By Andrew Toth-Fejel, Bankruptcy Litigation Support for Attorneys, Andy@BLSforAttorneys.com
North Sports v. Knupfer (In re Wind N' Wave)
Ninth Circuit Case No. 05-56254
November 1, 2007
Although the context of this case is limited, the implications are broader and worthy of attention. At issue in the opinion is the allowance of attorney fees for creditors in the context of filing an involuntary Chapter 7 case, and specifically the allowance of such fees if incurred in successfully appealing to the BAP the bankruptcy court's denial of attorney fees. Involuntary Chapter 7 cases are rare, with most federal districts having only a handful or two of them each year. However, the Ninth Circuit's holding here, involving the statutory construction of § 503(b)(4), an issue of first impression, applies not only to attorney fees for creditors bringing an involuntary Chapter 7 or 11 case under § 503(b)(3)(A), but also, for example, to fees for "a creditor that recovers, after the court's approval, for the benefit of the estate any property transferred or concealed by the debtor" under § 503(b)(3)(B), and for fees of a creditor "in making a substantial contribution in a case under chapter 9 or 11" under § 503(b)(3)(D). Also, § 503(b)(4) applies not only to attorney fees but as well to "reasonable compensation for professional services rendered by . . . an accountant" in the same contexts.
The Statutes
"Section 503(b)(3)(A), in combination with 503(b)(4), grants creditors costs incurred in connection with filing an involuntary bankruptcy petition," and in same other contexts indicated above. Section 503(b)(4) reads in relevant part:
(b) After notice and a hearing, there shall be allowed administrative expenses, . . . including
4) reasonable compensation for professional services rendered by an attorney or an accountant of an entity whose expense is allowable under [503(b)(3)], based on the time, the nature, the extent, and the value of such services, and the cost of comparable services other than in a case under this title, and reimbursement for actual, necessary expenses incurred by such attorney or accountant.To distinguish a 1991 Ninth Circuit case denying attorney fees for unsuccessful litigation about attorney fees which the Court had "refused to adopt a per se rule," here it added in the condition indicated in the Holding section below, that the case “exemplifies a ‘set of circumstances’ where litigation was ‘necessary.’ ”
Although this is a pre-BAPCPA case, the above quoted provision has not changed, except for some greater specificity in the bracketed section, which does not affect this holding.
The Holding
The Ninth Circuit panel held that
creditors who receive compensation under 503(b)(4) [such as for bringing an involuntary petition] should also be compensated for costs incurred in litigating a fee award, so long as the services meet the Section 503(b)(4) requirements [e.g., "reasonable compensation . . . based on the time, the nature, the extent, and the value of such services"] and the case “exemplifies a ‘set of circumstances’ where litigation was ‘necessary’. ”In applying this standard to the facts of this case, the Court indicated that there was no dispute that the creditors were entitled to attorney fees for filing the involuntary case--an allowable expense enumerated in § 503(b)(3), nor any dispute that the amount of fees for the appellate work at issue was reasonable. So the remaining question was whether the litigation was necessary, not a frivolous appeal "merely to acquire litigation fees." The Court said "yes":
[T]he fact that the Petitioning Creditors were erroneously denied their fee award in the bankruptcy court—notwithstanding Ninth Circuit precedent urging otherwise—suggests that the litigation expenses incurred on appeal were unavoidable, as appeal to the BAP was the only avenue through which the creditors could receive their due compensation.The Ninth Circuit's Rationale
Briefly, the Court reasoned that § 503(b)(4) regarding certain limited categories of creditors' attorney fees is similar in pertinent ways to § 330(a) regarding debtors' attorney fees, and so used Ninth Circuit and other case law on § 330(a) and analogized these to its statutory interpretation of § 503(b)(4). The Court focused on preventing attorney fee "dilution":
[It would be] both inconsistent with the policy of the Bankruptcy Reform Act and “fundamentally inequitable” to demand that counsel prepare and present extensive fee applications and yet simultaneously “deny[ ] compensation for the efforts necessary to comply with those requirements.” [Citation deleted.] . . . [L]itigation over a fee award should also be compensable, otherwise fee awards would be diluted: “If an attorney is required to expend time litigating his fee claim, yet may not be compensated for that time, the attorney’s effective rate for all the hours expended on the case will be correspondingly decreased.”To distinguish a 1991 Ninth Circuit case denying attorney fees for unsuccessful litigation about attorney fees which the Court had "refused to adopt a per se rule," here it added in the condition indicated in the Holding section above, that the case “exemplifies a ‘set of circumstances’ where litigation was ‘necessary.’ ”
by: Andrew Toth-Fejel
Bankruptcy Litigation Support for Attorneys
Andy@BLSforAttorneys.com
Please note that this writer is not licensed to practice law in Oregon. This means that he is not legally permitted to give any legal advice or provide and legal services. This Bulletin and the entire contents of this website is written only for attorneys. and is not intended for the public. If any non-attorney is reading this, you must consult an attorney about ANYTHING you read here. Nothing in this website is intended to be nor should be read as being legal advice to anyone.
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