More on Sundquist: Are Fees Based on Contingency Fee Agreement here Reasonable?

No according to Judge Klein (in 40 pages).

Sundquist v. Bank of America (In re Sundquist) — B.R. — (Bkrtcy, E. D. Cal. Nov, 2017) Klein, J.

Issue:   Is it appropriate to “expunge” an attorney’s lien on the facts here?

Holding:   Yes.  The court here “canceled” the fee agreement between counsel and the debtor on the basis, in part, that fees exceeding $70,000 here were unreasonable.

Judge Christopher Klein

This is a 40 page diatribe excoriating the efforts of debtor’s counsel on behalf of the debtor.  It lays out very nicely however the rules of determining what fees are “reasonable” and how that determination intersects with state law.   

After entry of $6 million (minimum) judgment in favor of the debtors and against Bank of America for violating the automatic stay, a dispute arose between the debtor and their attorney.   The debtor, using new counsel, filed a Motion to Expunge a claimed “attorney’s lien” which allegedly attached to the judgment.  The assertion of the lien apparently arose out of Judge Klein’s efforts to award attorney’s fees as part of the judgment against the bank.  He ordered counsel to file “the statement required by § 329 disclosing the compensation agreed to be paid.”  “The ensuing supplemental statement stated that fees were on an unspecified contingency.”  After further disclosures and briefings, Judge Klein “canceled” the contingency fee agreement.  “Treating Ms. Henderson’s doctored, back-dated contingency fee agreement at face value, this court concluded that the contingency fee exceeded the reasonable value of services within the meaning of § 329(b) and canceled the agreement.”  In any event, as part of the judgment in favor of the debtors, the court awarded $70,000 in fees saying that that was reasonable.

The attorney later filed a Notice of Lien which referenced the contingency fee agreement.  The court said this was designed to “hold-up” the debtors and any potential settlement.

“Ms. Henderson has been acting through counsel to interfere with that proposed settlement by threatening to sue Bank of America by way of collateral attack unless Ms. Henderson receives fees that ‘far exceed the $70,000 allocated in Judge Klein’s March 23, 2017 decision.’  She also has threatened to sue the Sundquists under the Uniform Voidable Transactions Act.”

In response to the Motion to Expunge, the attorney questioned the court’s jurisdiction to rule on whether the lien was enforceable under California law.  Note: It seems obvious that the issue “arises” under title 11.  As to 329, “The § 329(b) powers to cancel fee agreements and order return of payments to the extent that they exceed the ‘reasonable value’ of services are committed to the discretion of the bankruptcy court.”  The court reiterated that $70,000 was reasonable and any amount over that was unreasonable.

At the end Judge Klein commented that he was tempted to disallow all fees because of the conduct of the attorney with respect to disclosing the full nature of the contingency fee agreement.  But he decided to leave the allowed fees at $70,000.

“Nevertheless, the fact remains that counsel undertook a representation that other lawyers declined.  She stood up for the Sundquists.  In the tradition of lawyers who find themselves needing to act as amateur psychologists to clients in emotion-charged situations, she held their hands and comforted them through the process.  She may have flailed in water over her head in competition with a strong-swimming defense, but at least the facts were on her side.  While there is much to be criticized about the quality of, and omissions in, her litigation presentation, it was adequate – barely adequate – to enable this court to discern the just result.”

“An order will issue expunging the subject lien.”

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