A recent U.S. Court of Appeals for the Fifth Circuit ruling will benefit access to justice for low-income people who seek Chapter 13 bankruptcy relief, and the consumer debt attorneys who represent them.
The question in the case was whether a bankruptcy court is allowed to reimburse debtor attorneys who pay certain fees up front on behalf of their clients, and later in the bankruptcy, seek fee reimbursements from the estate. A district court had ruled that the law prohibits some fee reimbursements, but the Fifth Circuit disagreed.
“That call remains within the discretion of each bankruptcy court, which is permitted—but not required—to authorize it for any given case,” said the May 13 opinion in McBride v. Riley.
Brad Drell, director of Gold, Weems, Bruser, Sues & Rundell in Alexandria, Louisiana, said the ruling impacts consumer debt lawyers who represent individuals.
“These tend to be the poorest of the poor. Essentially, what they’re trying to do is front the costs for the client, like any lawyer would do in any case,” Drell said, noting that such lawyers’ business model relies on the fee reimbursements during the bankruptcy.
“It does open the door for more people to obtain Chapter 13 relief. This is a critical access-to-justice issue,” he said. “It will allow lawyers to expand their practices.”
The appeal resolves a dispute between the Bankruptcy Court for the Western District of Louisiana, represented by two Chapter 13 trustees, against Chapter 13 debtor’s attorneys involving “no-money-down business models” where a debtor’s attorney advances the client’s fees for filing, credit counseling and credit reports.
The appellants, Thomas McBride and his law firms, Joseph Moore and E. Orum Young Law, argue they should get reimbursement of these fees, along with their compensation under the bankruptcy court’s “no-look fee” arrangement, a process many bankruptcy courts use to fast-track the lawyer-compensation process for routine cases.
The bankruptcy court found the fees are not reimbursable under the court’s no-look fee standing order. It also decided debtor’s counsel could not get reimbursed for advancing the costs because 11 U.S.C. §§503(b) and 330 only allow debtor’s lawyers to get reasonable compensation, and not reimbursements.
The order simultaneously denied reimbursement requests in 18 other pending cases.
McBride and two other debtor’s counsel in affected cases appealed the order to the district court, which affirmed the bankruptcy court. Then they appealed to the Fifth Circuit.
If the Fifth Circuit would have allowed the Louisiana bankruptcy court’s ruling to stand, it would have invalidated local rules that currently allow fee reimbursements in bankruptcy courts in the Southern and Northern Districts of Texas and two in Mississippi, noted the opinion.
The Fifth Circuit found the bankruptcy court correctly interpreted its own no-look fee standing order, but erred in finding that bankruptcy courts always lack discretion to reimburse the fees.
“We reject that conclusion as a matter of statutory interpretation and vacate that portion of the judgment,” said the opinion.
The statute in question gives courts discretion to award lawyers reasonable compensation, based on the benefit and necessity of the legal services for the debtor, said the opinion. The Fifth Circuit found that filing, credit counseling and credit report fees are necessary to represent debtors’ interests, and that the law gives courts discretion to compensate lawyers for such costs.
Dana Kaersvang, an appellate attorney in the U.S. Department of Justice’s Civil Division, who represented acting U.S. Bankruptcy Trustee David Asbach in the case, declined to comment.