Opinion
No. 01-80188
January 7, 2002
OPINION
The issue raised in this case is whether an attorney who has represented the debtor in a prepetition lawsuit on an hourly basis and is retained by the trustee on an hourly basis, may be awarded compensation for his unpaid prepetition time. When the Debtor, Dale O. Freidinger (DEBTOR), filed his Chapter 7 bankruptcy petition on January 16, 2001, he was the Plaintiff in a pending wrongful discharge lawsuit that had been filed nearly four years earlier, on May 27, 1997.
The DEBTOR properly disclosed the lawsuit as an asset on Schedule B and listed its value as "unknown." The DEBTOR also claimed an exemption in the lawsuit on Schedule C, for an "unknown" amount, pursuant to 735 ILCS 5/12-1001(b), the "wildcard" exemption provision. The Chapter 7 Trustee (TRUSTEE) filed a timely objection to the DEBTOR'S claim of exemption in the lawsuit and an Order was entered limiting the exemption in the suit to the amount of $25. The law firm of Jim Rochford and Associates (JRA) represented the DEBTOR in the wrongful discharge suit. The DEBTOR retained a different lawyer to file his bankruptcy case. The DEBTOR did not schedule JRA as a creditor in his bankruptcy schedules.
The bankruptcy filing was originally processed as a no asset case, but based upon the nonexempt potential value of the wrongful discharge suit, the TRUSTEE filed a report of possible assets and a notice fixing time for filing claims was mailed to all creditors. The claim bar date expired without JRA filing a proof of claim.
Though JRA did not receive formal notice of the claims bar date of June 4, 2001, the TRUSTEE sought to retain the firm prior to the expiration of the time for filing claims.
On April 26, 2001, the TRUSTEE filed an application to employ JRA to represent the TRUSTEE in the wrongful discharge suit, which remained an asset of the bankruptcy estate subject to the TRUSTEE'S administration. The application proposed that JRA would be compensated on an hourly basis at the rate of $180 per hour for James M. Rochford's time and senior associate time, $130 per hour for junior attorney time and $75 per hour for paralegal time, plus out-of-pocket expenses. Attached to the TRUSTEE'S application is a "STATEMENT RE: NO DIVISION," signed by James M. Rochford, which provides as follows:
James M. Rochford states that he is the attorney for the bankruptcy estate to pursue a pre-petition wrongful termination case filed on behalf of debtor, Dale Freidinger, in the Circuit Court of Tazewell County, Illinois, as Case No. 97 L 62, and wishes to be duly appointed in the above entitled case; that in accordance with 11 U.S.C. § 327 he does not hold nor represent an interest adverse to the estate and that he is a disinterested party; that there is no agreement between him and any other persons for sharing of compensation in any form or guise, which is prohibited by 11 U.S.C. § 504.
After notice of the TRUSTEE'S application was sent to all creditors and the objection date passed with no objections being filed, an Order was entered on May 31, 2001, authorizing the TRUSTEE'S retention of JRA on the terms stated in the application. Four days later, on June 4, 2001, a notice of compromise was filed stating that the lawsuit had been tentatively settled for the sum of $25,000. No objections to the proposed settlement were filed and on June 27, 2001, an order was entered authorizing the TRUSTEE to accept the sum of $25,000 in settlement of the wrongful discharge lawsuit.
On September 5, 2001, JRA filed a motion for attorney's fees and costs, seeking to be paid the sum of $22,855.42 from the settlement proceeds, which would leave $2,144.58 for the bankruptcy estate. The fees and costs requested are broken down between prepetition amounts and post-petition amounts, as follows:
Fees Costs Total
Prepetition $18,665.50 $536.42 $19,201.92
Postpetition $ 3,628.50 $ 25.00 $ 3,653.50
Total $22,294.00 $561.42 $22,855.42
The DEBTOR originally hired JRA, in 1995, to prosecute the wrongful discharge suit on a one-third contingent fee basis. According to JRA and the DEBTOR, the terms of the fee agreement were subsequently changed in July, 1997, to provide for compensation to JRA on an hourly basis. During the course of the representation, JRA periodically sent statements to the DEBTOR, but JRA'S records reflect that the DEBTOR made only seven payments of $25.00 each, the last on May 13, 1998.
The Court held a hearing on the motion for attorney's fees and costs and raised the issue as to whether an attorney retained by the TRUSTEE on an hourly basis is entitled to compensation for the attorney's unpaid, prepetition time. JRA filed a brief relying upon, alternatively, the Attorneys Lien Act, the common fund doctrine, and quantum meruit. Before addressing these arguments, the Court will first discuss the statutory framework for retention and compensation of professionals, including attorneys.
JRA was employed, pursuant to 11 U.S.C. § 327(e), for the specified special purpose of representing the TRUSTEE in the continued prosecution of the wrongful discharge suit. Holding a large claim against the DEBTOR for unpaid attorney's fees, JRA was not "disinterested" and would not have qualified for employment under Section 327(a). See, U.S. Trustee v. Price Waterhouse, 19 F.3d 138 (3rd Cir. 1994). A narrow exception to the rule prohibiting employment of professionals who are not disinterested is carved out by Section 327(e). Under that section, an attorney who has represented the debtor prepetition may be retained by the trustee for a specified special purpose, most often the continued prosecution of a prepetition claim, even though the attorney holds a claim against the estate for unpaid fees and, therefore, is not "disinterested." In re DeVlieg, Inc., 174 B.R. 497 (N.D.Ill. 1994), appeal dismissed, 56 F.3d 32 (7th Cir. 1995). While a non-disinterested attorney may be hired by the trustee to perform special purpose services for the estate, nothing in Section 327(e) suggests that such an attorney may thereby have a claim for prepetition fees paid in compensation for postpetition services.
Professional fees are accorded administrative expense priority status under § 503(b)(2). It is well established that only postpetition services rendered for the benefit of the bankruptcy estate, exclusive of prepetition services rendered to the debtor, are eligible for priority status. Matter of Jartran, Inc., 732 F.2d 584 (7th Cir. 1984); In re HSD Venture, 178 B.R. 831 (Bankr.S.D.Cal. 1995); In re Precision Carwash Corp., 90 B.R. 34 (Bankr.E.D.N.Y. 1988). Unpaid prepetition attorney fees ordinarily may not be accorded priority status but must be treated simply as a general unsecured claim. In re Foster, 247 B.R. 731 (Bankr.S.D.Ohio 2000); In re Yablon, 136 B.R. 88 (Bankr.S.D.N.Y. 1992).
The general standard for awarding compensation to a professional person employed under Section 327 is "reasonable compensation for actual, necessary services" and "reimbursement for actual, necessary expenses." 11 U.S.C. § 330(a)(1)(A) and (B). The fee applicant has the burden of proving it has earned the fees it requests, and that the fees are reasonable. Zolfo, Cooper Co. v. Sunbeam-Oster Co., Inc., 50 F.3d 253, 261 (3rd Cir. 1995).
Even where the employment of a professional has been approved by the bankruptcy court upon specific terms of compensation, the bankruptcy court nevertheless is obliged to review the application for compensation under the standards set forth in Section 330. In re Engel, 124 F.3d 567, 571-72 (3rd Cir. 1997).
As the starting point for its analysis, the Court must first determine the terms of JRA'S compensation set forth in the order approving the TRUSTEE'S application. The order authorizing employment, entered May 31, 2001, which tracks the application, provides as follows:
The representation by James M. Rochford of the bankruptcy estate will be on the following fee basis: compensation to be received by James M. Rochford will be on an hourly basis at the rate of $180 per hour for his time and senior associate time, $130 per hour for junior attorney time and $75 per hour for paralegal time plus out-of-pocket expenses.
Neither the application nor the order makes any reference to recovery of prepetition time as an element of JRA'S compensation. In the absence of a specific reference and in light of the general rule that unpaid prepetition professional fees may not be recovered via a postpetition retention by the trustee, the Court concludes that the terms of compensation upon which JRA was retained provided, subject to Court review, for compensation on an hourly basis for the postpetition time spent and costs incurred. Therefore, this is a case where the professional is seeking compensation in an amount greater than that proposed in the retention Order.
Since it would be an extraordinary request for a professional to seek recovery of prepetition fees, if the TRUSTEE intended to request such compensation, the Court would expect such a request to be expressly and unequivocally stated in the application for retention.
Perhaps JRA misunderstood the effect of retention on an hourly basis. A misunderstanding appears likely given that the TRUSTEE'S application makes no reference to recovery of prepetition fees, yet JRA'S application for compensation, without mentioning the inconsistency, seeks recovery of all unpaid prepetition fees and costs.
The Court does not mean to suggest that the compensation awarded to JRA herein would be different if the TRUSTEE'S application had specifically requested reimbursement of prepetition fees and costs. The Court finds it difficult to conceive of a circumstance where such a request would be approved.
Before applying the standards for awarding professional compensation set forth in Section 330, the Court will address the three arguments raised by JRA. First is JRA'S claim of a statutory lien against the proceeds from settlement of the wrongful discharge suit. Pursuant to the Illinois Attorneys Lien Act (Act), 770 ILCS 5/1, a lien can be created in favor of attorneys on all claims placed in their hands for suit or collection. The Act provides, in its entirety, as follows:
Attorneys at law shall have a lien upon all claims, demands and causes of action, including all claims for unliquidated damages, which may be placed in their hands by their clients for suit or collection, or upon which suit or action has been instituted, for the amount of any fee which may have been agreed upon by and between such attorneys and their clients, or, in the absence of such agreement, for a reasonable fee, for the services of such suits, claims, demands or causes of action, plus costs and expenses. To enforce such lien, such attorneys shall serve notice in writing, which service may be made by registered or certified mail, upon the party against whom their clients may have such suits, claims or causes of action, claiming such lien and stating therein the interest they have in such suits, claims, demands or causes of action. Such lien shall attach to any verdict, judgment or order entered and to any money or property which may be recovered, on account of such suits, claims, demands or causes of action, from and after the time of service of the notice. On petition filed by such attorneys or their clients any court of competent jurisdiction shall, on not less than 5 days' notice to the adverse party, adjudicate the rights of the parties and enforce the lien.
Before being entitled to the benefits of the Act, the attorney must perfect the lien by serving notice in writing on the party against whom the client has a claim and the lien does not attach until after service of the notice has been properly made. Rhoades v. Norfolk and Western Railway Company, 78 Ill.2d 217, 399 N.E.2d 969, 35 Ill.Dec. 680 (1979). Because a lien for attorney's fees is purely a creature of statute, the Act must be strictly complied with in order to establish a lien and a right of action for enforcement. Crabb v. Robert R. Anderson Co., 117 Ill. App.2d 271, 275-276, 254 N.E.2d 551 (1st Dist. 1969); Unger v. Checker Taxi Co., 30 Ill. App.2d 238, 241, 174 N.E.2d 219 (1st Dist. 1961). Under the Act, the notice must be served by personal service or by registered or certified mail. Unger, 30 Ill. App.2d at 242. These are the only modes of service acceptable under the Act. Cazalet v. Cazalet, 322 Ill. App. 105, 108-109, 54 N.E.2d 61 (3d Dist. 1944). The Act's service requirements are strictly enforced in bankruptcy cases. In re Kleckner, 93 B.R. 143 (N.D.Ill. 1988); Williams v. Roger Associates of Bethany, CT., Inc., 1997 WL359976 (N.D.Ill. 1997); In re Del Grosso, 111 B.R. 178 (Bankr.N.D.Ill. 1990).
JRA was unable to produce a copy of a lien letter sent to the wrongful discharge defendant, New Frontier Management. JRA represented to the Court that it is the long established practice of its law office to send out such letters immediately upon being retained. JRA believes a lien letter was sent to New Frontier Management and the file copy of the letter has simply been misplaced. According to JRA, if the letter was in fact sent, it would have been sent in late May, 1995.
In the absence of a copy of the letter, as well as proof of service personally or by registered or certified mail, the Court cannot conclude that JRA complied with the requirements of the Act. Since JRA has the burden to establish compliance, the Court finds that JRA failed to establish compliance with the requirements of the Act and that no valid, enforceable attorney's lien against the settlement proceeds exists. Even if a lien letter was properly served in 1995, it would necessarily have claimed a lien for a one-third contingent fee, as that was the fee agreement that existed at that time between the DEBTOR and JRA.
JRA makes no claim of having served a second lien letter reflecting the hourly fee agreement entered into in 1997. Because the Court finds that no valid lien existed, it is not necessary to decide whether the subsequent cancellation of the contingent fee agreement, and replacement by an hourly fee agreement, would render JRA'S lien claimed on the basis of the contingent fee agreement invalid.
JRA next relies on the common fund doctrine. The common fund doctrine is a common law rule that permits a party who creates, preserves, or increases the value of a fund in which others have an ownership interest to be reimbursed from that fund for litigation expenses incurred, including counsel fees. Brundidge v. Glendale Federal Bank, F.S.B., 168 Ill.2d 235, 659 N.E.2d 909, 213 Ill.Dec. 563 (1995). The doctrine has been recognized and applied in the United States Supreme Court, the lower federal courts, and in the courts of virtually every state in the Union, including Illinois. See, Baier v. State Farm Ins. Co., 66 Ill.2d 119, 361 N.E.2d 1100, 5 Ill.Dec. 572 (1977). The doctrine's purpose is equitable in nature. Where one party's efforts have created a common fund that accrues to the benefit of third parties, the doctrine permits the initial party's attorney's fees to be paid from the fund as a whole, not merely from that party's portion, thus spreading the fees proportionately among those benefitted by the suit. The Boeing Company v. Van Gemert, 444 U.S. 472, 100 S.Ct. 745, 62 L.Ed.2d 676 (1980).
JRA has failed to explain how the common fund doctrine applies to the case at bar. As best the Court can determine, it appears that JRA'S position is that the settlement proceeds from the wrongful discharge suit constitute a common fund in which two different parties, the TRUSTEE and the DEBTOR, each have an interest. The DEBTOR'S interest, however, is de minimis, amounting only to the allowed exempt amount of $25. Moreover, JRA'S fees are already being determined as against the entire fund, i.e., the full $25,000 settlement proceeds. This is not a question of allocating the fees equitably among different parties who have an interest in a common fund. The common fund doctrine is inapplicable.
Finally, JRA argues that the fee ought to be determined on a quantum meruit basis. In Illinois, the equitable doctrine of quantum meruit permits an attorney, who has been discharged by the client prior to completion of a matter to be compensated in an amount equivalent to the reasonable value of the attorney's services. Rhoades v. Norfolk W. Ry. Co., 78 Ill.2d 217, 229-30, 399 N.E.2d 969, 35 Ill.Dec. 680 (1979); Wegner v. Arnold, 305 Ill. App.3d 689, 713 N.E.2d 247, 238 Ill.Dec. 1001 (2nd Dist. 1999). Until and unless a discharge of the attorney occurs, however, the attorney's fees are ordinarily determined solely based upon the contract between the attorney and his client. Because JRA was not discharged, but was retained by the TRUSTEE and completed the prosecution of the wrongful discharge suit, the usual basis for application of the equitable doctrine of quantum meruit is not present here.
Even if one were to consider the effect of bankruptcy as constructively discharging the prepetition attorney, the attorney was rehired by the TRUSTEE, completed the lawsuit, and earned his fee, albeit on terms dictated by the Bankruptcy Code. This is not a situation where an attorney, through an eleventh hour firing, is unfairly denied compensation for work performed. JRA is entitled to compensation, the amount of which must be determined pursuant to Section 330. JRA may bemoan the adverse effect of bankruptcy on its prepetition contract expectancy, but its voice is merely one more tenor in the chorus of prepetition unsecured creditors.
Moreover, the application of the equitable doctrine of quantum meruit in the context of an attorney fee award in bankruptcy is problematic. Bankruptcy courts are simply not authorized in the name of equity to ignore the rules for professional compensation set forth in the Bankruptcy Code. In re Milwaukee Engraving Co., Inc., 219 F.3d 635, 637 (7th Cir. 2000). The doctrine of quantum meruit is not permitted to be used in bankruptcy cases where compensation to professionals acting on behalf of the estate must be based on provisions of the Bankruptcy Code. In re Weibel, Inc., 176 B.R. 209, 212 (9th Cir. BAP 1994).
Section 330(a)(3), 11 U.S.C. § 330(a)(3), outlines the factors that the Court should consider in determining compensation to be awarded to a professional employed under Section 327, and provides:
(a)(3) In determining the amount of reasonable compensation to be awarded, the court shall consider the nature, the extent, and the value of such services, taking into account all relevant factors, including —
(A) the time spent on such services;
(B) the rates charged for such services;
(C) whether the services were necessary to the administration of, or beneficial at the time at which the service was rendered toward the completion of, a case under this title;
(D) whether the services were performed within a reasonable amount of time commensurate with the complexity, importance, and nature of the problem, issue, or task addressed; and
(E) whether the compensation is reasonable based on the customary compensation charged by comparably skilled practitioners in cases other than cases under this title.
In addition, the twelve factors laid out in Johnson v. Georgia Highway Exp., Inc., 488 F.2d 714, 717-19 (5th Cir. 1974), are also applicable to fee requests in bankruptcy cases:
1. The time and labor required.
2. The novelty and difficulty of the questions.
3. The skill requisite to perform the legal service properly.
4. The preclusion of other employment by the attorney due to acceptance of the case.
5. The customary fee.
6. Whether the fee is fixed or contingent.
7. Time limitations imposed by the client or the circumstances.
8. The amount involved and the results obtained.
9. The experience, reputation, and ability of the attorneys.
10. The "undesirability" of the case.
11. The nature and length of the professional relationship with the client.
12. Awards in similar cases.
Bankruptcy courts are accorded broad discretion in determining compensation for professional services performed in bankruptcy cases because "the bankruptcy judge is on the front line, in the best position to gauge the ongoing interplay of factors and to make the delicate judgment calls which such a decision entails." In re Independent Engineering Co., Inc., 197 F.3d 13, 17 (1st Cir. 1999). The overarching consideration with respect to professional fees is one of reasonableness based upon the particular facts and circumstances of a given case. Matter of Kenneth Leventhal Co., 19 F.3d 1174 (7th Cir. 1994). A bankruptcy court may award an amount different from that requested, 11 U.S.C. § 330(a)(2), and may base the award on terms different from those upon which the professional was retained, 11 U.S.C. § 328(a).
The Court has applied the Johnson factors and those listed in Section 330(a)(3) to the facts of this case. Only the most significant factors merit discussion. Here, there is no question that JRA spent a substantial amount of time and effort on the wrongful discharge suit, most of which occurred prepetition. It was necessary for the TRUSTEE to retain a lawyer to conclude the prosecution of the pending wrongful discharge suit and those services were necessary to the proper administration of the estate. Compared to the amount of postpetition attorney's fees and costs, a $25,000 settlement is a good result for the estate. The settlement loses its luster when the prepetition fees and costs are added to the mix.
Ordinarily, given that JRA chose to enter into an hourly fee agreement with the TRUSTEE, which is necessarily limited to postpetition services, compensation would be awarded for the postpetition fees in the amount of $3,628.50 and postpetition costs in the amount of $25. However, this is an unusual situation. Bankruptcy trustees almost always retain attorneys to prosecute claims on a one-third contingent fee basis. JRA was most likely under the mistaken impression that an hourly fee agreement would permit compensation for unpaid prepetition fees, as well as postpetition fees, and would thus be more advantageous than the usual one-third contingent fee arrangement.
The customary fee arrangement for handling similar litigation outside of bankruptcy is a one-third contingent fee basis, the original terms of JRA'S employment by the DEBTOR in 1995. It would have been reasonable and appropriate for the TRUSTEE to have filed an application to retain JRA on a one-third contingent fee basis.
Because the compensation awarded is based upon a percentage of the settlement, it is not necessary for the Court to evaluate the individual time entries submitted by JRA. The Court notes, however, that most of the entries fail to describe the substantive purpose of the activity and, therefore, lack the requisite specificity to permit reimbursement under the Bankruptcy Code. See, In re Poseiden Pools of America, Inc., 180 B.R. 718 (Bankr.E.D.N.Y. 1995).
Given these unusual circumstances, the Court is of the opinion that this is the rare case in which compensation should be awarded on terms different than those provided in the retention order. The Court holds that JRA should be compensated for attorney's fees in the amount of $8,333, one-third of the $25,000 settlement amount, plus postpetition costs of $25.
This Opinion constitutes this Court's findings of fact and conclusions of law in accordance with Federal Rule of Bankruptcy Procedure 7052. A separate Order will be entered.
ORDER
For the reasons stated in an Opinion entered this day IT IS HEREBY ORDERED that Jim Rochford and Associates is awarded, pursuant to 11 U.S.C. § 330, attorneys fees of $8,333.00, plus costs of $25.00. The TRUSTEE is authorized to pay the attorneys fees and costs when this Order becomes final and nonappealable.