McProud v. Siller, No. 14-17045 (9th Cir. 2017)
Annotate this Case11 U.S.C. 502(b)(4) acts as a federal cap on a fee already determined pursuant to state law. The Ninth Circuit affirmed the district court's reversal of the bankruptcy court's decision reducing a claim for pre-petition attorneys' fees under section 502(b)(4). Section 502(b)(4) limits claims for services rendered by the debtor's attorney to the extent that such claims exceed the reasonable value of such services. The panel explained that the proper mode of analysis was: (1) an acknowledgment or determination that the fee contract was breached; (2) an assessment of the damages for the breach under state law; (3) a determination under section 502(b)(4) of reasonableness of the damages claim afforded by state law; and (4) a reduction of the claim by whatever extent, if any, it is deemed excessive. The panel also held that the section 502(b)(4) cap limits fees for services already performed. The Full Faith and Credit Act requires, in the circumstances of this case, that the judgment of the state court confirming the arbitration award be given full faith and credit in the bankruptcy proceeding.
Court Description: Bankruptcy. The panel affirmed the district court’s reversal of the bankruptcy court’s decision reducing a claim for pre-petition attorneys’ fees pursuant to 11 U.S.C. § 502(b)(4), which limits claims for services rendered by the debtor’s attorney to the extent that such claims exceed the reasonable value of such services. Agreeing with the Tenth Circuit, the panel held that section 502(b)(4) acts as a federal cap on a fee already determined pursuant to state law. The proper mode of analysis is: (1) an acknowledgment or determination that the fee contract was breached; (2) an assessment of the damages for the breach under state law; (3) a determination under section 502(b)(4) of reasonableness of the damages claim afforded by state law; and (4) a reduction of the claim by whatever extent, if any, it is deemed excessive. The panel held that it is error for a bankruptcy court to bypass this 4 IN RE CWS ENTERPRISES analysis and determine for itself in the first instance a reasonable contingent fee using the lodestar method. Agreeing with the Third Circuit, which analyzed section 502(b)(7), the panel held that the bankruptcy code’s reasonableness cap limits a pre-petition obligation for a debtor’s attorneys’ fees, even if such fees were allowable under state law, and even if such fees had been reduced to a state court judgment. The panel held that the bankruptcy court was required to give full faith and credit to a state court’s judgment, confirming an arbitration award and entitling the attorneys to their fees, to the same extent that California res judicata law would give that judgment preclusive effect. The panel affirmed the district court’s conclusion that issue preclusion applied because the arbitration proceeding establishing the reasonableness of the fees was fully contested and later confirmed by the judgment of a California court. The panel held that, although there might in some cases be room for a reduction, under section 502(b)(4)’s reasonableness cap, of a state court judgment confirming an arbitration award for a contingent fee, there was no room in this case because the relationship between the contracted-for amount the service the attorneys provided was not such as to make enforcement of the contract or payment of the fee unreasonable.
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