Reasonability of a Creditor's Claim for Attorneys' Fees

• Publication year: 2020

Reasonability of a Creditor's Claim for Attorneys' Fees

Lauren Firestone

REASONABILITY OF A CREDITOR'S CLAIM FOR ATTORNEYS' FEES

Abstract

Under the Bankruptcy Code, bankruptcy judges are generally given the power to limit claims for attorneys' fees to a "reasonable" amount. If an attorney for the debtor or an attorney for a creditor's committee tries to collect unreasonable fees from the debtor's estate, the judge can disallow them, preserving the valuable and finite resources of the estate. Yet, the Code does not extend the judge's power to limit claims for attorneys' fees made by creditors. Generally speaking, creditors are not able to collect their attorneys' fees from the debtor's estate. However, in Pacific Gas and Electric's (PG&E) 2019 bankruptcy case, an unusual combination of facts required the debtor to pay the attorneys' fees of many of their creditors. If a creditor submitted a claim for unreasonable attorneys' fees, judges would not have the power to disallow these fees. These attorneys could therefore collect exorbitant fees at the expense of other creditors, and judges would have no mechanism to control this behavior.

This Comment advocates for an amendment to the Code that gives judges the power to restrict all unreasonable claims for attorneys' fees. This amendment would solve two issues. First, the amendment would clarify that a creditor can submit claims for their attorneys' fees when a state statute requires the debtor to pay these fees. While most jurisdictions allow a creditor's claim to include their attorneys' fees, a minority of bankruptcy courts do not allow these claims. The minority position is inconsistent with the Code. Therefore, this amendment to the Code would clarify that the Code does not disallow a creditor's claims for attorneys' fees. Second, the amendment would give judges the new power to control unreasonable claims for a creditor's attorneys' fees. This power would ensure that all claims including attorneys' fees are treated the same and that creditors' attorneys, in rare cases like the PG&E case, could not take advantage of this hole in the Code. Judges need a mechanism to control all claims that include attorneys' fees, no matter how infrequent the situation.

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Introduction

A. Introduction to Attorneys' Fees

The bankruptcy court is a court of equity. Bankruptcy courts are guided by equitable principles, tasked with exercising discretion to safeguard the public interest, so long as their acts are consistent with the provisions of the Bankruptcy Code.¹ Debtors who find themselves in bankruptcy rarely have the resources to repay all of their creditors. The code provides mechanisms to repay these creditors fairly. While some of the debtor's resources are owed to creditors who existed before the debtor filed for bankruptcy, the debtor must use some of these funds to repay actors who did work on behalf of the debtor during the bankruptcy process. These actors include attorneys who are owed fees for the services they provide in the bankruptcy case. These attorneys will be paid from the same pile of money as all other creditors to whom the debtor owes money. Therefore, every dollar the court pays an attorney is another dollar taken away from the creditors who are simply trying to recover what they were already owed by the debtor. On the other hand, without strong representation by an attorney, creditors will be unable to recover any amount from the debtor. As a result, the subject of these attorneys' fees awards "is perhaps the most delicate issue which a bankruptcy court must consider."²

Bankruptcy courts generally have discretion in determining the amount of attorneys' fees awarded, so long as the courts are acting within the confines of the Code.³ When bankruptcy attorneys representing the debtor apply for payment from the debtor's limited funds, the Code specifies that their payment must always be reasonable.⁴ The Code also requires reasonability of fees being paid to the attorneys who represent committees in bankruptcy.⁵ But, a similar blanket provision for attorneys of creditors is missing from the Code. Instead, the Code is silent for creditors' attorneys and does not provide bankruptcy judges with any mechanisms to limit unreasonable claims by creditors' attorneys. Because "every dollar expended on legal fees results in a dollar less that is available for distribution to the creditors," bankruptcy courts should work to

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prevent inequitable recovery of funds from all attorneys, including the attorneys of creditors.⁶

B. Fee-Shifting Creditor's A ttorneys' Fees

A Code provision about a creditor's attorneys' fees would be inapplicable in most bankruptcy cases. Generally speaking, the attorneys' fees of creditors will not be paid by the debtor. The fees will instead be paid by that creditor outside of the bankruptcy forum. Under the American Rule, there is generally no fee-shifting, meaning that both parties bear the burden of paying their own attorneys' fees.⁷ But, there are some ways to overcome the American Rule. If the American Rule is overcome in a bankruptcy case, the debtor will be required to pay that creditor's attorneys' fees.⁸

If a creditor is able to overcome the American Rule, she is able to include the contingency fees of her attorneys as a line-item on her proof of claim in bankruptcy. This line-item exists on the creditor's prayer for relief at the end of her proof of claim.⁹ When listing the total amount of her claim, the creditor must indicate that the amount of the claim "includes interest or other charges," and then "attach [a] statement itemizing interest, fees, expenses, or other charges required by Bankruptcy Rule 3001(c)(2)(A)."¹⁰ This itemized statement includes all damages the creditor is requesting as a part of her claim.

Creditors in bankruptcy are not always individuals in a business relationship with the debtor. In some cases, these creditors are involved in personal injury or mass tort litigation with the debtor. These tort victim creditors often set up contingency fee arrangements with their attorneys.¹¹ In these arrangements, the attorney is only paid if the tort victim's case wins at trial. The attorney is then paid a percentage amount of the tort victim's award, an amount which is often substantially higher than the recovery in cases without contingency fee arrangements.¹² In cases where these large fees were imposed on the debtor-

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business, the costs have driven the businesses to file for bankruptcy¹³ and have reduced the available compensation for other creditors (including the victims themselves).¹⁴

C. Case Study: The 2019 PG&E Bankruptcy

One of these mass tort bankruptcy cases, Pacific Gas and Electronic Company ("PG&E"), was filed in 2019.¹⁵ PG&E was charged with causing a series of California wildfires in 2017. These wildfires resulted in both the loss of life and property for many California citizens at an estimated $30 billion in liability.¹⁶ The potential liability for PG&E arises primarily because of a unique California statutory doctrine known as "inverse condemnation."¹⁷ This doctrine has its roots in the United States Constitution's takings clause.¹⁸ The takings clause requires government units to award compensation when they take or damage private property.¹⁹ Because courts have extended this power of eminent domain to private utilities companies like PG&E, these companies also must assume the risk of liability for any damages caused by the taking of private property.²⁰ The doctrine of inverse condemnation creates strict liability for these private utility companies, as these companies are responsible for any damages caused, regardless of any fault or lack of foreseeability on the part of the company.²¹

As part of the inverse condemnation doctrine, entities that cause damages to private citizens are also required to pay the attorneys' fees of these citizens.²² Therefore, California's inverse condemnation doctrine is an example of a fee-shifting statute that overcomes the default American Rule. This statute comes into play in situations like the California wildfires, as there are a number of

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victims who want compensation for their damages as a part of a large mass tort lawsuit. Creditors will primarily use contingency agreements with their attorneys in these mass tort cases, leading to a high proportion of recovery for attorneys. Due to the strict liability in inverse condemnation and the fact that this matter is being handled by a bankruptcy judge instead of a jury trial, there is no risk of non-recovery for tort victims in the PG&E case. The creditors' attorneys in the PG&E case will likely gain an unjust windfall because the usual risk of non-recovery in contingency cases is absent in the PG&E case. The Code does not cover this unique situation where the debtor is required to pay the tort victim's attorneys' fees. Therefore, the bankruptcy court in the PG&E case likely will not have any power under the Code to review these claims for attorneys' fees.

If a creditor submitted a claim for unreasonable attorneys' fees, the debtor's estate would be required to pay this unreasonable claim at the same pro rata proportion as the legitimate claims of tort victims with actual injuries. In this situation, the tort victim's attorneys are able to take advantage of two parties. Not only can they take advantage of the tort victim through an unfair fee arrangement, but they are also able to unjustly take resources from the debtor's estate without any review by a bankruptcy judge. For a court of equity, this is an inequitable solution.²³

D. Roadmap

This Comment will discuss how the Code's provisions for paying a creditor's claim for attorneys' fees are underdeveloped. Because the Code lacks clear instruction on how to treat claims for a creditor's attorneys' fees, bankruptcy judges lack the explicit power to review unreasonable claims by a creditor for their attorneys' fees, even though these...