.estate ;and the debtor against overreaching by an officer of the court who is in a peculiarly advantageous position to impose on both the creditors and his client.
The irony here, as any debtor's attorney knows, is that this premise is totally wrong; in reality, attorneys representing debtors in bankruptcy are probably guilty of attempting to do something inherently economically unfeasible ... providing quality legal services for people who can't afford them. In reality, the vast majority of individuals, families and small businesses who file for bankruptcy are usually stretched close to the limit in terms of having funds available to pay an attorney. Probably a majority of such debtors are unable to raise even a reasonable fee at one setting and frequently pay their retainer fees in little installments. An extensive study of lawyers, debtors and the factors that influence the choice between filing the various chapters of bankruptcy, by Jean Braucher, Professor of Law at the University of Cincinnati College of Law, revealed that;
... prices are controlled by the inability of many clients to pay more than the fees charged. Clients often have to save up over a period of months to pay fees or down payments on fees. The lawyers said that clients most frequently obtain the amounts required in advance by not paying debts that will be discharged ... Others borrow from relatives and friends.
Thus, typical debtors hardly have either the will or the wherewithal to treat their attorneys "too liberally" with fees. And, these kinds of debtors make up the vast majority of debtors who file bankruptcy, that is to say, no-asset cases.
This predicament has been recognized in the bankruptcy literature. For example, Arnold B. Cohen and Mitchell B. Miller in their treatise, Consumer Bankruptcy Manual state:
"The problem facing debtors' counsel in most consumer cases, of course, is not whether they are entitled to reasonable compensation consistent with what they would be entitled to receive in nonbankruptcy cases, but how to get it. Because most debtors are experiencing serious financial difficulties when they first visit an attorney, some of them may not have sufficient money to pay the full amount of their fee in advance."
"In Chapter 7 cases, however, it is preferable and, as a practical matter, necessary for counsel to be paid in full before the petition is filed. This is because most Chapter 7 cases will be no-asset cases in which funds will not be available to pay even priority administrative expenses in full."
The text quoted above from Collier's cites a case, In re Wood and Henderson, which ostensibly documents how debtors are tempted to "... deal too liberally" with their attorneys in paying retainer fees. The reference to Wood and Henderson as authority for such remarks is often carried over into even very recent published opinions. However, an examination of Wood and Henderson, a chapter 7 case, illustrates that it is an excellent example of sloppy and undocumented assumptions which, having been made in one case, are carried over in a cavalier manner and cited as authority by other writers. In Wood and Henderson the court found that a retainer fee of $9,795 was excessive and that a fee of $800 in the case was "...reasonable compensation," ordering the balance disgorged. Referring to the Bankruptcy Code section governing attorneys' fees the opinion contains the language "It recognizes the temptation of a failing debtor to deal too liberally with his property in employing counsel to protect him in view of financial reverses and probable failure." This is the language that is carried over by later writers who assumed that the Wood and Henderson case of course must have contained some justifying data to support it.
However, scrutiny of the Wood and Henderson case reveals that it in no way supports the assumption that debtors may "deal too liberally" with their attorneys.
In the first place, this case was not about the reasonableness of attorneys' fees in bankruptcy, but rather the jurisdiction of the District Court in one state to adjudicate the fees of parties in a different state.
Secondly, in this case the attorneys, Wood and Henderson, did not even respond to the court proceedings for examination of their fees, with the result that the court's order was rendered by default. In other words, no actual evidence was introduced or considered one way or the other regarding the reasonableness of the initial retainer.
Thirdly, the case clearly was governed by the subsequently discredited notion of economy of the estate which in the real world has no bearing on the reasonableness of fees.
Fourthly, in this case there was not a scintilla of evidence regarding the cost of comparable services in comparable nonbankruptcy cases.
And finally, the case cited no empirical evidence whatever in support of the notion that debtors are often tempted to deal too liberally with their attorneys.
In other words, this case is worthless as authority ostensibly justifying restrictions on debtors' attorneys' fees.
In fact, the historical record as found in the published opinions and bankruptcy literature pertaining to fee abuses contains scant credible evidence of guilt by the private bar representing debtors; by and large the vast majority of abuses, crying evils and sordid chapters were committed, rather, by trustees elected by the creditors or appointed by the courts, or trustees' lawyers.
The large number of published opinions which deal with alleged fee abuses may be divided into three large groupings. These are, cases which deal with the merits of actual fee abuses; cases which deal with trivial or nominal issues regarding the reasonableness of various itemized charges and billings; and cases which deal with alleged violations of bankruptcy code sections, rules and guidelines designed to prevent fee abuses.
Of these, the vast majority deal with quibbling over what the author feels are trivial differences of opinion about itemized billing (e.g., should the lawyer be paid .20 ¢ per page for photocopying, or .30 ¢? Was a staff conference involving two lawyers really necessary, or was it duplicative and should be compensated at a reduce rate? Was a certain phone call that took twenty minutes unnecessarily long?).
The second largest category of cases deals with violations of regulations designed to prevent fee abuses. Thus, for example, should the lawyer be sanctioned because he failed to obtain court appointment before performing work for the estate in a chapter 11?
The third category is by far the smallest and is the only category actually dealing with the merits of alleged fee abuses, that is, cases having to do with the reasonableness of attorneys' fees and expenses. While the other categories contain hundreds, perhaps thousands of published opinions, one must search far and wide to find cases that are actually about over-charging in real-life situations.
Some of the cases cited in the literature supposedly dealing with "excessive" fees by debtor's' attorneys typically are based not on actual evidence of excess, but on other factors; thus, for example, Collier's cites In re Roustabout Co., a case which found requested fees of $39,558, and a lower court award of $15,000 "excessive" when the actual reason for the finding was more the failure of the law firm to document, and therefore justify, its time and charges. And, one notes, the case did not deal with a debtor's lawyer but with fees requested (as usual in such cases) by the trustee's attorney.
A second case, In re Riverview Fin. Srvs. comes to the astonishing conclusion that a chapter 7 case involving assets of $1.4 million and debts of $4.3 million did not justify a retainer fee of $10,000, but only justified fees of $4,000, despite the law firm's fully accounting for all time and expenses spent on the case. Like virtually every case dealing with this subject, this opinion contains not an iota of evidence regarding the cost of comparable services in the nonbankruptcy area. In reality, in the nonbankruptcy area no competent attorney in his right mind would consider taking a case involving so much potential exposure (in view of the size of the assets and the extent of the debt) for a fee of less than $10,000 to do nothing more than cover the potential liability, much less the time expended. Since the only justification given in the literature for putting the squeeze on debtors' attorneys' fees is to prevent depletion of the estate, does this case stand for the proposition that this $1.4 million estate was excessively "depleted" by a fee of $10,000?
In a third case, In re J.J. Bradley & Co., the court ordered disgorgement of some $20,000 out of a retainer fee of $25,000 not on the basis that the fees claimed for work on the bankruptcy case per se were unreasonable, but rather on the basis that the fees were actually incurred not for work on the bankruptcy, but for other legal services performed for the debtors individually outside the purview of bankruptcy. Thus, this case does not appear to be on point. And so on and so on.
Stringent monitoring of fees and fee practices has helped stamp out several high-volume clinics providing poor quality services and employing clearly questionable ethics. Two examples are worth noting, those of Hessinger & Associates, in California, and American Financial Services in District of Columbia. These cases involved "trafficking" in large volumes of cases, fee-splitting, and incompetent legal services. A most egregious example was In re Hessinger, in which the court observed, among other things;
Hessinger & Associates is supposedly a law firm. ... The evidence has revealed an incredibly ugly and evil enterprise. In the guise of being a law firm, Hessinger & Associates is able to lure debtors into its offices with the sole intent of extracting as much money as possible from them with no concern whatsoever about counseling them."
The author can corroborate from his own experience the court's findings in Hessinger. Some time ago the author hired a bankruptcy paralegal who had been an office manager in one of the Hessinger offices. The author expected to benefit from the paralegal's extensive experience in dealing with a large volume of cases; assuredly, thought the author, the Hessinger organization must have an excellent system for case management. Soon after employing the paralegal, the author held an office conference with her and explained that the author's office had occasionally "forgotten" to do a judgment lien avoidance on exempt assets in chapter 7 cases, because of a gap in procedural follow-up on certain cases. What, asked the author, did Hessinger's organization do to prevent such omissions? The author sat back expectantly, hoping to learn from the paralegal's inside experience. What he got, instead, was a blank stare from the paralegal. After a moment of silence, the author posed the question again, only with more emphasis. This time, the paralegal answered. "What, she asked, "is a judgment lien avoidance?" The author was astonished at this answer. But, he thought perhaps they simply called it something else at Hessinger. The author explained the idea of a judgment lien avoidance on exempt property, and again asked, how did Hessinger handle such matters? "I don't know," answered the Hessinger paralegal; "We never did them."
One may point to these examples as support for the notion that the courts and trustees need to keep their stranglehold on debtors' lawyers' fees. Ironically, however, it is this very stranglehold that virtually invites such sleazy operators into the bankruptcy system; good lawyers who want to provide quality legal services by handling a reasonable volume of cases carefully and taking enough time to service them properly are driven out of the field, leaving it open to those who see an opportunity to make a profit only in high-volume clinics operated by poorly paid, poorly trained and over-worked staff who don't, or can't, take pride in their product. That overly-rigid fee regulation has the indirect effect of encouraging bankruptcy "mills" to crop up was noted by the recent A.B.I. Symposium on Professional Compensation.
.c. 5. Reluctant acquiescence
Today, lawyers appearing for debtors before the United States Bankruptcy Courts reluctantly acquiesce in the humiliation and financial devastation of having their fees heavily scrutinized and routinely arbitrarily slashed by the courts. This acquiescence is founded on a vague acceptance of the notion that their fees are so tightly regulated because there must have been an ancient history of debtors' attorneys running amuck with fee gouging. Today's consumer bankruptcy lawyers meekly take it for granted that debtors' lawyers of yesteryear must have engaged in numerous sordid chapters involving awfully egregious crying evils, and we all have to pay for the sins of our fathers. Upon scrutiny of the historical record, however, one finds that such justifications are based on a myth ... the myth that, left unsupervised, the debtors' lawyers will greedily sack the estate in order to fatten their fees.
.c. 6. No justification for regulation of fees in consumer cases
The empirical record reveals few actual cases of fee gouging or other similar abuses regarding fees or billings on the part of private attorneys representing debtors in bankruptcy. Certainly the anecdotal evidence found in the media sometimes contains histrionic reports of lawyers soaking large reorganization cases for vast sums; however, as Harvey R. Miller observed, "... nobody writes about the cases in which attorneys and other professionals absorb substantial holdbacks of interim compensation, and ultimately a significant reduction in compensation and expenses when the assets of an estate deteriorate during administration."
In fact, there is no evidence that, left to the ordinary checks and balances that keep attorneys' fees reasonable in nonbankruptcy work, such as the pressures of market rates, competition, and oversight by professional licensing organizations in the respective states, that debtors' attorneys in bankruptcy would not act in a reasonably ethical manner in setting and collecting their fees and other compensation. There is no evidence that consumer bankruptcy lawyers are any more or less ethical than lawyers practicing in any other field of law.
The justifications for, and the consequences of, overly-stringent fee regulation in consumer cases was recently discussed at the American Bankruptcy Institute symposium on professional compensation. The fact that there was little abuse of fees on the part of consumer debtor attorneys was mentioned repeatedly. One of the panel members, bankruptcy attorney Jennie Behles, remarked;
My conclusion is that some problem exists, but not a great problem. ... Why should we be doing it at all? ... And what the study showed, much to our surprise, is that there really is not a lot of concern about protection of debtors. The study seems to indicate that the marketplace, in and of itself, and advertising in the marketplace helped protect the consumer debtor from overreaching by lawyers ...
Participating in the symposium was Professor Ray Warner, who edited the 1991 A.B.I. Report on Compensation. Prof. Warner remarked, "... is it a concern? Yes, and it should be. Is it a problem? Not really." And, again, "I think there is not much of a problem here. The market largely works to keep the fees down."
And also on the symposium panel, Keith Shapiro, formerly chairman of the A.B.I. Committee on Professional Compensation, observed, " ... frankly, I think virtually all of the professionals in this field are very good, honest people. It's the exception to the rule where abuse exists." And, observed Mr. Shapiro, "... the 1991 ABI National Report on Professional Compensation revealed that few significant abuses had been discovered or uncovered by the courts and others involved in the process."
.c. 7. The effect of ".i.economy of the estate;."
As alluded to above, the notions of crying evils and sordid chapters were the mythical justifications for the adoption of the notion of economy of the estate ... the notion that debtors' attorneys should not be paid for all of their work in order to preserve the assets of the estate. Where the fees requested were deemed out of proportion to the size of the estate, the requested compensation was not fully allowed.
The effect of the notion of economy of the estate was frequently to allow attorneys' fees only at the lower end of the spectrum of what attorneys in other fields of law would normally expect for similar services. For example, in one Ninth Circuit case the referee in bankruptcy had substantially reduced an attorney's fee application, decreeing, among other things, "The economical spirit of the Bankruptcy Act demands that an attorney be paid in bankruptcy matters an amount appreciably less than he could command for similar services in purely private employment." The court on appeal found this to be an unreasonably tightfisted interpretation of the notion of economy of the estate, but basically endorsed the idea of penny pinching when it comes to attorneys' fees, stating "Determining reasonable fees in bankruptcy cases is no different from determining them in private employment, except that the spirit of the Bankruptcy Act would seem to require a court to fix such fees at the lower end of the spectrum of reasonableness." There was a dissent in that case by Judge Merrill; unfortunately for debtors' attorneys, however, this dissent protested the overly generous approach of the majority's opinion and argued for an even more parsimonious measure. Among other things, Judge Merril decreed "The majority seems to overlook the fact that where services are rendered to an estate from which compensation is to come, the modest proportions of the estate, if it is decently to survive administration, frequently compel the allowance of fees which under other circumstances would be regarded as wholly inadequate."
In a case out of the Southern District of New York a similar ruling was had in which the court declared "Obviously, therefore, allowances cannot be paid at the prevailing rates of the private sector; they must be moderate in the interests of the debtors, shareholders and creditors." And the court in the Fifth Circuit held ;
"... in a reorganization proceeding, where the lawyers look for compensation to the debtor's estate which may belong, in equity, largely to others than those who have requested their services, they should have in mind the fact that the total aggregate of fees must bear some reasonable relation to the estate's value. Under these circumstances they cannot always expect to be compensated at the same rate as in litigation of the usual kind."
And some circuits had adopted, as a standard of measure of reasonableness in the award of private attorneys' fees, the average salaries of federal judges.
.c. b. .i.Economy of the estate discarded
.c. 1. 1978 .i.Congressional reforms
The historical result of such policies and doctrines was inevitably the avoidance of bankruptcy law by talented or experienced attorneys. Although there appear to be few empirical studies to document the effects of these policies, it may be reasonably presumed that the field was left to those lawyers of marginal talent and skill who could find no more lucrative business. The good attorneys avoided bankruptcy practice and kept to more financially rewarding areas of expertise. Over time, bankruptcy practice acquired a tawdry reputation; it was rightly deemed the business of bottom-feeders in the profession.
This situation was eventually recognized, and Congress made attempts to correct the situation. The Congressional session held over the period 1977-78 produced a split in Congressional sentiment over compensation for professionals between the Senate and the House. The Senate report favored the previous "economy of the estate" philosophy. The House side, however, took strong umbrage at this. The House comments, which prevailed in the adoption of the final amendments of the Code and for purposes of legislative intent, declared that the intent of the adoption of § 330 was to over-rule those cases which had stood for the doctrine of economy of the estate, and stated, inter alia.;
If that case were allowed to stand, attorneys that could earn much higher incomes in other fields would leave the bankruptcy arena. .i.Bankruptcy specialists;, who enable the system to operate smoothly, efficiently, and expeditiously, would be driven elsewhere, and the bankruptcy field would be occupied by those who could not find other work and those who practice bankruptcy law only occasionally almost as a public service. Bankruptcy fees that are lower than fees in other areas of the legal profession may operate properly when the attorneys appearing in bankruptcy cases do so intermittently, because a low fee in a small segment of a practice can be absorbed by other work. Bankruptcy specialists, however, if required to accept fees in all of their cases that are consistently lower than fees they could receive elsewhere, will not remain in the bankruptcy field.
Attorneys' fees in bankruptcy cases can be quite large and should be closely examined by the court. However, bankruptcy legal services are entitled to command the same competency of counsel as other cases. In that light, the policy of this section is to compensate attorneys and other professionals serving in a case under title 11 at the same rate as services of other than in a case under title 11. ... Notions of economy of the estate in fixing fees are outdated and have no place in a bankruptcy code.
This shift in policy has been well recognized in the bankruptcy literature.
"The .i.legislative history; specifically indicates that the movement away from an economy based standard was intended to provide for compensation of bankruptcy attorneys at the same rate as nonbankruptcy attorneys and to ensure that parties involved in bankruptcy would be able to secure qualified counsel."
"The aim of the new Code is to compensate attorneys at a reasonable rate based on, among other factors, the .i.cost of comparable services; in a case other than under the Bankruptcy Code. This change of policy serves to attract bankruptcy specialists of high quality who would otherwise choose another field in order to avoid the 'bankruptcy haircut' prevalent under the old Bankruptcy Act."
"Under the Code, the legislative history reflects a significant shift in policy. Attorneys and other professionals serving in a bankruptcy case are to be compensated at the same rate that would be used to compensate them for performing .i.comparable services in nonbankruptcy cases;."
.c. 2. Sufficient .i.economic incentive
Following the publication of these statements of Congressional intent published case law took on a more generous tone regarding compensation of professionals, resulting in the basic concept that bankruptcy attorneys were entitled to charge and be paid in conformity with existing market practices and the prevailing market rates. "Bankruptcy courts must consider whether the fee awards are commensurate with fees for professional services in nonbankruptcy cases, thus providing sufficient economic incentive to practice in the bankruptcy courts." "Congress intended to provide adequate compensation, on a par with that available in other areas of practice, to attract competent counsel to the bankruptcy specialty." " ... it is clear that in adopting § 330 Congress intended to retreat from doctrines which strictly limited fee awards under § 241 to less than attorneys might have received for services of the same professional quality in non-bankruptcy cases."
.c. 3. The ".i.Lodestar" formula
In implementing the new policy, the majority of courts have carved out what is generally referred to as the lodestar formula. Basically, the lodestar formula is a method of arriving at a reasonable compensation by multiplying a reasonable hourly rate times the total number of hours expended on the matter, and adjusting the result according to a list of factors usually referenced as the .i.Johnson factors.; The lodestar factors include the time and labor required, the novelty and difficulty of the question, the skill requisite to perform the legal service properly, the preclusion of other employment by the attorney due to acceptance of the case, the customary fee, whether the fee is fixed or contingent, time limitations imposed by the client or the circumstances, the amount involved and the results obtained, the experience, reputation and ability of the attorneys, the undesirability of the case, the nature and length of the professional relationship with the client, and awards in similar cases.
.c. 4. ".i.Market rate.;"
The first part of the Lodestar formula is arriving at a reasonable hourly rate and identifying what services may be billed at the hourly rate. Having abandoned the economy of the estate criterion, the more liberal policy forged by the courts since the adoption of the Code is the notion of market rate, or cost of comparable services. Basically, the idea is that bankruptcy attorneys should be paid at the same rates, for the same kinds of services, as non-bankruptcy lawyers doing comparable work.
The court in the Seventh Circuit described the effect of the market rate as the measuring stick for attorneys compensation:
It is not the function of judges in fee litigation to determine the equivalent of the medieval just price. It is to determine what the lawyer would receive if he were selling his services in the market rather than being paid by court order.
A judge is not permitted to destroy substantial entitlements to attorneys' fees on the basis of his inarticulable and unsubstantiated dissatisfaction with the lawyers' efforts to economize on their time and expenses.
In subsequent proceedings the same court " ... reemphasized the need to rely on market factors to determine the appropriate fee award. The circuit court mandated that the district court rely on evidence of what the market would allow for comparable services rather than utilize a time sampling approach."
The majority rule follows the market rate principal. "... there remains a possibility that an enhancement will be necessary to make the amount of compensation reasonable and commensurate with the rate for comparable non-bankruptcy services.
.c. 5. .i.Bankruptcy Reform Act of 1994
The Bankruptcy Reform Act of 1994 made several relatively innocuous changes in the Code sections governing compensation. One welcome change is that the Act codifies the common sense notion that the debtor's attorney in a chapter 13 case is entitled to be compensated for legal services provided on behalf of the debtor, and not merely the estate. And, the changes to § 330 continue the policy of taking into consideration the costs of comparable services for nonbankruptcy work.
However, bankruptcy professionals are worried that the amendments to § 330 have inserted ambiguity into the Code about how important the costs of comparable services standard should be. The alarm bell about the possibility that judges and trustees will take advantage of this ambiguity to revert back to the notion of economy of the estate was rung at the 1995 A.B.I. symposium, which observed that the amendments to §330 appear to have demoted costs of comparable services and made it merely one factor in a nonexclusive list of factors that may be considered.
Furthermore, the increased debt limits for eligibility for chapter 13 under § 109(e) included in the Reform Act has caused more difficult and complex cases to be filed as chapter 13 that previously would have been chapter 11 cases; there is no evidence yet that compensation guidelines for chapter 13 cases are being adjusted upward to reasonably account for the added time and effort debtors' lawyers now have to invest in such cases.
.c.III. - Present Reality: Inadequate compensation
Despite the generous language found in the House report and in published opinions regarding market rate, the fact is that debtors' attorneys are substantially under-compensated for their work in the bankruptcy courts, and the consequences are on the verge of disaster.
The economics of operating a law practice specializing in consumer bankruptcy law in the 1990's are so impractical that virtually all of the negative effects of over-regulation of compensation are becoming manifest, including flight from bankruptcy practice by talented attorneys, increased filings of personal bankruptcy by bankruptcy attorneys, a widening circle of mediocrity in the quality of legal services and increasing numbers of mediocre lawyers, fly-by-night clinics and form-filers, and increasing cost and congestion in the courts as they consume vast amounts of time and energy wallowing in misguided attempts to reduce the cost of bankruptcy by choking off attorneys' fees. And, there is a myriad of other unfortunate consequences, as well.
Few published cases have acknowledged that debtors' attorneys are not being adequately compensated. Although a case not directly pertaining to compensation of debtors' counsel, perhaps the clearest acknowledgment of the reality of inadequate compensation of professionals in bankruptcy is the opinion by Hon. Lisa Hill Fenning in her 1991 opinion in In re Commercial Consortium of California. The debate in this case was under what conditions a firm might charge according to its current rates rather than the lower rates when a case was commenced. Observed Judge Fenning;
The efforts of Congress to bring compensation in line with other areas of practice have only been partially successful. Inequities in compensation persist. A recent comprehensive study by the .i.American Bankruptcy Institute; documents that the still-pervasive result is fees being awarded at lower rates in bankruptcy cases, than in other comparable areas of practice. [cite].
Addressing the problem of delays in receiving payment, Judge Fenning remarked;
The provision for hearings every 120 days was intended to ... and did ... put bankruptcy counsel on essentially the same payment schedule as other lawyers. In 1978, when the Code was enacted, attorneys customarily billed their clients on a quarterly basis. Times have changed. Lawyers now run their practices in a more business-like fashion. Computerization has simplified and speeded the billing process. As widely documented in the legal press, the billing cycle has shifted to monthly statements. The 120-day provision of Section 331, intended to be a help to lawyers in 1978, has become a straight-jacket for the lawyers of the '90s. Thus, even payments every 120 days no longer compensate bankruptcy attorneys on a fully equivalent basis with their non-bankruptcy colleagues.
.c. a. .i.American Bankruptcy Institute Report
The American Bankruptcy Institute conducted an extensive study of compensation of professionals in bankruptcy cases. Its report, published in 1991, is approximately 275 pages long and contains findings pertaining to a wide range of issues regarding fee rates, fee awards, reimbursement of expenses, and the effect of actual court practices on the goals and objectives set forth in the statement of Congressional intent.
In a nutshell, the report concludes that debtors' attorneys in bankruptcy are not being adequately compensated, and that the bankruptcy courts are largely to blame. In his overview of findings, Professor G. Ray Warner states, among other things;
... the high rate of objections [over fees] may be a symptom of the uncertainty and lack of predictability problems mentioned above. If so, then the frequent fee disputes may be an expensive sideshow distracting the professionals from the more important task of administering bankruptcy estates in an efficient manner.
Although the .i.survey; data suggest that both professionals and trustees experience a great deal of delay in receiving payment of their fees, the data also suggest that few judges are willing to alleviate some of that .i.delay; by allowing interim professional fee applications more frequently than once every 120 days.
The survey results also provide some indication that the fee rulings by the bankruptcy courts are having a net effect of undermining the Code's comparable services standard. Although the data are mixed and further research is indicated, there is some evidence that bankruptcy lawyers may be receiving less .i.compensation; than their peers in non-bankruptcy fields.
The Report continues:
... in order to attract competent professionals to estate work, the ".i.costs of comparable services;" standard was incorporated into the Code. Thus, the proper comparison is to the compensation received by similarly skilled professionals employed by private clients. The data discussed above suggest that the [bankruptcy] lawyers surveyed are not earning as much as lawyers in other fields, and that the highest hourly rates allowed for bankruptcy work are lower than the upper range rates charged by private firms in general.
Fourty-three percent [of the respondents] reported that fee rulings had altered their willingness to do estate work...
...the large percentage of lawyers reporting ... suggests that at least some competent practitioners are moving away from debtor work.
...Those lawyers reporting a large number of [adverse fee rulings] may have abandoned estate work entirely. The others appear to have become more selective. In either case, the debtor, trustee or committee was unable to employ the lawyer of its choosing. Thus, in some cases at least, estate work may not be commanding the same competency of counsel as other cases.
In concluding that bankruptcy attorneys are probably not achieving market rates (i.e. cost of comparable services), the Report states "As noted above, the liberalizing trend instituted by the Code appears to have peaked, with a trend towards stricter review of fee requests over the last five years. And, although there is no stampede of professionals jumping the bankruptcy ship, adverse fee rulings have caused many professionals to decline estate work."
Part of the problem identified by the Report is a general lack of knowledge of .i.market rates;, or costs of comparable services, on the part of bankruptcy judges. According to the Report fully 27% of the judges admitted that they had virtually no knowledge of market rates, and another 60% admitted they had only a "fair amount" of knowledge of such rates.
Another part of the problem, according to the Report, is the attorneys' failure to provide adequate information of market rates in their fee applications or by other means.
The A.B.I. report studied a number of specific billing items to ascertain the actual practices of bankruptcy judges regarding compensation for them. Among the finds were;
.c. 1. .i.Travel time
It is almost universal that attorneys in nonbankruptcy areas bill for travel time at their regular hourly rates. "Non-bankruptcy attorneys typically bill their travel time at the full hourly rate because it precludes them from engaging in other billable professional work."
Unfortunately, a majority of bankruptcy judges either allow nothing for travel (5%), allow travel at reduced hourly rates (59%), or allow it at some other rate not linked to hours, such as, reimbursement for mileage only (12%). This means that only 25% of judges allow compensation at the market rate (i.e. regularly hourly rates).
.c. 2. Compensation for .i.fee applications
In other areas of law attorneys expect, and are typically allowed, full compensation for preparation of fee applications.
Bankruptcy judges, however, typically fail to award for actual time spent in preparation of fee applications. According to the report approximately 18% of bankruptcy judges admit they allow no compensation at all for time expended in preparation and hearing of a fee application, and approximately 25 % of attorneys say their local judges refuse to allow such compensation. Of all judges, only 61% say they allow compensation for such time at full hourly rates (but lawyers report only 55% of judges make full-rate allowances), while 12% of the judges say they allow it at reduced hourly rates. Approximately 2% allow a "flat fee" for fee applications.
.c. 3. .i.Intra-office conferences
Again, the general practice in the non-bankruptcy market is to charge for necessary and reasonable staff conference time to discuss a client's case. The A.B.I. report called this "intra-office conference" time. Only 38% of the judges polled said they allowed compensation for all conference time at full hourly rates. Six per cent stated they allowed no compensation at all for staff conference time, and 35% stated they allowed for some, but not all such time. The remaining judges reported other ways in which they allowed reduced compensation (such as, for example, allowing conference time at a reduced billing rate).
.c. 4. .i.Maximum fees and fee caps
Comparing bankruptcy judge's or trustee's practices with regard to allowance of maximum retainers in chapter 7 cases with market practices for comparable work in non-bankruptcy fields is difficult, because in reality nothing is really quite comparable. About the most that may be said is that the market practice in virtually all nonbankruptcy areas for which retainer fees are customarily collected, is that it is left up to the attorney to decide first, what is fair and reasonable, and second, what the market will bear (i.e. what are clients willing to pay). Virtually no courts or professional organizations attempt to interfere with the free market in this regard.
In bankruptcy, as usual, the judges and trustees have a different point of view. According to the A.B.I. report fully 32% of judges have "guidelines" providing for fee caps in consumer chapter 7 cases; 68 % of the judges claimed they had no such guidelines. However, the judge's responses were contradicted by 57% of the lawyers polled on the same question, who said that their local judges imposed maximum fee guidelines.
Interestingly, 52% of the lawyers reported that the guidelines where unwritten, while only 5 % reported written fee guidelines in Chapter 7. Thus there appears to be a vague, somewhat Kafkaesque aspect to this, with lawyers sensing a fee ceiling imposed more by the court's attitude than by a clear and explicit written policy.
In addition to the court's maximum fee caps, the local trustees' offices sometimes contribute to a general atmosphere of big-brother looking over one's shoulder when setting fees. For example, in the author's case, it seems every tax-related chapter 7 case he has elicits a letter from the U.S. Trustee's office inquiring to know the basis upon which he charged his fee. Responding to these letters is an irritating waste of time, and adds to the hidden costs of doing bankruptcy work.
Needless to say, the very notion of fee caps for chapter 7 work is contrary to market practices, and is hardly justified. Since the vast majority of chapter 7 cases are no-asset cases, it can hardly be argued that a fee cap is necessary to protect the estate or the creditors. Furthermore, while it is true that perhaps half of all chapter 7 cases are "routine" the other half are not (if the lawyer knows what he or she is doing and is able to spot all potential issues), and the attorney should be permitted to charge for all actual and necessary time expended in providing the service for the client. Similarly, in chapter 13 cases the courts impose maximum fee and maximum retainer guidelines which violate market principles.
.c. b. The .i.Altman Weil Pensa Economic Surveys
A well-established, independent law practice management consulting firm, Altman Weil Pensa, conducts an annual national survey of law firm economics. The survey for small law firms for 1993 compared average compensation of attorneys in 14 different specialties of law and concluded that the compensation for bankruptcy attorneys was third from the bottom. These findings were consistent with the Altman & Weil survey for 1990, which was cited in the Report of the American Bankruptcy Institute. The 1993 survey revealed that bankruptcy income was 24% below that of lawyers in the commercial and contract law fields, 30% below that of taxation lawyers, and 37% below that of lawyers practicing in the personal injury litigation field. Bankruptcy compensation was even below that of criminal defense, a field traditionally viewed as low-paying.
.c. c. .i.Consumer bankruptcy attorneys convention - 1994
In 1994 the second annual .i.Consumer Bankruptcy Conference; sponsored by Consumer Bankruptcy News conducted a survey of debtors' attorneys regarding the economics of handling chapter 13 cases. The survey revealed that only a small minority of debtors' attorneys will handle chapter 13 cases, and that the universal reason that more lawyers do not handle chapter 13 is the inability to obtain adequate compensation for the work required. Over 50% of the attorneys who did .i.chapter 13 work; said they would raise their fees if they could (many of them by more than 50%), but that pressures on fees applied by the judges and the trustees prevented them from doing so.
A subsequent article appearing in .i.Consumer Bankruptcy News; quotes the Chapter 13 Trustee for the Colorado area, .i.Sally Zeman;, "We've lost some good attorneys. There have been many attorneys that stopped doing 13s because they were spending more time, doing more work, under more pressure, and earning smaller fees than they received in 1987."
Quoting a local bankruptcy attorney .i.John Berman;, "It got to the point where the courts were scrutinizing fee arrangements to the point where they considered everything you did to be ordinary. If no objections were filed it meant the case required no skill, not that you did a good job."
.c. d. The .i.NACBA survey of chapter 13 compensation; - 1992
The restrictions on attorneys fees in .i.chapter 13; are similarly severe across the country. A survey by the National Association of Consumer Bankruptcy Attorneys in 1992 revealed that nearly 10% of trustees allow the debtor's attorney no fees "up front" at all; another 6% allow up-front fees of no more than $500; and 38% limit total fees in consumer chapter 13 cases to less than $1,000 without a motion for supplemental fees. For the balance of fees not taken up front, according to the NACBA survey, in 29% of the regions the attorney must wait longer than 30 days after confirmation before he may expect to receive his first payment. And, in virtually every case the attorney may not collect interest on the delayed payments.
The NACBA survey results are somewhat different but nevertheless consistent with those found by the .i.American Bankruptcy Institute Report; on this issue. The Report found that the mean fee maximum in 1991 was $845, with the highest reported fee cap at $2,000 and the lowest at $100. Approximately 42% of judges set fee maximums at $750 or lower and 29% allowed maximum fees over $1,000.
e. The 1995 Behles-Giddens Report for the A.B.I.
In 1995 the New Mexico bankruptcy law firm of Behles-Giddens, P.A., conducted an extensive survey of chapter 13 trustees and attorneys for presentation to the 1995 American Bankruptcy Institute Bankruptcy Reform Study Project.
Responses came from 94 trustees and 51 attorneys.
Sixty-three percent of the attorneys polled indicated they believed requirements of the United States Trustee increases the cost of chapter 13 proceedings, and 69% believed they increase the cost of chapter 7 proceedings. Similarly, 80% of the responding attorneys indicated that changes in the bankruptcy code since 1984 have increased the cost of chapter 7 proceedings, and 78% believe they have increased the cost of chapter 13 proceedings.
When asked what effect they thought fee caps in chapter 13 cases had on fees, 52% of the responding lawyers believed they caused a decrease in attorneys' fees, and 32% believe they cause lawyers to channel clients into chapter 7 and away from chapter 13. Fifty-four per cent of the lawyers believe that fee caps result in a decrease in the quality of legal services provided for the debtor. Fourty-three per cent of the attorneys believe that they collect less than 75% of their approved fees in chapter 13 cases.
.c. f. Anecdotal evidence
Individual lawyers across the nation provide anecdotal evidence of a myriad of problems related to compensation.
Melvin J. Kaplan, Chicago, Illinois
Melvin Kaplan has been a debtor bankruptcy specialist for 30 years. Very recently, however, Mr. Kaplan has started looking for some other kind of legal work to do, because of inadequate compensation for debtor work. Says Mr. Kaplan;
To survive today one must work harder and put in longer hours to make less money. Cutbacks are imperative. I have been forced to stop all of my bankruptcy publications and reporters, thus making my library of 30 years worthless. I have cut out newspaper advertising which basically in our area provides access to telephone numbers giving free bankruptcy information. I can only hire young inexperienced people who have difficulty getting jobs elsewhere because I cannot afford to pay market rates. Once trained, they leave for better paying jobs, generally with creditors or creditor attorney's firms.
In a chapter 13 case whatever order is entered, chances are the attorney will not get paid anyway, so why bother in the first place?
Our judges also will not take into consideration that debtor's attorneys' fees allowed are really contingent ... I personally collect about 60% of fees allowed in chapter 13 cases ...
I have limited my practice to chapter 13 and chapter 7 cases for over 25 years and have reached the point where I can no longer earn enough to maintain my existing practice. Accordingly, I am looking into other practice areas to survive.
Mark Segal, Las Vegas, Nevada
Mark Segal, a very experienced debtors' attorney with a tax problem focus, complains that the extra work required in tax problem cases is not fairly reflected in the local fee guidelines applicable in his area. He also complains about fees generally, particularly in chapter 13. The local guidelines provide for maximum fees of $1,800; "Of course, we do not receive the $1,800 if the clients do not make their payments [to the trustee]. Surprise!"
We have found ourselves in many situations where thousands of dollars of additional time has been rendered attempting to help the client cure his or her postpetition problems, but then the client either runs out of money or does not want to modify the plan and the chapter 13 gets dismissed. Needless to say, we are left holding the bag. ... if the fee is not paid in full it is generally because the plan is not confirmed, the plan is confirmed but the client does not complete the plan payments or certainly does not make enough payments to cover the balance of the fee which we do not collect up front.
Roger G. Cotner, Grand Haven, Michigan
Roger Cotner's fee application was, in his view, arbitrarily reduced, so he filed an appeal. However, before the appeal had progressed very far, he began getting phone calls, including, he says, calls from the trustee's office and the judge's law clerk, urging him to drop the appeal. Out of self-defense, he reluctantly acquiesced. He writes:
One of our three judges ... consistently reduces proposed attorney fees awards even when no party objects to an entry of an order awarding these fees. I recently had my uncontested fee application reduced from approximately $950.00 to $500. I appealed this to the U.S. District Court. Suddenly, the issue became bigger than life and I had numerous representatives from various offices contacting me, all urging me to abandon the appeal. I did abandon the appeal but want to take steps to assure that this scenario does not happen again.
The author - Morgan D. King, Dublin, California
The author practices primarily in the Ninth Circuit, Oakland, California division. By comparison with many other areas of the county, the Oakland division is relatively liberal regarding award of attorney's fees in consumer cases. For example, in chapter 13 the present "Guidelines" provide for an initial retainer in consumer cases of $1,500, and for business cases $2,800. Although the initial "up-front" fees that may be taken should not be more than $500 and $1,500, respectively, there is no prohibition against taking more "up front," the guidelines merely providing that such additional fees will be "scrutinized."
Nevertheless, despite these liberal guidelines, the author regularly loses up to a third of his billable time on chapter 13 cases. This may be seen by looking at the "big picture" of law firm economic's in the author's firm. What recently caught the author's eye were the figures on his annual profit/loss statements for the last two years; in both years, the total overhead for the office (not including compensation to the author) virtually equalled the gross income from the bankruptcy work performed by the firm. In other words, after a great deal of time, energy, light and heat in processing hundreds of bankruptcy cases, the author had made not a dime of profit on the bankruptcy work. In fact, the only profit showing on the books virtually equalled the fees collected from the author's personal injury case settlements, which consumed less than 10% of the office overhead. This was another example of the old 80-20 rule; eighty per cent of your profit comes from only 20% of your work.
The second thing the author noticed was that a computer printout of all chapter 13 cases handled by his office indicated that he was failing to collect an average of $800 in billable time and expenses per case. The author calculates he loses approximately 21.4% of his billable time due to chapter 13 cases that collapse with fees still owing, and another approximately 9% in lost interest accruing on delayed payments. The author estimates another 10% is lost simply because he does not have the time to apply for fees where the fees do not exceed $1,000. And, the author estimates he loses another 10-15% in unfair reductions by judges.
Next, the firm looked at what it could be grossing over a recent two-year period if it had dedicated the firm's resources to non-bankruptcy work; the concluson is that the average gross receipts from bankruptcy cases are substantially below what the staff should be generating, and in fact would be generating, in virtually any other field of law.
.c.IV. .i.Causes of inadequate compensation
While there is some evidence that bankruptcy judges' failure to acknowledge comparable market hourly rates is a contributing factor to the poor economic performance of debtors' attorneys, the causes for failure of debtors' attorneys to be paid commensurate with their non-bankruptcy colleagues are not due primarily to the judges' insistence on unreasonably low hourly rates for lawyer or paralegal time. Most of the judges acknowledge the reasonableness of attorneys' hourly rates comparable with similar rates in comparable nonbankruptcy matters.
Rather, the reasons for the failure of adequate compensation, while largely on account of the day-to-day decision making by bankruptcy judges, fall into other categories; such as; (1) arbitrary discounting of fee applications, (2) failure to assure actual payment of awarded compensation, (3) delays in payment of compensation, (4) disregard of actual market practices in regard to specific billing items, (5) unnecessarily severe sanctions for unintentional or benign violations of technical rules regarding employment of professionals and payment of fees, and (6) needlessly time-consuming fee application requirements in small bankruptcy cases. A secondary reason is the inconsistent application of the market rate or cost of comparable work criterion in the published opinions.
.c. a. Arbitrary discounting of fees
The local bankruptcy courts regularly, arbitrarily discount the time spent in travel, time spent preparing and hearing fee applications, and other reductions without any evidence the time was not necessary and reasonable.
One example is in compensation for travel time.
Virtually all lawyers charge full hourly rates for travel to and from court, unless their offices are just across the street or down the block from the courthouse. Nevertheless, in Northern California where the author principally practices, the judges either allow nothing for travel, or allow it only based on reimbursement for mileage at $ .28 per mile. The author's office is an average of 1.33 hours distance round-trip to and from the courthouse. The author calculates that his office consumes an average of $53,306 worth of billable time on such travel annually, at the rate of $140 per hour; in 1994 this represented approximately 11% of all billable time for the firm. And yet, the local guidelines in the Oakland division only allow compensation for travel at $ .28 per mile with no hourly compensation, and the Eastern District allows it at only 1/2 the regular hourly rate.
Another cause for concern is the time spent on fee applications. Even a simple fee application, if done carefully and correctly, is quite time-consuming. Simply reviewing, correcting and augmenting the billing statement in a typical consumer case can easily consume two to four hours; it may take half an hour just to calculate the costs of the long distance phone calls and log them the way most bankruptcy judges want them logged, that is, an entry showing the date, to whom it was made, the subject, the number of minutes, the cost per minute, and the total. Furthermore, as a practical matter these tasks cannot be delegated to a paralegal; for example, only the lawyer who has a full grasp of the whole case can intelligently review and correct the billing log.
And yet, the author has been told by the judges that the fees for a fee application should not exceed 5% of the total fees requested! While this may work fine for a mega-case, it is preposterous to limit a consumer bankruptcy attorney to 5% of a fee application of $750.
The biggest problem and the must frustrating to deal with, is an across-the-board bias of bankruptcy judges against debtors' attorneys getting paid.
In virtually every published opinion where the courts deny fees to debtors' attorneys, no actual evidence is offered to justify the reductions. Rather, the judges simply have a "gestalt" reaction and start slashing fees and costs.
The result is that a substantial amount of time that the lawyer in his professional opinion was required to be invested in the case is arbitrarily erased because a judge, with no proof to back him up, and in many cases no experience as a consumer bankruptcy attorney, second-guesses the attorney and decides large amounts of time were not necessary. Many of these judges never actually practiced bankruptcy law as attorneys, and others worked for large firms doing primarily corporate reorganizations. Most bankruptcy judges appear to be quite out-of-touch with the economic and professional dynamics of actually representing consumer and small-business debtors on a day-to-day basis.
A typical case illustrating this problem is the relatively recent case of In re Mondie Forge Co.. In that case the debtor's attorney had received a prepetition retainer fee of $10,000 to handle a corporate chapter 7.
The portion of the retainer fee not consumed in prepetition services were deemed assets of the estate. The Trustee objected to the retainer fees, and the attorney applied for court approval of the fees.
The attorney did not help his own case. He did not have a written fee agreement. He filed inconsistent statements regarding the amount of the retainer fee. He took the position that the entire retainer fee was an earned-on-deposit classic retainer fee, but could not document the claim with a written fee agreement.
Nonetheless, after starting out with a quite erudite essay on the requirements of sections 329 and 330 in regards to retainer fees, the court then summarily, and without any evidence to support it, cheats the attorney out of substantial amounts of his fees.
The court finds that "... only 11.75 hours of the 31.10 hours submitted for postpetition fees for services were reasonable, actually rendered, necessary and beneficial to the Debtor's estate and, accordingly, compensation in the amount of $1,762.50 will be awarded and $2,902.50 of said fees is hereby ordered disgorged." The opinion goes on to pick out other portions of the application and in a similar vein slash and burn the fees, ordering substantial disgorgements.
Any attorney who practices law in the real world, reading this opinion, will recognize the unfair dilemma the debtor's attorney is placed in. When a case is in progress, the attorney is expected to perform a myriad of services for the client who retained him. Failure to promptly and thoroughly perform such services will inevitably result in a complaint to the Bar. But when the lawyer performs these services, he can expect to have the bankruptcy court arbitrarily reject compensation for them. In Mondie Forge, the debtor corporation had apparently held an auction of corporate assets. This auction was attended by the debtor's attorney, who logged 4.5 hours of time for the task. The court, in its wisdom, declares this task to be "clerical" in nature, and not compensable. Huh? What competent attorney in his right might would send his secretary to monitor the auction of a client's assets? What client would put up with this kind of treatment without complaining to the State Bar? Didn't the attorney have a fiduciary duty to the estate to monitor the disposition of assets of the estate to assure that they were disposed of in a commercially reasonable manner? In any event, isn't the attorney entitled to exercise his own professional judgment except in obvious cases of abuse?
The American Bankruptcy Institute report on compensation identified one of the reasons for this as the judges' lack of familiarity with the practical and financial realities of law practice today. This lack of familiarity with private practice on the part of the bankruptcy bench was also identified in the A.B.I. roundtable discussion on costs of bankruptcy; Remarked Hon. Leif Clark;
And if I am simply going to draw on my personal experience, notwithstanding all the case law that says that the judge is presumed to be an expert on attorneys' fees, the longer I am on the bench, the less I know about what is really going on out there.
And, unfortunately, the way that too many bankruptcy judges deal with this void is to attempt to apply intuitive, rather than evidentiary, criteria. As Hon. John Pearson pointed out in the A.B.I. roundtable conference on costs of bankruptcy;
... as the Seventh Circuit Judge Posner said in the Steinlauf v. Continental Illinois Corp. (In re Continental Illinois Securities Litigation), the judge gave no examples of excessive time spent on legal research; he just had a gestalt reaction that they were too much; that is not good enough. You cannot have a gestalt reaction; you cannot have a gevalt reaction; you have to have some reason for doing it ...
.c. b. Local rules and guidelines
Local rules and guidelines for compensation in bankruptcy cases frequently cause problems for the sole practitioner or small firm representing debtors in bankruptcy.
1. Fee caps
The ABI Report on Compensation states that in 1991 67% of the responding lawyers indicated there were maximum fee guidelines (i.e. fee caps) for chapter 13 cases in their districts. Acknowledging that these fee caps may be unrealistically low, the Report states "... the difficulty of rebutting the ceiling set by the maximum fee guideline may force consumer bankruptcy attorneys to accept less than reasonable compensation, especially if the attorney cannot hope to receive compensation for the time spent challenging the guideline."
For example, the Eastern District of the Ninth Circuit (Sacramento, CA) requires that an attorney must be appointed by the court to represent a debtor in chapter 13. These guidelines require that before being appointed, the debtor's attorney must select one of the following two options regarding fees; (1) either agree to take no more than $1,250 total fees in the case, regardless of how much time is actually and reasonably invested in the case; or take any amount "up front" but put it in a trust account and not draw against it until a noticed fee application is made and court approval obtained.
The first problem with such guidelines is that the Bankruptcy Code does not require prior court appointment to represent a debtor in chapter 13, but only to represent a debtor-in-possession in a chapter 11 under 11 U.S.C. § 1107(a) or a trustee under § 327. Thus these guidelines treat chapter 13 more like chapter 11 reorganization, and needlessly add to the time-burden required of the debtor's attorney to administer the case.
The second problem is that the first option provided in the guidelines, which provides that the attorney may not seek more than $1,250 in the case, by setting an arbitrary limit on compensation violates the Lodestar standard and the provision of § 330 that the attorney shall be paid for his actual and necessary time expended on the case. The guidelines place too much weight on ostensibly "normal and customary" services.
The third problem is that the second option provided by the guidelines, depositing all the retainer funds in a trust account until approved by the court, places an unrealistic burden on the sole practitioner or small law firm. Also, it creates a problem in deciding when to apply for the fees; how does the debtor's attorney know when the work on the case is finished?
These guidelines help to create the very problem they are designed to control; they cause an increase in law office overhead, and add to the number of hours required to process a case. And, the requirement that the funds be put in a trust fund until approved by the court is a tougher ethical standard than the typical one even for chapter 11 cases, which allow the prepetition retainer to be deposited in a trust fund and drawn against as the services are provided, only subject to an eventual application for approval.
The actual intent of, and the effect of, the Eastern District guidelines is to pressure the debtors' lawyers into electing the first option, which allows them to utilize the retainer fee immediately, but which caps the fees at an artificial limit. Thus these attorneys are extorted into acquiescing in a fee policy which violates settled law in the Ninth Circuit regarding the Lodestar standard.
2. The effect of amendment to § 109(e)
Another potential problem with local fee caps in chapter 13 cases is that it would appear that in most jurisdictions no adjustment has been made to compensate for the effect of changes in chapter 13 eligibility made in the Bankruptcy Reform Act of 1994. As indicated above, the Reform Act amended § 109(e), raising the debt limits of chapter 13 cases from $100,000 unsecured and $350,000 secured, to $250,000 unsecured and $750,000 secured. The effect of this amendment is that larger, more complex consumer and small business cases will be eligible for chapter 13 which previously would have been eligible only for chapter 11. In other words, more cases with chapter 11 type problems are being filed as chapter 13. However, there is no evidence that fee caps have been raised to provide for the larger complexity of these kinds of cases. For example, prior to the 1994 amendment to § 109(e) the author had never had a chapter 13 case in which a motion for use of cash collateral was necessary; in contrast, since the amendment the author has had four chapter 13 business cases requiring motions for cash collateral. However, there has been no change in the local guidelines increasing the fees to allow for the additional work.
.c. c. Trustee's schedules of payment
The individual chapter 13 trustees have their own respective policies regarding at what rate they will pay the balance of fees owed to debtors' counsel. Many of these policies provide that the balance of fees will be spread out over a lengthy period of time; in the meanwhile, the payout to the attorney must defer to payments made on secured claims or taxes.
d. Inadequate expense reimbursement.
The problem of inadequate compensation is not, as a general rule, attributable to any substantial degree to failure to award reasonable expenses. However, even in this area there is room for improvement. The 1991 A.B.I. Report on Compensation indicated that as many as 10% of judges fail to allow compensation for such things as long-distance phone charges, photocopy charges, legal research costs, and postage. And, reported bankruptcy opinions have left an uneven record on these issues, as well. Further adding to the confusion are large discrepancies between judges and districts regarding what is compensable, and at what rates. For example, the range of allowed compensation for photocopy charges is from $ .05 to $ .50 per page.
Recently Collier's published a new treatise entitled Collier Bankruptcy Compensation Guide. This book is remarkable for two reasons. First, it is a sad commentary that such a publication need be published; only in bankruptcy of all consumer law fields are the rules, pitfalls, and traps for the unwary so complex regarding attorney's fees that the subject fills a whole book. The author has sometimes felt that he needs a full-time attorney on staff to do nothing but advise the firm on how to assure compensation for its bankruptcy services. Second, the new Collier's treatise departs from the usual staid, neutral tone of the Collier's publications to make a number of rather acerbic editorial comments regarding how bankruptcy judges treat compensation matters.
A typical remark from the Collier's text alludes to allowance of expenses;
The blistering or irrational attacks on categories of reimbursable costs should not occur. The issue should be simple: are these costs normally charged by the applicant to commercial clients? If so, the standard of compensating for comparable services should extend to costs.
.c. e. Failure to assure actual collection of fees.
Another cause of inadequate compensation is the failure of judges to perceive a responsibility to help assure that the attorney actually receives the fees and expenses that have been awarded. This problem was noted at the 1995 A.B.I. symposium. Remarked Jennie Behles;
... a factor that has not been considered in setting these fees is collectability. Collectability is a real problem in consumer cases. If you think that $1,500 is a reasonable fee, that's fine. But what this survey shows is that out of that $1,500 somebody's probably collecting a thousand. That has an effect on keeping good attorneys in the system.
This problem manifests itself primarily in Chapter 13 and small business Chapter 11 cases, where the award and collection of fees beyond the initial retainer fee are strictly supervised by the court.
The courts seem to take it for granted that once they have issued an order approving fees and costs, that their responsibility to assure adequate payment ends. This approach, however, utterly fails to provide for the approximately 67% of cases that are never completed, many of them having substantial unpaid balances for fees.
The author studied 39 chapter 13 cases filed by his office in 1993, representing 90% of the chapter 13 cases filed by his office that year.
In many of the cases the balance of retainer fees had been provided to be paid through the plan. In others, additional postpetition legal services had incurred which should have been paid through the plan. The problem arises when some of these cases, for one reason or another, collapse and are converted to chapter 7 or dismissed.
Nationally, only 32.89% of chapter 13 cases are actually completed. For the 39 cases looked at by the author, as of mid-1995 fully 53.8% (21 cases) had been converted or dismissed. Of those cases, 14 still owed attorney's fees and costs which should have been paid through the plan. The fees thus lost accounted for 21.4% of the fees accrued as of mid-1995. This compares poorly with the average time written off by nonbankruptcy firms, which is only 7%.
Although most trustees' offices possess the automation technology to do meaningful statistical studies of their cases, apparently no statistical study has been done to indicate what percent of the failures occur over a time-line. It is not known, for example, how many of the failures occur in the first six months, the second six months, the third six months, etc. Similarly, no information exists to show the spread of awarded attorneys' fees over the same time-line. It is possible that most of the fees are scheduled to be paid out over the first 18 months after the award, while most of the failures occur after the first 18 months; thus, most of the fees would actually be paid to the lawyers. However, informal and anecdotal information suggests that, in fact, this is not what happens.
In the author's office, most of the supplemental fee awards occur well into the life of the plan. This is because most of the work which incurs the need for supplemental fees is done after the initial fee agreement is signed but before confirmation, or well after confirmation. In either event, the initial fees which are approved as part of the routine confirmation process will not cover the additional fees. In the case of post-petition work, the project may take six months or a year to arise or be completed (e.g. a motion for relief from stay for falling behind in mortgage payments which comes up, say, a year after confirmation). Thus, typically it may be six months, a year, or even 18 months into the plan before the application for additional fees is calendared. The award for additional fees, when made, will typically require a pay-out period of from six to 18 months.
What this means, in effect, is that in order to be fully paid for work done on the case, the debtor must remain in chapter 13 for about two and a half years; it takes the first year just to pay the balance of retainer fees which were provided to be paid through the plan, plus another year to 18 months to pay supplemental fees awarded postpetition.
If the rate of failures in chapter 13 cases is an even time-line, then it may be presumed that in cases for 36-month plans, one-third of the failures will take place each year. If the national average holds true in the Author's district, this means that 67.11% of the cases will fail, and the failures will be spread out at about 1/3 per year. Thus, 22.37% of the cases will fail in the first year, 44.74% of the cases by the end of the second year, and another 11.19% by the middle of the third year. Thus, by the end of the first 2 1/2 years during which fees are to be paid out approximately 55.93% of the author's filed chapter 13 cases will fail. Clearly, the result is that a substantial portion of the fees which are scheduled to be paid out during that same time-period will therefore go unpaid. The author estimates that he reserves an average of 50% of his fees for payment through the plan. If over half of those cases (55.93%) fail at an even rate over a 2 1/2 year period, approximately 27.97 % of the total fees in chapter 13 cases will not be paid. Since the author's estimated margin of profit in chapter 13 cases, assuming all billable charges are collected, is between 10% and 15%, the author is not only not making money, but in fact is losing money on his chapter 13 cases. This is consistent with his computer findings of an average loss of over $800 per case (which includes additional fees incurred post-petition and lost due to plan fall-out).
It may be argued that the loss or "slippage" in collecting the balance of fees due to plan failures may be a relatively small portion of the total fees. Thus, it may be suggested that the actual loss represents only 10 to 20% of total billable time of all bankruptcy cases handled by the office. But such an argument fails for the simple reason that in the typical debtor's bankruptcy firm today, that 10 to 20% of the fee represents the total profit from the cases. In fact, the actual profit margin for all bankruptcy cases on the debtors' side is probably less than 10%.
.c. f. .i.Delay in payment of compensation
The debtor's attorney experiences considerable loss of the value of his fees due to deferred payment, particularly in chapter 13 cases. The NACBA survey indicated wide variance in how much time elapses from confirmation of the plan until the first fee payments start. Some of the delays are considerable. In the Eleventh Circuit, Northern District (Alabama), for example, one jurisdiction does not confirm the plan until eight months after the case is filed. The delay in the start of the payments, combined with the delay in over-all payment, substantially diminishes the value of the fees due to inflation and other factors.
.c. g. No compensation for delay
Most nonbankruptcy law firms either demand and obtain the balance of fees within 30 days after they are accrued, or else they charge interest on the balance to pay for the loss of value of the money over time.
In chapter 11 and chapter 7, the Bankruptcy Code does not stand in the way of tacking on interest for deferred payments, and many courts will in that manner accommodate the debtor's attorney for such delay. However, the Code does not authorize interest on administrative fees in chapter 13. Accordingly, the delay in receiving the balance of fees in chapter 13 cases will diminish the present-day value of the fees without compensating interest. In the case of the author's 39 cases, the author calculates that he has lost approximately $7,250 on the fees billed, calculated at the rate of 10% per annum over 30 months. Other attorneys report similar losses.
.c. h. Disregard of .i.market rates and practices
It is rare to find evidence that in rendering a fee award a judge has considered, or is even informed about, the costs of comparable non-bankruptcy legal services. Evidence of trustees' knowledge in this area is even rarer.
Virtually any experienced, skilled and successful attorney will calculate his retainer fee giving some consideration to the total benefit to be reasonably expected that the client will obtain from the legal service.
In one case, the author's firm discharged nearly half-a-million dollars in general unsecured debt for the client, and charged a fee of less than $1,000. However, the client objected to about $250 worth of the fee on the ground that he thought it was a "fixed fee" agreement. The bankruptcy court sided with the debtor. Thus, for the benefit of wiping out over $400,000 in debt, the client paid a little under $700! By contrast, in any non-bankruptcy case, the attorney would have charged at least $10,000 to obtain the same result, and in many cases substantially more. In California, an attorney shuffling paperwork to handle a probate with assets of $400,000 would be allowed, as a matter of statute, a minimum of $9,155 in fees for work involving about the same amount of paperwork, and quite possibly less legal complexity than a chapter 7 case. To handle a collection matter worth that much a collection attorney would typically charge a minimum of 20%, or $80,000. Compare, a real estate broker selling a home worth $400,000 would be entitled, in California, to a customary commission of 6%, or $24,000; even in a "down" market when such brokers may cut their commission in half in order to "close the deal" we're looking at a compensation of $12,000 for filling out fewer papers than an attorney would in handling a $400,000 bankruptcy.
.c. i. Unnecessarily severe .i.sanctions
It seems that some bankruptcy judges have a distorted image of the typical consumer bankruptcy attorney; they think all lawyers belong to big firms with huge cash-flows. This is because many of the judges never practiced consumer bankruptcy in private practice, and many others came from large downtown law firms.
As a result, some bankruptcy judges order substantial disgorgements of fees for minor or merely technical errors in fee rules, without giving adequate thought to the financial burden such loss of compensation may have on a small firm. There is substantial authority to the effect that sanctions in the nature of disgorgement should, except in the most extreme cases, do no more than deter similar future conduct, not create a financial hardship on the firm. "A particularly relevant equitable factor is the sanctioned party's ability to pay ... courts must be careful not to impose monetary sanctions so great that they are punitive ... or that might even drive the sanctioned party out of practice." That is, the court should impose the minimum sanction required to deter future conduct.
.c. j. Over-burdensome .i.fee application requirements.
In a great many of the chapter 13 cases, the additional fees incurred were under $1,000. For such a small balance, it is not practical for the author to devote an average of one full day to draft a fee motion and attend the hearing. Thus, a substantial portion of billable time is simply lost because the author does not have the time to apply for it. And, in those cases where a motion is made, the courts regularly, arbitrarily reduce the fees for the time expended in preparing the motions. The author has not done a study of the losses in the 39 cases, but estimates that as much as 10% of his billable time is forfeited in this manner.
.c.V. The effects of .i.inadequate compensation on the law firm
As a result, the actual practice of debtors' bankruptcy as a field of law is, today, second-rate, and the evolution of bankruptcy law, as well as the quality of legal services provided to debtors, suffers accordingly. Circumstantial evidence of this is found in legal malpractice statistics; bankruptcy practice has one of the highest incidence of claims for malpractice in the legal field. Other evidence may be found in the American Bankruptcy Institute Report on Compensation which surveyed the effects of fee restrictions for relatively recent years, and found, among other things, that among the effects were a growing reluctance of quality lawyers to do bankruptcy work.
The deleterious effects of restrictive fee regulation are recognized in the literature. "The sophistication of bankruptcy law in the United States requires experts to make it run. Restricting fee recoveries will not change this, it will only serve to make the same system perform even more poorly."
There should be no question that not being able to be paid for services rendered inevitably results in an overwhelming mediocrity in one's lawyering. As was observed by Harvey R. Miller:
"You have to take into account the economics of the practice of law, as well as other professions; it has changed dramatically. You know, the days when you hired somebody out of law school and paid them five dollars a week are long gone. So to are the days when you did not have to rent machines or buy machines. Office space is now very expensive. The practice of law is a highly capital-intensive business."
And, the economic facts of life suggested by Mr. Miller are, as all debtor attorneys know from experience, magnified in a bankruptcy practice due to the hidden costs of handling consumer debtor cases. Debtor work places a substantially higher than average burden on the firm's resources, including, but not limited to; very heavy wear and tear on photocopiers and computers, unusually heavy demand on supplies, postage and phone charges, extra staffing requirements to handle incoming phone calls, client inquiries and time-log data entry functions, and advertising expenses. These added overhead costs suggest that consumer debtor bankruptcy lawyers should collect higher, rather than lower, than comparable compensation in non-bankruptcy areas. Thus, even if bankruptcy firms were being compensated on a level equal with their non-bankruptcy colleagues, the hidden overhead would result in lower profits.
The effects of operating a law practice on a shoe-string are not difficult to discern. Here are a few:
.c. a. .i.Bankruptcy of bankruptcy lawyers
Probably the most notable bankruptcy of a bankruptcy attorney in recent years was that of Max Cline. By 1992 Max Cline's consumer bankruptcy firm was the largest in California, with 15 offices throughout the state, employing 12 lawyers and 12 paralegals. The firm grossed approximately $3 million in 1991.
But in 1992 he filed for chapter 7 bankruptcy. The primary reason was two malpractice lawsuits filed against him at a time when he did not carry malpractice insurance. However, underlying this crisis was the fact that he couldn't afford malpractice insurance. After ten years of operating a huge volume bankruptcy practice, Mr. Cline's chapter 7 bankruptcy was listed as a no-asset case! "In a big firm," said Mr. Cline, "having lots of lawyers is great because you're billing for time. But these are flat fees."
.c. b. .i.Impairment ;of quality of legal services
The effects of inadequate compensation for a firm handling a substantial volume of bankruptcy work are manifested in a variety of direct and indirect ways which all tend to impair the ability of the firm to deliver quality, or even competent, legal services in the bankruptcy field.
.c. 1. Understaffing
In the typical small firm with professional employees staff salaries are probably the largest single item of overhead expense. When one hires a new attorney, the salary is only the beginning of the added expense; for each new attorney or paralegal on staff the firm typically has to figure in increases in such things as workers' compensation insurance premiums, state disability insurance payments, employment taxes, benefits, and increases in legal malpractice insurance premiums.
Accordingly, each staff person is very expensive. When the cash-flow is inadequate to cover the overhead, it is almost certain the firm will be forced to reduce its professional staff, or hire cheaper, less qualified staff.
A reduced or less qualified staff obviously impairs the ability of the firm to deliver timely, quality legal services. The work-load previously carried by a number of attorneys and paralegals is now re-distributed to fewer attorneys and paralegals. Attention to details and legal issues suffers. Deadlines are pressed and sometimes missed altogether. There is less time for client relations. And the stress level increases, sometimes to the point where additional staff is lost due to "burn-out," thus further aggravating the problem.
.c. 2. No library or computerized research
When the firm starts getting behind in paying its bills, services begin to be terminated. Since the rent, phone, supplies and salaries are the sine qua none of an office, other expenses slide because they not as immediately necessary. However, many of these services are, in fact, necessary to enable the firm to deliver professional services over time.
One of the expenses which many bankruptcy lawyers feel is an expensive luxury is access to legal research resources. This may take the form of a subscription to a hard-copy library, such as the Bankruptcy Reports with weekly advance sheets, or a subscription to an automated on-line legal research service.
Either way, it's expensive, and either way it's going to get cut off when the monthly bills aren't paid.
The result is a firm of lawyers unable to stay current with case law and unable to quickly and efficiently research a legal issue.
.c. 3. Minimal continuing education
The lawyer who is constantly attempting to put out fires in improperly handled cases, constantly having to put aside case work to do administrative tasks because he can't afford additional office help, constantly struggling to make ends meet on a shoestring ... such a lawyer sacrifices the time-consuming, meditative and scholarly endeavors that are necessary to keep him at the top of his profession. In short, he slowly deteriorates into that unsightly vision at the courthouse ... the hack.
.c. 4. Curtailment of legal services
Chief among clients' complaints about consumer bankruptcy attorneys is that their lawyers refuse to fight for them on issues that may involve the lawyer in adversary or contested proceedings. Too many chapter 13 attorneys browbeat their clients into caving in to the creditors whenever a legal fight looks imminent. Representing a debtor in a typical adversary or contested matter may require a tremendous investment of office resources for a sole practitioner or small firm. The virtual impossibility of being adequately and timely compensated for such an investment can put the firm at serious risk of a cash-flow problem. The restrictions on compensation thus create a strong disincentive to properly, aggressively and competently protect the rights of debtor clients.
The stretched-out bankruptcy lawyer is forced to sacrifice his client on the alter of efficiency. There is no time to properly educate and counsel the clients. They are rushed through the system, uncomprehending, unprepared and unrepresented. Worse, any ripple in the case which creates a serious problem for the client simply goes untreated. The client calls frantically ... the lawyer grabs the phone and in short order browbeats the client into not pursuing the issue. Has a creditor filed a complaint to determine dischargeability? Does the client have a defense? No matter. The client is pressured into giving up, caving in, compromising. Why? Because the lawyer has no time to deal with it, and even if he did he wouldn't because he knows, based on sad experience, that the court will not compensate him fairly for his time and effort. The client is politely abandoned. As the Hon. Judge John Pearson remarked recently in an A.B.I. panel discussion on the costs of bankruptcy, "I hear you saying on one hand that they are getting bad advice, and Judge Scholl saying they are charging too much for it. The problem I see is: how can an attorney do a good job for a $300 or a $200 bankruptcy? I mean it is like an uncontested divorce; there is no such thing." Under such circumstances, it can hardly be said that the debtor will be able to achieve the full and fair potential for a fresh start.
.c. 5. Abandonment of appellate work
In most areas of law lawyers are able to charge their clients for appeals. In bankruptcy, the legal costs of appeals are typically beyond the ability of impecunious debtors. Accordingly, it is quite common for a consumer debtor attorney, if he takes a case up on appeal at all, to do it pro bono. However, when a small debtor law firm or sole practitioner is being starved of compensation for the regular work he performs, he is not able to invest additional time in unproductive appellate work.
.c. 6. Penny pinching
One classic example of a bankruptcy attorney's penny pinching is the law firm in Northern California that mails its motions and other pleadings printed on both sides of the page. Sometimes, this firm uses the photocopier to reduce the size of the pages so that two pages will fit on one sheet. When asked why they do follow this practice, the attorney replied that he had to pinch pennies in order to make a profit in bankruptcy.
.c. 7. Avoidance of challenging or complicated cases
Time and again the author has taken cases other bankruptcy attorneys have turned down. They turn them down because they can afford to handle only routine cases which will not incur additional fees, because they feel that they will never get paid for the additional work and expenses.
.c. 8. Reliance on volume to make a profit
When you can only make ten dollars profit on every case, there is tremendous pressure to try to build a high-volume, quick turn-around bankruptcy practice. Inadequate compensation, combined with market forces such as competition, combine to encourage such practices. "In general, the "market" which establishes fees in chapter 13 cases is highly competitive and supports only "high-volume" consumer bankruptcy firms."
Is there anything inherently wrong with doing such a practice?
In fact, there are several serious problems associated with high-volume consumer bankruptcy.
.c. i. Incompetence
The high-volume practice is often founded on several false premises ... one, that the vast majority of cases are similar in nature, and, two, that they can be competently processed with fast, efficient cookie-cutter methods.
In fact, however, bankruptcy law is the most complex field of all consumer law fields. Such areas as routine family law, criminal defense, personal injury, small business and estate planning do not have as many potential issues and traps for the unwary as bankruptcy. And, the insidious nature of bankruptcy practice is that the consequences of not handling each case with sufficient sophistication and attention to its unique issues do not typically begin to appear for several years. Hence, many naive or unethical lawyers jump into the field and begin cranking out a high volume of cases, in some cases interviewing as many as four new clients per hour. For a long time such lawyers actually believe they can get away with handling the cases in such a manner. In a few years, however, the habitual failure to pay attention to detail begins to rear its head ... clients call wondering why this debt was not wiped out, or why there is still a lien on the home, or why the trustee demands surrender of assets. The mistakes, unpleasant surprises and unforeseen consequences, after incubating for a time, emerge from their cocoons and begin devouring the lawyer and his practice. High-volume practices need a large, very intelligent, and highly trained support staff, and it is virtually impossible to build such a staff without paying premium salaries and benefits ... things the shoe-string operation can't afford. Hence too many high-volume practices are staffed with dolts and incompetents who regularly mishandle cases. That such is the case is corroborated by the unusually high rate of malpractice claims in bankruptcy.
.c. ii. Unsuitable debtors pushed into bankruptcy
Second, because the profit margin is so thin and the concomitant need for high volume is so great, the lawyer quickly loses all sense of professionalism and discretion as to which cases are actually suitable for bankruptcy or chapter 13 ... in his eyes every client must be hustled and signed up. Hence, many cases are channeled into bankruptcy which should not be. Individuals who really need only some financial guidance and not bankruptcy, frauds, manipulators, and sincere individuals whose problems in fact cannot be solved with a bankruptcy ... all are shoveled into the voracious funnel of the high-volume lawyer. Such a practice is a like a shark ... it must ceaselessly, mindlessly move forward through the water with jaws wide apart to consume ever more business, or die. This can be deemed only a tragic disservice to the public, to the creditors and to the bankruptcy system.
.c.VI. Effects of .i.inadequate compensation on the bankruptcy system.
.c. a. .i.Cost to the estate.
Ironically, fee regulation as practiced in the bankruptcy courts and by the trustees defeats the very purposes for which it is supposedly done in the first place, that is, to reduce the costs to the estate; it must cost millions of dollars in court-room time and resources expended on fee issues, and millions of extra dollars annually in fees awarded to compensate attorneys solely for the preparation and hearing of fee applications ... dollars which must ultimately be assessed against estates and debtors. The Behels-Giddens Report indicated that 63% of responding attorneys believe the trustee's requirements increase the cost of processing a chapter 13 case, and 69% believe it increases the cost of a chapter 7 case. This is another example of the law of unintended consequences.
.c. b. Flight of qualified bankruptcy specialists
The fact that oppressive fee regulation is discouraging high quality attorneys from continuing to do bankruptcy practice has been cited previously in this article.
.c. c. Wasted time
The fuss which courts and law firms alike must make over fees and fee applications must surely impair the ability of both to do the jobs for which their existence is justified in the first place, and adds yet another monetary burden to the estate. How many judge-hours must be expended annually in reviewing and hearing fee applications and fee disputes? Is it as much as 10% of total productive time? Twenty per-cent? This burden on effective judicial functions has been loudly lamented by the bankruptcy bench. Similarly, how much of the typical lawyer's time and office resources are exhausted by the onerous requirements of time-keeping, drafting of applications, attending hearings, and laboriously responding to trustee's inquiries? Surely the economic drag on one's practice has to impair one's ability to deliver quality legal services. And, how much additional money is drained from the debtors' cash-flow, or from the estate, to pay for the additional attorneys' fees and costs for such tasks?
.c. d. .i.Impaired legal services
The fundamental result of lack of adequate compensation for lawyers representing debtors in bankruptcy must assuredly be an across-the-board deterioration in the ability of such lawyers to do what is expected of them ... that is, to deliver quality legal services. Even worse, the oppressiveness of the system and the effect it has on actual compensation cannot but drive away the very kind of talent in the legal industry that Congress has made explicitly clear it does not want to drive away. Observed Jennie Behles at the 1995 A.B.I. symposium;
I thought since judges seemed to really like the idea of caps or things of that sort that they must be working really well. Both the trustees and the attorneys thought they were having a deleterious effect; that they were causing cases that should be 13s to be filed as 7s; they were, to some extent, affecting the quality of work.
The Behles-Giddens Report, submitted to the Montana session of the A.B.I. Symposium on Professional Compensation, revealed that fully 54% of responding attorneys believe that fee caps in chapter 13 cases impair the quality of legal services.
.c. e. .i.Funnelling cases into chapter 7
One of the eventual results of inadequate compensation in chapter 13 and chapter 11 cases is that attorneys begin, consciously or unconsciously, to urge their clients to avoid those two remedies in favor of a chapter 7 liquidation. The reason is that since most chapter 7 cases are no-asset cases, the attorney ordinarily gets his fee from other than assets of the estate and thus ordinarily does not need to make an application for fees, thus sliding by the scrutiny of both court and trustee. In other words, it is easier to get paid a reasonable compensation in most chapter 7 cases.
Although empirical evidence of this is hard to find, some statistics present strong circumstantial evidence that this is happening. An article in Consumer Bankruptcy News, after discussing the complaints of debtors' Chapter 13 attorneys regarding inadequate compensation in Colorado, pointed out:
Last year there were 20 percent fewer .i.Chapter 13; filings in Colorado than during 1993. This drop-off occurred during a year when total consumer bankruptcy filings in the state declined by only four percent. Viewed another way, during 1993 one out of every four consumer bankruptcy petitions was filed under Chapter 13. A year later, the ratio was down to one in five.
This phenomenon was also identified at the recent A.B.I. Symposium on Professional Compensation. A survey conducted for the A.B.I. Symposium on Professional Compensation, presented at the Montana session in 1995, revealed that 32% of the responding lawyers believe that fee caps in chapter 13 cases cause lawyers to steer their clients into chapter 7 instead. This is corroborated by the survey of bankruptcy lawyers and case filings conducted by Prof. Jean Baucher, which found that "Cincinnati, with the lowest rates of use of chapter 13 by the high-volume subject lawyers in the cities studied, also has the lowest fee incentive for use of chapter 13." Prof. Baucher's study also cited a number of other scholarly essays, all of which concluded that the particular lawyer's bias as to which chapter of bankruptcy the client should file was the most important factor in determining which chapter the client eventually elected.
A report out of Chicago indicates that in one month in 1995, the two largest consumer bankruptcy firms in the area filed a total of approximately 760 consumer bankruptcy cases, of which only one was a chapter 13 case; all the others were chapter 7s. And the attorneys in charge of those firms testified in hearings conducted by Hon. Robert E. Ginsberg that the reason they no longer filed chapter 13 cases is that they could not continue to lose money on them and provide the necessary services.
The irony, of course, is that in the hierarchy of bankruptcy values and public policy Chapter 13 is the preferred remedy. But economic pressures are forcing attorneys to abandon this remedy in favor of Chapter 7 simply because they can't get paid for their work in Chapter 13.
.c. f. Lack of .i.malpractice insurance
Statistically, bankruptcy has one of the highest rates of malpractice lawsuits. This would be bad enough, but it wouldn't quite so bad if bankruptcy lawyers carried errors and omissions insurance. Unfortunately, too many of them don't.
For over a decade bankruptcy attorney Max Cline operated one of the largest bankruptcy legal clinics in the country. His Oakland, California headquarters offices filed so many chapter 13 cases that the local chapter 13 trustee routinely reserved an entire block of time on the 341 calendar just to handle the load.
Then in 1992 Max Cline filed chapter 7 bankruptcy on himself. When asked the causes of his financial collapse, high on his list were two malpractice cases that had been brought against him, for which he had to pay the substantial defense costs out of his own pocket because, he said, he had not been able to afford malpractice insurance. Even though Mr. Cline is considered an excellent lawyer with a reputation for ethical, high quality representation, and the two malpractice cases against him were defensible, his reliance on a volume of chapter 13 cases kept his huge operation on a hand-to-mouth monthly budget that did not afford insurance premiums.
Law firms operating on a shoe-string have a number of things in common. Among these are the use of answering services or machines instead of office receptionist, failure to keep an up-to-date law library, skimpy continuing education activities, and "going bare," that is, going without legal malpractice insurance. This can only harm the rights of innocent debtors who must rely on their lawyers to protect their rights.
.c. g. The "Where's Waldo? "game.
The oppressiveness of the regulatory requirements as they are presently administered doubtless forces some bankruptcy attorneys to simply ignore the procedural requirements of disclosure and application and take fees directly from the client "under the table" rather than be exposed to the arbitrary reduction of fees that is virtually certain should the lawyer actually make a formal application for fees. The result is that the very purposes of the requirements are defeated by their overly-zealous pursuit.
In other cases, the attorneys engage the court in a sublimated version of the game, Where's Waldo? Waldo, in this case, is the task or time entry that the lawyer was required to perform under his professional obligations to the client, and yet is certain to be found noncompensable by a judge. The game is to hide this time by burying it in some other time entry that is not so easy to refuse payment for, and see if the judge can find it.
Thus, instead of truthfully logging .25 minutes of time to instruct a secretary and supervise him/her in a complicated mailing of documents (which is certain to be deemed "clerical" and not compensable), the attorney will simply pad his 1.5 hours of legal research and make it 1.75 hours instead.
Thus, the system penalizes the honest attorney and rewards the dishonest attorney. Worse, it forces some attorneys to become dishonest in how they report their time, out of sheer necessity to be paid for their time.
The author is sometimes advised by colleagues to stop being so honest and learn how to play Where's Waldo? The author, however, is still holding out in the hopes that bankruptcy judges will wise up.
.c. h. Clogging the courts with sloppy work product
Although there is little discussion in the literature on this point, the author's observations in court and at meetings of creditors, particular in chapter 13 cases, leaves him with the clear impression that much of the work of judges and chapter 13 trustees is absorbed in cleaning up poor work done by lawyers, including policing up sloppily prepared schedules, educating lawyers on proper procedure, and the like. An important question is, is this work submitted by mediocre lawyers, or are inherently good lawyers forced to produce mediocre work because of the impediments to good work created by operating a law practice on a shoestring?
.c. i. Less distribution to the creditors
An ironic, indirect effect of debtors' attorneys not receiving adequate compensation is that the net distribution to creditors may be impaired. Thus, the attempt to reduce depletion of the estate and maximize recovery to creditors by limiting professional fees may be backfiring. One way in which this result happens is that poorly paid lawyers guide more debtors into chapter 7 than chapter 13; of course, typically the creditors receive less in chapter 7 than chapter 13. Another factor is that less qualified lawyers and underfunded debtor law firms are less able to render effective assistance to help debtors succeed once they enter chapter 13. And, where overly-stringent fee regulation incurs additional costs for such things as fee applications and litigation over fees, there is less money to distribute to creditors.
These issues were identified at the 1995 A.B.I. symposium on professional compensation.
j. Debtors' fraud
Already mentioned is the problem of the high volume debtors' practice that puts pressure on the attorney to sign up and file every case he can get his hands on, with the result that many unsuitable or inappropriate cases are funnelled into bankruptcy.
Where a bankruptcy lawyer is pressured by the courts and the trustees to keep his fees to the bare minimum, the staff inevitably slips into a habit of fast and superficial evaluations of the debtors and their financial situations. The author believes that a truly competent case evaluation, even for a relatively routine consumer case, should take a minimum of one hour to two and a half hours.
Failure to perform a thorough initial evaluation means that some debtors who have committed or intend to commit bankruptcy fraud or other bad faith activity will slip through.
Bankruptcy fraud on the part of debtors in consumer cases is perceived as a serious problem by the U.S. Department of Justice.
If debtors' attorneys were adequately compensated for their work, they could afford to invest more time and care in evaluating cases. This means that the attorneys would identify more instances of fraud or fraudulent intent, and be able to afford to turn such cases down.
.c.VII. Suggestions for .i.reform
The evidence developed in this article suggests that appropriate reform of the fee regulation system in bankruptcy will increase levels of compensation while reducing the over-all costs of bankruptcy, improve the quality of legal services delivered to debtors, and increase the distribution to creditors.
The Bankruptcy Reform Act of 1994 established the National Bankruptcy Commission, with a mandate to study the bankruptcy system and report to Congress in 1997. Among the issues the Commission will look at is compensation of professionals in bankruptcy cases.
In contemplation of the Commission's work, the American Bankruptcy Institute is preparing to make serious recommendations on a number of bankruptcy issues, and has initiated a series of symposia under the umbrella of the ABI Bankruptcy Reform Study Project.
Also in contemplation of making a contribution to the proceedings of the Commission is the National Association of Consumer Debtor Attorneys.
These organizations, and others, will doubtless have the ear of the Commission when considering its reports and recommendations to Congress. Accordingly, there is much that such organizations can do to help find solutions to the problems identified in this article. And, any serious consumer debtor attorney can and ought to make a contribution by supporting and participating in these organizations.
There is more, however, that can be done. Individual lawyers can make a difference, if enough of them make an effort to do so. Similarly, judges and trustees have the power to reevaluate these issues and make changes in how they approach them.
The Committee on Compensation of Debtors' Attorneys is preparing to help make a contribution by surveying NACBA members, and also nonbankruptcy attorneys, to more precisely identify problems in compensation, develop information about costs of comparable services, and draft recommendations for judges and trustees, lawyers, and Congress to help solve those problems.
The following items are not the result of the work of the Committee, but rather the author's suggestions. At this stage, they should be viewed as only points for discussion. As the Committee develops more ideas and data, additions and refinements of suggestions will be made.
.c. a. What lawyers can do.
1. Make more applications for fees.
2. Make better applications for fees.
As mentioned earlier, one of the observations of the 1993 A.B.I. Report on Compensation was that the judges are ill-informed on the costs of comparable services, and comparable billing practices for non-bankruptcy work; another observation was that bankruptcy lawyers frequently fail to help educate the judges by offering information on these topics in their fee applications.
Accordingly, in making fee applications, lawyers should make a greater effort to supplement their routine documentation with additional material regarding the economics of handling bankruptcy cases in their respective law firms, and also information and data on comparable non-bankruptcy market rates and billing practices. This can be done with the use of affidavits, surveys, articles, and expert testimony by law firm management consultants. Expert testimony may establish the customary fee within the locality.
3. Appeal more adverse fee rulings.
One of the ways the system in a sense extorts bankruptcy attorneys to keep quiet about their fee grievances is that it is time-consuming and uneconomical to litigate fee matters. Even though there is case authority that bankruptcy lawyers are entitled to compensation for the time expended in defending their fees, this seldom seems to happen. Nevertheless, the task of reforming the state of the law and getting judges and trustees to face reality will probably require the synergy of individual lawyers fighting harder to protect their rights to reasonable compensation. There is no other way around this ... more bad fee rulings should be appealed, even though it may be uneconomical in any particular case, because this may be the only way to get the attention of the courts.
4. Do not acquiesce so meekly to fee caps, oppressive fee guidelines, and pressure from judges and trustees to accept less than a fair compensation for your work.
5. Speak out more courageously at meetings of judges, trustees and lawyers.
6. Join the ABI or NACBA and actively participate.
.c. b. What judges can do.
1. Greater sensitivity to economic needs of small law firms.
Unlike many creditor law firms, most debtor firms are relatively small and often are no more than a solo practitioner. There are some high-volume firms in many of the large population centers, but the profit margins of these firms is often very slim. Accordingly, when a judge makes a disgorgement order, or arbitrarily reduces a fee application, the effect is much greater than in a large, high-profit law firm. In fact, a few such rulings can place a solo practitioner or small firm into a serious cash-flow crisis, which can only further impair the delivery of quality legal services.
2. Greater sensitivity to non-bankruptcy market rates and practices.
The A.B.I. report on compensation came to several conclusions regarding why the courts too often fail to award fees equal to comparable market rates for nonbankruptcy work. Among these were that many judges are not adequately informed of current market rates and billing practices, and that debtors' attorneys too frequently fail to provide sufficient information about such rates and practices when they make their applications for fees.
Greater emphasis must be placed on the costs of comparable services, including market rates and billing practices for comparable nonbankruptcy work. The need for this has been observed. For example, bankruptcy attorney Keith Shapiro, former chairman of the A.B.I. Committee on Professional Compensation, at the recent symposium, observed, "... consideration should be given to bolstering the effectiveness and the integrity of the cost of comparable services standard, in the wake of the 1994 amendments."
And, one of the recommendations of the 1991 ABI Report on Professional Compensation was that the Committee ...
... recommends that the Federal Judicial Center undertake to educate judges on means of determining the "cost of comparable services" to better enable them to apply this Congressionally mandated standard to fee award and expense reimbursement requests.
3. Greater effort to assure actual collection
As a first step, the courts should cease their almost universal habit of making arbitrary reductions of requested fees and expenses, in view of the reality that bankruptcy practice already involves higher than ordinary risks of non-payment, and hidden costs that increase the overhead in handling bankruptcy work.
4. Elimination of fee caps
Fee caps are unnecessary in the typical no-asset chapter 7 or chapter 13 case. Ordinary market forces are effective in keeping fees within reasonable bounds. And, artificial fee caps only discourage good lawyers, impair a firm's ability to do quality work, and ultimately reduce the recovery of creditors from the estate.
5. Eliminate fee limit guidelines in chapter 13
There is no reason the courts or the trustees need bother with fees in no-asset cases. Oversight of fees in such cases is nothing more than unjustified harassment of attorneys. There is no risk of depletion of the estate, because there is no estate. Debtors have the same protections against fee gouging as clients in any other field, including bar association discipline, arbitration of fees, and the courts. And, the market is substantially effective in limiting fees to a reasonable market level.
6. Provide for faster payment in plans
A key problem for consumer debtor attorneys doing chapter 13 is the double risk of late payment, and of non-payment of the balance of fees over and above the "up front" retainer fees. Chapter 13 trustees should be mandated to provide for the balance of the retainer fee to be paid through the plan at a rate that will assure payoff within six months of the confirmation of the plan, or pay 100% of the plan payment toward the balance until paid off.
7. Reduction of required legal services
The guidelines for compensation of debtors' attorneys in chapter 13 cases for the Oakland (California) Division, Ninth Circuit, require that once the consumer debtor attorney becomes attorney of record on the case, he has an open-ended obligation to represent the debtor through the duration of the case. This includes all contested and adversary matters that may arise. The guidelines provide for no exceptions to this. Thus, for example, the debtor who keeps missing his mortgage payments and who is subject to repeated motions for relief from stay is entitled to have his attorney stand next to him at every hearing, regardless of whether it is feasible for him to keep the house, and regardless of whether he can afford to pay additional attorney's fees. Typically in those situations, the court eventually grants relief from stay, which is soon followed by a motion to dismiss by the trustee. By that time, the attorney has invested several thousand dollars worth of time defending a hopeless case. And it is quite certain he will never collect his fees.
Reports Mark Segal, bankruptcy attorney in Las Vegas, Nevada:
Once we elect to jump in as counsel, we are required to do all work necessary unless we file a motion to withdraw. ... what I call the womb to tomb mentality. It seems like many clients expect you to do anything and everything for them for the basic fee. In chapter 13 cases this mentality seems to continue the entire length of a plan period, even those stretching out for five years. ... Of course, clients expect you to talk to them on the phone for free and to handle any minor ails and complaints that they might also have.
Consumer debtor attorneys should not be required to represent debtors in either chapter 7 or chapter 13 on an open-ended basis. The obligation to represent the client should be balanced against the necessity for an attorney's attention (the typical motion for relief from stay is more a financial than a legal problem), the feasibility of the debtor's plan, and the ability of the debtor to pay for the legal services required.
.c. c. What Congress can do.
1. Simplification of fee application process
One of the salient points made at the A.B.I. symposium was that the courts and trustees try too much to treat the fee application process for consumer cases in the same way they treat them in reorganization cases. This is unnecessary and inappropriate, and adds unnecessary burdens on the consumer attorney in order to be compensated. Observed Jennie Behles;
... I think if there is a problem in chapter 13 and chapter 7 cases, it is the attempt to try to apply the same rules and the same procedures in determining fees or setting fees in those matters that we do in the mega-cases. It is some of these very factors that increase the costs of determining fees and dealing with fees in those cases.
Continuing, Ms. Behles observed;
... I think the first thing we've got to do with consumer cases is to determine that they are consumer cases and try to treat these cases not the way we treat these mega-cases but to try to look at the regulation [of] fees that is appropriate for those cases.
Accordingly, the code should be amended to require, in no-asset chapter 7 cases and in all chapter 13 cases, no more than a check-box standard form fee application, accompanied by an itemized statement; and further amended to provide that there shall be a statutory presumption that the fee application is reasonable, accurate and approved unless contradicted by credible, specific evidence brought by a complainant who is either the debtor or a creditor.
2. Eliminate oversight of fees in no-asset cases
There is no need for court or trustee involvement in fees for no-asset consumer cases. And, there is probably no need for it in chapter 13 cases unless a creditor or the debtor objects. Bar association discipline procedures, the state civil courts, arbitration, and market forces already effectively control the vast majority of potential fee abuses. The courts have been satisfied to allow market forces to control fees in no-asset chapter 7 cases, and most lawyers practicing chapter 13 believe that market forces place considerable downward pressure on chapter 13 cases.
The involvement of the courts and the trustees in such cases only adds to the burdens on the debtors' lawyers and increases the overall costs of bankruptcy. The money saved by browbeating lawyers is probably much less than the added expense of this needless enforcement.
3. Allowance of interest on deferred payments in consumer cases, including chapter 13.
One of the recommendations of the 1991 ABI Report on Professional Compensation is that;
The Bankruptcy Code should be amended to expressly provide that reasonable compensation for delay in payment may be awarded to trustees and professionals where the court finds, after notice and hearing, that the delay and amount of compensation involved are material. The survey reveals that the courts are expeditiously hearing and ruling on fee applications, but that delays engendered by lack of available estate funds and other causes not the fault of the professional are common.
4. Amend § 330 to provide that compensation for reasonable and necessary expenses shall be mandatory, not discretionary with the court, and that such expenses shall include photocopy charges, long-distance telephone, excessive postage, facsimile charges, on-line legal research charges, courier charges, and ordinary travel charges such as parking and bridge tolls.
5. Amend § 330 to provide that reasonable and actual travel time and time expended in preparation of fee applications shall be fully compensable at regular hourly rates. A statement of legislative intent should be added to the effect that there shall be a presumption that "reasonable" time is the time actually expended on the matter.
6. Establish a statutory basis to discipline needlessly meddlesome trustees. A chapter 7 trustee who repeatedly and without clear justification hassles a debtor attorney over fee issues does nothing but harm. However, currently there is no mechanism in place to sanction such a person; the U.S. Trustee's office, even if sympathetic to the debtor attorney, is apparently powerless to reign in a rogue elephant.
7. Amend the code to prohibit any requirement that counsel obtain prior court approval to represent debtors in chapter 13. A number of courts have local compensation guidelines which require court appointment before fees are approved. This is unnecessary and simply adds to the cost and inconvenience of representing debtors. If some court review of the attorney's qualifications is a concern, the court could require an initial one-time application to the court which, once approved, would apply in all cases the attorney files thereafter.
8. Amend the code to prohibit maximum fee guidelines (fee caps) in bankruptcy cases generally, or at least in no-asset consumer cases and chapter 13s.
9. Amend the code to establish the "costs of comparable services" standard as the primary criterion, rather than merely one factor in a litany of factors to be considered in awarding compensation, thus clarifying that the notion of "economy of the estate" is not to be applied.
10. Delegation of fee disputes to peer-group panels.
Steps to relieve bankruptcy judges of matters not directly connected with the law and merits of bankruptcy cases are not unprecedented; for example, as part of an effort to relieve bankruptcy judges of administrative duties the Code was amended in 1978 to remove bankruptcy judges from creditors meetings. Similarly, the idea of removing the fee monitoring and fee approval functions from the bankruptcy courtroom is not new, and in fact was broached recently at the A.B.I. panel discussion, The Costs of Bankruptcy: A Roundtable Discussion, cited several times previously in this article, the following colloquy occurred;
MR. JONES: What, philosophically -- if we had to write this Code all over again -- what would be so terrible if bankruptcy was like any other type of litigation? In the grand scheme of the law, there are relatively few areas where judges are asked to award fees. What would be so horrendous if fees were paid on the concept of, there are clients out there, whether they be debtors or creditors; that clients are educated; that people are told about their responsibilities --
MR. MILLER: You are talking about the big cases though.
MR. JONES: No, I am not talking only about the big cases.
MR. MILLER: Creditor apathy is the main theme.
MR. JONES: But in those cases though, there is not a creditors' committee counsel who is looking to get paid sometime; they are not there. There is at least a chairman of a committee that is a client, a representative client of a class.
What would be so terrible if fees were applied for or fee applications were filed; that you had notice to all the people with a pecuniary interest, and, unless somebody said, "Judge, this is terrible; this is coming out of my pocket and I want an evidentiary hearing and I want you to resolve that dispute."
JUDGE CLARK: Then the fee would be paid without a court order?
MR. JONES: Right. You would not be signing your name. Why is that such an anathema to our system?
In nonbankruptcy practice the state and local bar associations, as well as the small claims court, do a fairly respectable job of monitoring and sanctioning fee gouging. In California, for example, fee disputes are initiated by the client, and are typically resolved by an arbitration panel consisting of two members of the local bar, plus one non-attorney member. The parties may stipulate to binding or non-binding arbitration. If non-binding, the non-prevailing party may apply to the local small claims or municipal court for a binding adjudication.
In bankruptcy, it makes sense that fee disputes should only arise if there is a party who complains, that is, the debtor or a creditor. Reviews of objections raised sua sponte by the courts only add a further economic burden upon the consumer attorney, and often result in additional fees assessed against the debtor for the time expended in litigating the objections; why should a noncomplaining debtor be saddled with additional charges to finance a complaint he never made in the first place?
Where such disputes do arise, why not have such disputes initially presented to a panel of two local bankruptcy attorneys and one non-bankruptcy lawyer? There could be one debtor lawyer and one creditor lawyer. These should be from the same genre of practice as the attorney involved in terms of size of firm, and typical size of client. The existence of a non-bankruptcy practitioner would add some urgently needed reality to the process of evaluating fees.
The benefits would be enormous. First, a tremendous burden of time would be lifted from the judges. Second, only legitimate complaints, and not merely a judge's or trustee's "gestalt" reactions, would be addressed, thus eliminating the notion of the sua sponte court review, which in reality is only harassment of the lawyer. And, finally, with peers judging each other, the adjudications would arrive at more fair and realistic results.
11. Simplification of the bankruptcy process
The complexity, and the trend toward increasing complexity of the bankruptcy system is a major source of high professional fees in bankruptcy cases. And, any efforts to reduce the costs of bankruptcy by reducing the fees incurred will accomplish little without changing and simplifying the process. That this is an important consideration was observed by several commentators at the A.B.I. Symposium on Professional Compensation. Observed former committee chairman Keith Shapiro;
In order to achieve Congress' often stated bankruptcy reorganization goals, reductions in gross professional fees can only be achieved through radical changes to the reorganization system itself.
... work should be on streamlining the organization process for small businesses in a way that allows necessary, professional expenditures to be greatly reduced and allows more small businesses to successfully reorganize.
And, observed Professor Ray Warner at the same symposium, "We probably need to come up with a different system to handle the no-asset cases; no trustee, no meetings, no paperwork. Save the panel trustees and others for the five percent asset cases."
Congress considered but rejected adopting a Chapter 10 for small businesses. This idea should be revived and reconsidered.
D. What bankruptcy organizations can do.
As indicated earlier, the United States Bankruptcy Commission is preparing to hold hearings on recommendations for congressional attention regarding the Bankruptcy Code. Both the American Bankruptcy Institute and the National Association of Consumer Bankruptcy Attorneys should prepare to make contributions and present evidence at those hearings. The Commission should be urged to recommend reforms to assure that consumer bankruptcy attorneys are fairly and adequately compensated.
In addition, such organizations can offer their members assistance to improve their ability to press for reforms locally, in terms of education of judges and trustees, and ameliorative appellate rulings.
The organizations can produce their own empirical studies and literature, such as surveys, reports and articles, to help in the process of educating the courts regarding the need for changes in attitudes, rules and practices, in order to more successfully implement public policy regarding fair compensation for the debtors' bar.
Finally, the organizations can undertake to create a model policy for fees and billing practices for consumer debtor attorneys. In fact, this is one of the objectives of the NACBA Committee on Compensation, of which the author is chairman.
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