A recent U.S. Court of Appeals for the Fifth Circuit decision considered whether a request for compensation submitted by a chapter 13 debtor's counsel under the standard compensation scheme set forth in the court's local rules (i.e., "no-look" fees) may be reduced on the basis that such fees are unreasonable for the services provided.  The Fifth Circuit ultimately concluded that standard fee compensation, whether it is under statutory or local rule, is generally presumed reasonable and should be awarded in full.  Accordingly, the court held that only in certain limited circumstances should courts review the reasonableness factors and consider fee awards less than the proscribed compensation.

Typically, pursuant to § 330 of the Bankruptcy Code and Federal Rules of Bankruptcy Procedure 2002 and 2016, in order to be compensated for the services provided during a bankruptcy case, professionals, including debtor's counsel, must maintain detailed time records and file comprehensive fee applications, which are reviewed by the court. To streamline this tedious and somewhat lengthy process, no-look fees are court-approved flat fees, which are presumed to be fair and reasonable (unless a reasoned objection is made), whereby debtor's attorneys may be compensated for their services without the need for typical formalities. No-look fees, which vary from jurisdiction to jurisdiction, are governed by local rules and vary by jurisdiction and are often limited to chapter 13 consumer cases that typically involve minimal assets and straightforward (if any) legal issues.

No-look fees are controversial in that many do not believe that they provide attorneys incentive to do more than the bare minimum and that as such, attorneys may receive a windfall for little or no effort in a case. In a recent case, Sikes v. Crager (In re Crager),1 the Fifth Circuit affirmed the U.S. Bankruptcy Court for the Western District of Louisiana's confirmation of the debtor's chapter 13 plan and award of the maximum amount permissible under the jurisdiction's no-look fee rule over the chapter 13 trustee's objection.

Pursuant to the Standing Order Regarding "No-Look" Fees and Addendums in Chapter 13 Cases (the "standing order"), which was entered on March 5, 2010, by the bankruptcy court,"a no-look fee not to exceed $2,800" applied to chapter 13 cases, for the performance by the debtor's attorney of a variety of services, which, among other things, included all services required to prosecute the debtor's case and excluded, for example, the representation of the debtor in an adversary proceeding.2 In Crager, the chapter 13 trustee objected to the no-look fee on the basis that the matter was "more simplistic and less complicated" than the average chapter 13 case because, for instance, the payment plan did not require any payments to secured creditors and involved only a handful of unsecured creditors.3 The trustee additionally argued that the plan should be denied because it was filed in bad faith given the fact that only the debtor's attorney would receive payment under the plan for the first 35 out of 36 monthly installments.4 The bankruptcy court rejected this argument and approved the plan and awarded the attorney fees.5

On appeal to the U.S. District Court for the Western District of Louisiana, the bankruptcy court order approving the plan and attorney fees was overturned on the basis that the plan was filed in bad faith because the fee award consumed too much of the available funds for creditors.6 In reviewing the plan and the compensation award, the Fifth Circuit reversed the district court's ruling and ultimately approved the no-look chapter 13 fee, despite the fact that the award resulted in debtor's counsel receiving nearly all of the amounts to be distributed under the chapter 13 plan.

The Fifth Circuit reviewed the requirements set forth in the standing order and noted that the no-look fee was not an entitlement and that "the Standing Order [did] not supplant the requirements of 11 U.S.C. § 330."7   As such, the Fifth Circuit rejected the district court's ruling that the burden was on the objector (in this case, the trustee) to "prove that the presumptive fee was unreasonable."8 The Fifth Circuit held instead that if an objection to a no-look fee is raised, the court is obligated to review the reasonableness of the award under the circumstances as required under 11 U.S.C. § 330.

Upon review of the facts in the Crager case, the court held that the no-look fee was reasonable under the circumstances, especially given the fact that the trustee objected to the attorneys' fees in "bad faith" on the basis that the case was "simplistic." Ironically, the Fifth Circuit held that the chapter 13 trustee's objection to the requested fees "transformed the case from a routine [c]hapter 13 matter into a complicated proceeding." As such, the Fifth Circuit reversed the district court's ruling and affirmed the bankruptcy court's confirmation of the $2,800 no-look fee.

In light of the holding in Crager, courts should allow standard compensation in accordance with the local rules in the case of a counsel's no-look fee unless there is a reasoned objection warranting a reduction. In such a case, compensation is presumed reasonable unless there is a reasonable basis for objection. Crager illustrates that this type of fixed compensation can facilitate the expeditious administration of bankruptcy cases. When there is fixed compensation, debtor's counsel receives the same compensation for cases regardless of his or her hourly services, and thus, there is no incentive to spend hours of litigation and negotiation if the matter does not warrant such time expenditure.

Originally published in theABI Ethics Committee Newsletter, January 2013

Footnotes

1. 691 F.3d 671 (5th Cir. 2012).

2. See www.lawb.uscourts.gov/judge/orders/StandingOrderReNoLookFees_Addendums.pdf

3. Crager, 691 F.3d at 677.

4. See Sikes v. Crager (In re Crager), Case No. 10-1863, 2011 WL 4591889, at *3, 4 (W.D. La. Sept. 30, 2011) (noting that many courts have held that chapter 13 plans that only pay attorney fees

5.Id. at *1.

6. Id. at *5 (holding that "the plan, which directs approximately 97 percent of the payments to go to [the debtor's] attorney and the administrative fees and a paltry 3 percent or so to [the debtor's] creditors, is inconsistent with the spirit and purpose of Chapter 13 and is therefore not filed in good faith").

7. Crager, 691 F.3d at 677.

8. Id.

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