Attorneys’ Fees: Reasonable Is In the Eye of the Beholder

In re Sundale, Ltd., 483 B.R. 23 (Bankr. S.D. Fla. 2012) –

Under Section 506(b) of the Bankruptcy Code, an oversecured mortgagee may be entitled to collect post-petition interest and reasonable attorney fees.  In Sundale there was a request for attorneys’ fees and costs of ~$3.9 million in connection with a mortgage claim that was under $5 million at the time the case started and grew to ~$6.3 million during the case.  The question for the court: were these fees reasonable?

The court had to determine whether the request was reasonable both because the loan documents authorized “reasonable” attorney’s fees and because Section 506(b) only authorizes reasonable fees as part of a secured claim.

In making this determination, courts typically apply a lodestar approach – namely number of hours times reasonable attorneys rates – and then adjust the result based on consideration of 12 factors:

  • time and labor required
  • novelty and difficulty of the questions
  • skill requisite to perform the legal service properly
  • preclusion of other employment by the attorney due to acceptance of the case
  • customary fee
  • whether the fee is fixed or contingent
  • time limitations imposed by the client or the circumstances
  • amount involved and result obtained
  • experience, reputation and ability of the attorneys
  • “undesirability” of the case
  • nature and length of the professional relationship with the client
  • awards in similar cases

Legal issues pursued by the mortgagee in this case included: defending a claim that the money was paid by the mortgagee to the debtor in settlement of a dispute as opposed to the advance of a loan, bringing a motion to characterize the case as a “single asset real estate case,” supporting a motion to appoint a chapter 11 trustee, opposing the debtors’ plan of reorganization, and various discovery disputes.  The court concluded that all of the mortgagee’s “major battles” were necessary and reasonable, although it did find some unnecessary actions and some excess time.

As a preliminary matter, the mortgagee voluntarily reduced the fee claim by ~$82,000 and costs by $10,000 so that the starting point was ~$3.1 million in fees and ~$756,000 in costs for a total of ~$3.9 million.  The court ultimately reduced the total by an additional ~$690,000 for a total award of $3.2 million.  Reasons given by the court for the reduction included:

  • some entries for a large number of hours did not have a sufficient description – i.e., “prepare for and attend meeting” or “continue trial preparation”
  • excessive time billed for research, drafting, revising, discussing and further revising – particularly where several attorneys were involved
  • minor issues not reasonably necessary to protect its interest (for example, over eight hours to oppose a motion for extension of time)
  • excessive time on discovery disputes
  • during the time following confirmation and the adversary proceeding to determine the mortgagee’s claim, excess time for numerous “strategy” sessions
  • after the trial, the primary attorney billed over 100 hours working on proposed findings and conclusions, which the court thought was excessive
  • excessive costs, such as thousands of dollars for copying costs with no indication of the cost per page and overhead items such as meals or overtime air conditioning
  • non-work travel time

The court commented that this case “included more litigation than most cases ten or twenty times their size.”  But the court also made it clear that it believed the debtors were the cause of the excessive litigation.  So, under the “unusual and unfortunate circumstances presented here,” it found that the request was largely reasonable and allowable.

The payment of attorneys’ fees is always a topic near and dear to the hearts of lawyers.  Submitting to a court’s detailed scrutiny of billing records after the fact can be uncomfortable, and the items criticized by the court in this case are not that unusual.  It is unusual to find a court approving a request that is so disproportionately large when compared to the claim.  However, as illustrated by this case, sometimes a court can be persuaded.

Vicki R. Harding, Esq.

About BankruptcyRealEstateInsights

Vicki R. Harding was a partner in the Detroit office of Pepper Hamilton LLP who moved to Arizona seeking warmer weather. Ms. Harding continues to handle commercial transactions with an emphasis on real estate and bankruptcy issues (but no longer owns a snow shovel).
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