First Circuit BAP Rules Attorney Fee Reduction Was Not Unreasonable - In re Stone

January 30, 2013

It's a routine practice for bankruptcy lawyers to roll their fees into the bankruptcy itself, as a way of financing the legal services needed to pursue a bankruptcy case safely and with the maximum possible benefit. Vincent Howard and our Ontario personal bankruptcy attorneys offer this to clients when appropriate. However, including the legal fees in the bankruptcy gives the court a chance to review the fees, and that means the court has a chance to object to fees it finds inflated. That's what happened in In re Stone, a decision of the Bankruptcy Appellate Panel of the First U.S. Circuit Court of Appeals. Kevin and Melissa Little of Massachusetts hired attorney Philip M. Stone to represent them in bankruptcy, but ended up needing extra work. The bankruptcy court and the appeals court agreed that Stone could have avoided that work.

The Littles were above-median-income debtors who were therefore qualified only for a Chapter 13 bankruptcy. They paid Stone a set amount of money for filing their initial paperwork and agreed that extra work would be billed at his hourly rate. Their initial plan proposed to pay $35 a month to creditors, citing a number of expenses the court found questionable. The trustee objected, saying their plan was not proposed in good faith. They filed a first amended plan, which resulted in an objection from the lender that held an auto loan they proposed to cram down. Thus, they had to file a second amended plan before plan confirmation. Stone then filed a fee application for $9,102. No one objected, but the court called three hearings on the fees. Saying Stone would not have done so much work if he had limited his clients' expenses in the first plan to lawful ones, it reduced the fees to just under $4,000.

Stone appealed, but the First Circuit BAP declined to find that the reduction was an abuse of discretion. The law permits reasonable compensation to a debtor's attorney in a Chapter 13 case, permitting the court to take into account factors like whether the services were necessary and how the bill compares to customary compensation in other cases. In this case, the court didn't believe Stone's rates were excessive, but felt that many of the hours Stone put into the case were unnecessary because the original plan and schedules were impermissibly generous to the debtors. Stone admitted that he knew the original plan could not be confirmed over objection, the panel said, but nonetheless filed it and engaged in negotiations the bankruptcy court felt were pointless. It also found that Stone could have delegated some of the tasks. Thus, it upheld the fee reduction.

Vincent Howard and our Santa Ana consumer bankruptcy lawyers rarely see a case involving reduction of the bankruptcy lawyer's fees. This is an unfortunate position to put attorneys in. Because we work in this field, we understand that bankruptcy filers sometimes have unrealistic ideas about what they will be able to protect from bankruptcy. The attorney in this case may have simply done what his clients requested, even though he may have known it wouldn't work. At Howard Law, P.C., our Moreno Valley individual bankruptcy attorneys want to respect our clients' wishes, but balance that with the need to make sure our clients have a realistic understanding of what the court will permit.

If you're ready to discuss the possibility of a bankruptcy as a way to get out of deep debt, don't wait to call Vincent Howard and the team at Howard Law. You can send us a message through our website or call 1-800-872-5925.

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