Q: I was appointed receiver for an apartment building.
I operated the property for six months, then the defendant filed
bankruptcy. I filed a claim, as a superseded custodian, under 11 U.S.C. §
543. The debtor objected to my fees and made various other crazy
objections. I had to hire counsel to defend my fees and to deal with all
the objections. Debtor’s counsel now claims my counsel and I are not
entitled to be paid for having to defend my fee request. Is that correct?
A: As indicated in the prior question and answer, the Supreme Court
has held that fees incurred in defending fee applications are not
compensable from a bankruptcy estate. However, like in the prior questions
and answer, that restriction does not apply to a receiver or his counsel,
who have to defend the receiver’s compensation when the receiver seeks to
be paid as a superseded custodian. This was explained recently by the
bankruptcy court in In re 29 Brooklyn Avenue LLC, 548 B.R. 642 (Bankr.
E.D.N.Y. 2016). In the case, a bank started a foreclosure and had a
receiver appointed. Fifteen months later, the borrower filed Chapter 11.
The receiver filed a claim for his pre-petition fees and expenses as well
as his fees for preparing and filing his final report with the bankruptcy
court, as required under 11 U.S.C. § 543(b). The debtor objected to the
receiver’s fees and report. Extensive discovery took place, and there was
an eight day trial. The bankruptcy court allowed the receiver’s claim for
$72,223.86, only disallowing $225.49 of the receiver’s claim. The receiver
then filed a motion for allowance of his attorney’s fees for defending the
objection to his claim. The receiver sought $355,953.25. The court stated
that whether the fee application could be granted depended on whether the
services the receiver’s counsel rendered were compensable under the
Bankruptcy Code and whether the amount sought was reasonable.
In deciding these issues, the court first noted that
custodians, such as a superseded receiver, are entitled to be reimbursed
for their fees and expenses from the bankruptcy estate. Id. at 645.
11 U.S.C. § 543(c)(2) states in part: The court “shall…provide for payment
of reasonable compensation for services rendered and costs and expenses
incurred by such custodian.” This compensation is entitled to an
administrative priority under § 503(b)(3)(E), which provides for an
allowed administrative expense for “the actual, necessary
expenses…incurred by…a custodian superseded under §543 of this title, and
compensation for the services of such custodian.”
In addition to allowing expenses and compensation for the
receiver, § 503(b)(4) grants an allowed administrative expense for
“reasonable compensation for professional services rendered by an attorney
or an accountant of an entity whose expenses allowed under subparagraph
(A), (B), (C), (D), or (E) of paragraph (3) of this subsection.” The court
concluded that the attorney’s fees requested by the receiver’s counsel
could be allowed to the extent they fell under the ambit of § 503(b)(4).
The court stated there was no question that the receiver’s counsel was
entitled to fees for services directly related to the process of turning
over property of the estate in the receiver’s control and providing the
required accounting. It further noted it was not necessary for the
receiver to obtain approval for retention of counsel from the bankruptcy
court as a prerequisite to seeking a fee under § 503(d)(4). Id. at
The debtor argued, however, that given the Supreme Court’s
decision in ASARCO, which bars the payment of fees for defending fee
applications, the receiver’s counsel should not receive compensation for
defending the receiver’s fee application. The court rejected that argument
pointing out that ASARCO was distinguishable on a number of grounds. Id.
at 647. First, in ASARCO it was the debtor who was objecting to its former
counsel’s fees. The Supreme Court in the case held that litigating against
one’s own client did not fall within what the court considered “actual,
necessary services rendered” under § 330(a). In the current case, however,
the services were rendered for the client. The work was performed by the
receiver’s counsel in defending the receiver.
The more basic distinction, however, was that the code
section involved was § 503(b)(4) of the Bankruptcy Code not § 330(a) which
was involved in ASARCO. The court indicated this was a completely
different fee shifting statute. The court stated § 503(b)(4) constitutes
an explicit fee shifting statute under the standards articulated in
ASARCO. Section 503(b)(4) specifically provides for attorney’s fees for
the prevailing party – in this case, an entity whose expenses have been
determined to be allowable under § 503(b)(3)(A) – (E). The court,
therefore, held that the receiver’s counsel was entitled to reasonable
compensation for services rendered to the receiver. Id. at 647-48.
The court stated the standard for reasonableness under § 503(b)(4) are
“the time, the nature, the extent and the value of such services, and the
costs of comparable services under this title.” Id. at 652. Because some
of the counsels’ time descriptions were vague and contained lumped
entries, and because of what the court felt were some duplicate services,
the court reduced the fee request, but it still awarded the receiver’s
counsel $234,206.25 in fees. Id. at 654.
So debtor’s counsel in your case is incorrect. If you need to
have counsel defend your fee request, your counsel is entitled to be paid
from the bankruptcy estate, so long as your defense is successful.
*Peter A. Davidson is a Partner of Ervin Cohen & Jessup LLP a
Beverly Hills Law Firm. His practice includes representing Receivers and
acting as a Receiver in State and Federal Court.