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 Hon. Ronald H. Sargis, Bankruptcy Judge for the Eastern 1

District of California, sitting by designation.

ORDERED PUBLISHED

UNITED STATES BANKRUPTCY APPELLATE PANEL

OF THE NINTH CIRCUIT

In re: ) BAP No. CC-10-1466-KiSaPa

)

ONTSON FITZGERALD PLACIDE and ) Bk. No. LA 10-36656 AA

LORI ANN PLACIDE, )

)

Debtors. )

 )

)

THE MARGULIES LAW FIRM, APLC, )

)

Appellant, )

)

v. ) O P I N I O N

)

ONTSON FITZGERALD PLACIDE; )

LORI ANN PLACIDE, )

)

Appellees. )

______________________________)

Argued and Submitted on May 13, 2011,

at Pasadena, California

Filed - September 20, 2011

Ordered Published - October 5, 2011

Appeal from the United States Bankruptcy Court

for the Central District of California

Honorable Alan M. Ahart, Bankruptcy Judge, Presiding

Appearances: Craig G. Margulies argued for appellant The

Margulies Law Firm, APLC;

Eric M. Sasahara argued for appellees Ontson

Fitzgerald Placide and Lori Ann Placide. 

 

Before: KIRSCHER, SARGIS and PAPPAS, Bankruptcy Judges. 1

FILED

SEP 20 2011

SUSAN M SPRAUL, CLERK

U.S. BKCY. APP. PANEL

OF THE NINTH CIRCUIT
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 Unless otherwise indicated, all chapter, section and rule 2

references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1532, and

to the Federal Rules of Bankruptcy Procedure, Rules 1001-9037.

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KIRSCHER, Bankruptcy Judge:

Appellant, The Margulies Law Firm, APLC (f/k/a Law Offices of

Craig G. Margulies, APLC) (“MLF”), appeals an order from the

bankruptcy court sustaining appellees’ objection to MLF’s claim

for prepetition attorney’s fees and costs MLF incurred

representing appellees against chapter 7 debtor, Lamar Edison 2

(“Edison”). The bankruptcy court found that MLF’s claim for

$80,869.33 was unreasonable, and it disallowed the claim in its

entirety. We AFFIRM.

I. FACTUAL AND PROCEDURAL BACKGROUND

A. Placides’s suit against Edison.

In 2004, appellees, Ontson F. Placide and Lori A. Placide

(“Placides”), entered into a contract with Edison for construction

and remodeling services on their home. The relationship soured,

and in February 2005 Placides sued Edison in state court for

breach of contract and various other claims. Before trial,

Placides entered into a stipulation with Edison, agreeing to

settle the matter for $82,000, plus attorney’s fees and costs

should any be incurred to enforce the stipulation. Edison soon

defaulted under the stipulation, which entitled Placides to a

judgment of $82,000 plus attorney’s fees and/or costs. Edison

filed a chapter 7 petition for relief on November 21, 2006, before

the judgment could be entered.

In February 2007, Placides retained MLF to file an adversary
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 In a Joint Pre-Trial Stipulation filed in December 2007, 3

Edison and Viola, who were still married at the time of the

adversary proceeding, admitted at least $300,000 in equity existed

in the residence, which was purchased in 1972 with community

funds. This stipulation was included as an exhibit to MLF’s

opposition to Placides’s objection to MLF’s proof of claim.

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proceeding against Edison. According to the terms of the

Engagement Letter, dated and signed by Placides on February 13,

2007, Placides agreed to pay all of MLF’s fees and costs,

regardless of the outcome of the case. Craig Margulies

(“Margulies”), the firm’s sole attorney, charged an hourly rate of

$300. Payments were due upon receipt of invoice and, in the

absence of any written objection by Placides within seven days of

receipt, Placides were deemed to have accepted and acknowledged

the invoice as correct for the relevant period. The Engagement

Letter states that it consists of the “entire agreement” between

Placides and MLF.

In the adversary complaint filed on February 16, 2007,

Placides sought to except their debt from Edison’s discharge under

sections 523(a)(2)(A), (a)(4), and (a)(6), and to deny Edison’s

discharge pursuant to sections 727(a)(2), (a)(4)(A), (a)(5), and

(a)(7). In connection with their claims against Edison, Placides

also sued Edison’s non-debtor spouse, Viola, in order to attempt

to recover an alleged fraudulent transfer of Edison’s interest in

their marital residence, which Placides believed had significant

equity. As Edison’s largest unsecured creditor (holding $82,000 3

out of the $85,128 of debt listed in Edison’s Schedule F),

Placides stood to gain from any recovery by the estate of the

residence, subject to administrative costs and a $6,000 priority

IRS claim.
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 The presiding bankruptcy judge bifurcated the trial and 4

only the 727 action went forward.

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Timothy Yoo, the chapter 7 trustee in Edison’s case

(“Trustee”), was named as a co-plaintiff in the adversary

proceeding. Trustee later filed a First Amended Application to

employ MLF as his special bankruptcy counsel in the Edison/Viola

adversary proceeding. The application stated that because the

estate had no assets available for litigation expenses, Placides,

pursuant to the Engagement Letter with MLF, would be paying all

fees and costs incurred. The application also provided that MLF

would receive a 40% contingency fee on all sums recovered for the

estate. An order approving MLF’s employment was entered on

December 6, 2007. Placides were served a copy of the employment

order.

A two-day trial against Edison and Viola took place on

February 7 and 8, 2008. The bankruptcy court entered a judgment 4

on May 9, 2008. Plaintiffs succeeded in denying Edison’s

discharge under sections 727(a)(4)(A) and (D), including

Placides’s debt of $82,000. However, the court found that the

residence had been transmuted from community property to Viola’s

separate property. Hence, the estate recovered nothing. Since

Edison was denied a discharge, Placides opted to not pursue their

nondischargeability claims against him.

For the suit against Edison and Viola, MLF’s fees and costs

totaled $124,161.80 ($106,631.25 in fees and $17,530.55 in costs).

The vast majority of the fees were incurred by February 2008,

which includes MLF’s time billed for trial. Until January 2008,

Placides had made regular payments to MLF totaling approximately
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 In their objection to MLF’s proof of claim, Placides 5

asserted they paid MLF approximately $60,000. Placides concede on

appeal that they paid only $49,123.96.

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$39,000. After that, Placides’s payments to MLF became sporadic. 

Between March and July 2008, Placides made four $5,000 payments by

check to MLF, but they later stopped payment on two of the checks.

All payments ceased after July 2008. Ultimately, Placides paid

MLF $49,123.96. About 18 months later, in January 2010, MLF sent 5

Placides a final demand letter attempting to collect the

outstanding balance, to no avail. In May 2010, MLF sued Placides

in state court for the unpaid fees and costs. MLF incurred an

additional $6,075.00 in attorney’s fees and costs for prosecuting

the collection action. MLF’s collection action was stayed once

Placides filed a chapter 13 petition for relief on June 29, 2010.

B. MLF’s proof of claim.

MLF timely filed its proof of claim in Placides’s bankruptcy

case for the unpaid attorney’s fees and costs. MLF asserted an

unsecured claim for $80,869.33 ($65,061.80 in principal, plus

$9,732.53 interest to date, plus $6,075.00 in attorney’s fees and

costs incurred for the collection action).

Placides objected to MLF’s claim in its entirety as grossly

unreasonable under section 502(b)(4). Specifically, Placides

contended that MLF’s total billed fees and costs of $124,161.80

were grossly disproportionate to their potential $82,000 recovery

from Edison, and MLF was not entitled to more than one third, or

$27,000. As such, contended Placides, the $49,000 already paid to

MLF was more than sufficient to satisfy its claim. While Placides

did not contest the enforceability of the Engagement Letter, they
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claimed that Margulies orally represented to them that Trustee

would absorb one-half of MLF’s attorney’s fees and costs. 

Placides also asserted that, just before trial, Margulies informed

them that trial could cost them up to approximately $15,000, at

which point they agreed to proceed. Placides further argued that

MLF’s collection action fees were not recoverable under California

law, and that MLF’s interest figure was unsupported.

MLF opposed Placides’s objection, arguing that its claim

should be allowed in its entirety. According to MLF, Placides

knew Edison’s estate had no assets, which is why they pursued

Viola and the residence; it was the only way they could get paid. 

Yet, despite the risks, Placides wished to continue. MLF rejected

Placides’s allegation that Trustee was liable for half of the fees

and costs. Per the terms of the Engagement Letter, Placides knew

they were liable for all fees and costs whether or not the

residence became an asset of the estate. MLF further contended

that it properly scaled its fees; they were not extravagant given

the complexity of the adversary with two defendants and difficult

family law issues. Plus, MLF obtained a judgment for Placides. 

Finally, MLF argued that it was entitled to attorney’s fees

incurred in the collection action under CAL. CIV. CODE § 1717.

In response, Placides argued that their lack of objection to

MLF’s fees and costs incurred in Edison’s adversary, or the fact

that MLF succeeded in representing them, was irrelevant to the

issue of whether MLF’s claim was unreasonable under section

502(b)(4). Placides admitted to accepting the risks of

litigation, but argued that this did not give MLF an unlimited

license to bill them with unreasonable attorney’s fees and costs. 
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 Of course, the Joint Pre-Trial Stipulation indicated that 6

$300,000 of equity potentially existed, assuming plaintiffs were

successful in recovering the residence as part of Edison’s estate. 

See fn. 3.

-7-

Placides further argued that, whether or not Trustee was to pay

half of the fees and costs, no reasonable party would agree to

bear all of the costs of litigation on behalf of two parties.

The bankruptcy court held a hearing on Placides’s claim

objection on October 28, 2010. MLF argued that its hourly rate of

$300, which it never raised during the 18 months it represented

Placides, was reasonable, and Placides never objected to any

invoices. MLF further noted that it would never have represented

Trustee and Edison’s estate but for the fact that it was the

source of funds for Placides; the residence had over $100,000 in 6

equity, which MLF contended would have paid Placides’s $82,000

claim against Edison in full. The court inquired whether all or

only Edison’s half of the equity was available, upon which MLF

responded that if the residence had been deemed community

property, all of the equity would have been available for Edison’s

estate as he did not claim an exemption. MLF clarified that the

contingency arrangement was with Trustee only, if the residence

were recovered, but otherwise Placides agreed to pay, and were

responsible for, all attorney’s fees and costs.

In the bankruptcy court’s opinion, Placides’s silence as to

MLF’s fees was irrelevant to whether MLF’s fees were reasonable

under section 502(b)(4):

That’s the question. It’s not what the Debtors did or

did not do. . . .[Y]ou are in a situation where under

502(b)(4), it’s sort of -- it’s almost like a strict

scrutiny standard . . . . It’s almost like looking at

what an insider would charge the party, the client. So
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that is your problem. That is your burden.

Hr’g Tr. (Oct. 28, 2010) at 7:15-21.

MLF then argued that the cases cited by Placides, where the

fees were found to be unreasonable, were cases in which debtor’s

counsel was employed under sections 327 or 330, and counsel was

severely depleting estate funds, which was not the case here. The

bankruptcy court rejected this argument and sustained Placides’s

objection to MLF’s claim:

. . . [T]he difficulty you have here now is that the

only way you [were] ever going to recover anything close

to . . . the [$]82,000, was to get that real property

brought back into the estate in some fashion, and sold

and enough paid off -- net . . . of all the expenses of

sale . . . and the priority claims ahead of your client,

including the trustee[’s] expenses, as well as your

attorney’s fees for the trustee . . . . Only if -- only

if all those things got paid, there was enough there to

pay those and your clients. That’s the only way. 

Otherwise, this was a losing proposition from the get

go, I’m afraid. That’s your problem here. That’s your

difficulty.

Id. at 8:18-9:8.

Because at most, if you didn’t get that -- you got

really, at most, what you could otherwise get,

essentially. You objected to the discharge. Well, I

would say, okay, that’s fine, you did it. But, it

doesn’t result in any dollar recovery to your clients

whatsoever. Nothing. Zero. Where are they? They are

just kind of back where they started. So they still

have a claim that continues to exist against Mr. Edison. 

But, they have not recovered anything. Nothing. No

dollars.

That is the problem. That is why you are going to lose

here this morning . . . . You have been paid the

[$]49,000, it is at least [$]49,000. . . . I think

under the facts, I think that is reasonable. 

Id. at 9:10-10:1.

. . . .

And you just can’t sustain your burden here to show that

you are entitled to anything more, based on these facts. 

Based on what the Debtors had -- the prospect of winning
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it from the get go. 

Id. at 10:15-18. 

. . . .

So, I am going to find that [the claim] is unreasonable

to the extent you want any more monies than what you’re

[sic] firm has been paid, so I am going to sustain the

objection.

Id. at 12:1-3.

In response to the court’s decision, MLF reiterated that the

equity in the residence was significant and would have paid

Placides in full. The court paused and asked where in the record

was the evidence to prove this fact. MLF responded that it was in

the complaint, which was attached as an exhibit to MLF’s

opposition. The court rejected an allegation in a complaint as

evidence; it needed to know the value of the residence, the

existing liens, and the amount of administrative expenses

involved.

MLF then inquired if the court was holding that attorneys

should never be entitled to fees when representing creditors in

discharge actions because all that can be recovered is a judgment,

which the court valued as worthless and a “pyrrhic victory.” The

court rejected MLF’s assumption and expressed its understanding of

MLF’s plight, but stated that attorneys in such actions must

assume the risk of not getting paid.

The bankruptcy court entered an order on November 5, 2010,

sustaining Placides’s objection to MLF’s claim for $80,869.33 and

disallowing it in its entirety pursuant to section 502(b)(4). 

This timely appeal followed.

II. JURISDICTION

The bankruptcy court had jurisdiction pursuant to 28 U.S.C.
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 We, like the Panel in Segovia v. Bach Constr., Inc. (In re 7

Segovia), 2008 WL 8462967, at *4 n.16 (9th Cir. BAP Oct. 22,

2008), could not locate a standard of review for orders

disallowing as unreasonable claims for prepetition attorney’s fees

or insider payments under section 502(b)(4). However, we agree

that an abuse of discretion standard would apply.

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§§ 1334 and 157(b)(2)(B). We have jurisdiction pursuant to

28 U.S.C. § 158.

III. ISSUES

1. Was the bankruptcy court correct to apply section 502(b)(4)

to MLF’s claim and impose a reasonableness standard to its fees?

2. Did the bankruptcy court err by shifting the burden to MLF to

prove the validity of its claim?

3. Did the bankruptcy court abuse its discretion in disallowing

as unreasonable MLF’s $80,869.33 claim for prepetition attorney's

fees?

IV. STANDARDS OF REVIEW

The proper interpretations of statutes and rules are legal

questions that we review de novo. Heath v. Am. Express Travel

Related Servs. Co., Inc. (In re Heath), 331 B.R. 424, 428 (9th

Cir. BAP 2005). Whether compliance with a given statute or rule

has been established is generally a question of fact, which we

review for clear error. Id.

The bankruptcy court’s allocation of the burden of proof is a

conclusion of law we review de novo. People’s Ins. Co. of China

v. M/V Damodar Tanabe, 903 F.2d 675, 682 (9th Cir. 1990).

We review an order disallowing as unreasonable claims for

prepetition attorney’s fees or insider payments under section

502(b)(4) for an abuse of discretion. To determine whether the 7

bankruptcy court abused its discretion, we conduct a two-step
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inquiry: (1) we review de novo whether the bankruptcy court

“identified the correct legal rule to apply to the relief

requested” and (2) if it did, whether the bankruptcy court's

application of the legal standard was illogical, implausible or

“without support in inferences that may be drawn from the facts in

the record.” United States v. Hinkson, 585 F.3d 1247, 1261-62

(9th Cir. 2009) (en banc).

V. DISCUSSION

A. MLF’s claim for prepetition attorney’s fees was subject to

section 502(b)(4).

 A proof of claim is deemed allowed and constitutes prima

facie evidence of the claim's validity and amount unless a party

in interest objects. Section 502(a); Lundell v. Anchor Constr.

Specialists, Inc. (In re Lundell), 223 F.3d 1035, 1039 (9th Cir.

2000); Rule 3001(f). Placides never disputed MLF’s right to

attorney’s fees and costs under the Engagement Letter. “Because a

pre-bankruptcy contractual obligation of a debtor to an attorney

is like any other contract claim against the estate, the attorney

can assert the claim in bankruptcy.” Yermakov v. Fitzsimmons

(In re Yermakov), 718 F.2d 1465, 1470 (9th Cir. 1983). While

state law governs MLF’s rights under the Engagement Letter,

bankruptcy law governs the allowance of MLF’s claim against

Placides’s estate. See Butner v. United States, 440 U.S. 48,

54-55 (1979).

MLF’s claim for attorney’s fees and costs may be allowed only

to the extent they are reasonable as determined under federal law. 

Landsing Diversified Props.–II v. First Nat'l Bank & Trust Co. of

Tulsa (In re W. Real Estate Fund, Inc.), 922 F.2d 592, 597 (10th
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Cir. 1991). Section 502(b)(4) provides that a prepetition claim

for services performed by an attorney or insider of the debtor

shall be disallowed to the extent the claim exceeds the reasonable

value of the services provided. Thus, “the excess amount of the

claim beyond such reasonable value fixed by the court is simply

disallowed and may not, therefore, share in the distribution of

the debtor’s assets.” 4 COLLIER ON BANKRUPTCY ¶ 502.03[5][c] (Alan N.

Resnick & Henry J. Sommer eds., 16th ed. 2009).

On appeal, MLF contends that a reasonableness standard does

not apply to its fees, but rather the contract amount controls. 

Specifically, MLF argues that a reasonableness standard should not

apply because it provided services to Placides almost two years

prepetition, the services had nothing to do with Placides’s

bankruptcy, and Placides represented that they had every intention

of paying. Like the bankruptcy court, we reject this argument.

Contrary to MLF’s contention, section 502(b)(4) covers unpaid

claims for services of an attorney “whether or not the services

were rendered in contemplation of the filing of the petition or,

indeed, whether those services had even anything to do with

bankruptcy or the debtor’s financial affairs.” Id. at

¶ 502.03[5][c][I]; In re Gutierrez, 309 B.R. 488, 493 (Bankr. W.D.

Tex. 2004) (a reasonableness standard under “[s]ection 502(b)(4)

applies to all claims for attorneys’ fees owed by a debtor prior

to the filing of the case in which the claim is made, whether that

claim be for representing the debtor in a prior bankruptcy case,

or for representing the debtor in any other capacity (personal

injury, state court litigation, probate matters, tax advice, etc.

etc.”) (emphasis in original); Sticka v. Geller (In re Stratton),
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299 B.R. 616, 623 (Bankr. D. Or. 2003) (same). Thus, MLF’s claim

for prepetition attorney’s fees falls squarely under section

502(b)(4) and is subject to a reasonableness determination,

regardless of the amount to which MLF is entitled under the

Engagement Letter.

B. The bankruptcy court properly shifted the burden of proof to

MLF.

MLF contends that the bankruptcy court erred by improperly

shifting the burden to MLF to support the validity of its claim

because Placides merely lodged an objection without providing any

evidence to defeat it. We disagree.

To defeat a prima facie valid claim under section 502, “the

objector must come forward with sufficient evidence and ‘show

facts tending to defeat the claim by probative force equal to that

of the allegations of the proofs of claim themselves.’” In re

Lundell, 223 F.3d at 1039 (quoting Wright v. Holm (In re Holm),

931 F.2d 620, 623 (9th Cir. 1991)). “‘If the objector produces

sufficient evidence to negate one or more of the sworn facts in

the proof of claim, the burden reverts to the claimant to prove

the validity of the claim by a preponderance of the evidence.’”

Id. (citations omitted). “The ultimate burden of persuasion

remains at all times upon the claimant.” Id.

Under section 502(b)(4), the claimant attorney or insider

bears the burden of proof on the question of reasonableness of

compensation for services. In re Siller, 427 B.R. 872, 881

(Bankr. E.D. Cal. 2010); In re Boulder Crossroads, LLC, 2010 WL

4924745, at *13 (Bankr. W.D. Tex. Dec. 1, 2010); Faulkner v.

Canada (In re Heritage Org., LLC), 2006 WL 6508182, at *8 (Bankr
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N.D. Tex. Jan. 6, 2006) (citing cases). Mr. Placide, in his

declaration in support of Placides’s objection to MLF’s claim,

testified that Margulies had represented that the attorney’s fees

and costs in Edison’s adversary proceeding would be distributed

equally between Placides and Trustee. Trustee, as near as we can

tell, has not affirmed or disputed this fact. Further, Placides

put at issue the reasonableness of MLF’s fees, which were

significantly in excess of the amount of Placides’s maximum

possible recovery of $82,000. These facts provided probative

evidence to negate the legal sufficiency of MLF’s claim, or at

least sufficiently question the reasonableness of MLF’s fees. 

Accordingly, the bankruptcy court did not impermissibly shift the

burden of proof to MLF.

C. Determination of Reasonableness of Attorney’s Fees.

The reasonableness of attorney’s fees under section 502(b)(4)

is a question of federal law. Schoenmann v. Bach Constr., Inc.

(In re Segovia), 387 B.R. 773, 779 (Bankr. N.D. Cal. 2008), aff’d,

2008 WL 8462967, at *6 (9th Cir. BAP Oct. 22, 2008); In re W. Real

Estate Fund, 922 F.2d at 597; In re Siller, 427 B.R. at 880. 

Bankruptcy courts have wide discretion in determining the

reasonableness of fees, and the appellate court will not overturn

the bankruptcy court's decision unless it abused its discretion. 

Law Offices of David A. Boone v. Derham–Burk (In re Eliapo), 468

F.3d 592, 596 (9th Cir. 2006).

In the Ninth Circuit, the primary method used to determine a

reasonable fee in bankruptcy cases is to calculate the lodestar. 

In re Yermakov, 718 F.2d at 1471. A court computes the lodestar

by multiplying the number of hours reasonably expended by a
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reasonable hourly rate. Id. However, the Ninth Circuit and this

Panel have made it clear that a court may depart from the lodestar

method where appropriate. See Unsecured Creditors’ Comm. v. Puget

Sound Plywood, Inc., 924 F.2d 955, 960, 961 (9th Cir. 1991)

(lodestar approach not mandated in all cases and court may employ

alternative approaches where appropriate); Digesti & Peck v.

Kitchen Factors, Inc. (In re Kitchen Factors, Inc.), 143 B.R. 560,

562 (9th Cir. BAP 1992) (lodestar method is primary approach but

is not exclusive method).

In Kitchen Factors, the Panel held that a court may abandon

the lodestar approach in determining reasonable fees where the

“time spent by counsel is not helpful because it is grossly

disproportionate to the amounts at stake.” 143 B.R. at 562. 

“‘Absent unusual circumstances, an attorney must scale his or her

fee at least to the reasonably expected recovery.’” Id. (quoting

Puget Sound Plywood, 924 F.2d at 961). “A claim for attorneys

fees is unreasonable under federal law to the extent the attorney

seeks fees that are disproportionate to the likely recovery.” 

Segovia, 387 B.R. at 779.

We recognize that Puget Sound Plywood and Kitchen Factors

were dealing with reasonableness of attorney’s fees under section

330. We also recognize the difference between being an attorney 

employed by the estate and being an attorney employed by a nondebtor private client. Under the former, counsel is seeking

payment from the estate; under the latter, counsel is seeking

payment from a private client. If a private client wishes to

waste his own money pursuing litigation which may not be costeffective, that is his choice. See In re Kitchen Factors,
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143 B.R. at 562-63. However, once that client files a bankruptcy

petition, counsel’s claim for fees is limited to a reasonable

amount, in the same fashion as the claim for an estate

professional under section 330. Therefore, we believe the same

reasonableness standard set forth in section 330 should govern an

attorney’s claim for fees under 502(b)(4). See In re Segovia,

387 B.R. at 779, aff’d, 2008 WL 8462967, at *6 (reasoning same);

In re Nelson, 206 B.R. 869, 882 (Bankr. N.D. Ohio 1997) (same).

Although not expressly stated, the bankruptcy court departed

from the lodestar method and employed a method more like the one

set forth in Puget Sound Plywood and Kitchen Factors. It focused

on the $82,000 at stake for Placides and the approximate $125,000-

plus MLF billed Placides in its effort to recover that $82,000. 

To the extent MLF argues that the bankruptcy court erred in

choosing an alternative method to determine the reasonableness of

its fee, we disagree. Because of the disproportionate nature of

MLF’s fees to Placides’s reasonably expected recovery, the court

was free to depart from lodestar and use an alternative method. 

In re Kitchen Factors, 143 B.R. at 562; Puget Sound Plywood,

924 F.2d at 961. 

In its reasonableness determination, the bankruptcy court

found that, prepetition, Placides paid MLF approximately $49,000.

It further found that $49,000 was the reasonable value of MLF’s

services for representing Placides in pursuing their $82,000 claim

against Edison, considering that Placides had no prospect of

recovering anything from Edison unless they could get the

residence into the estate, and, even then, insufficient equity

(net of costs) existed to pay Placides’s $82,000 claim in full. 
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The court considered Placides’s preserved $82,000 judgment against

Edison to be valueless because they had not recovered any money. 

Ultimately, the court found MLF’s claim for an additional

$80,869.33 in prepetition attorney’s fees and costs was

unreasonable, and it disallowed MLF’s claim in its entirety.

MLF contends that its fees were reasonable and proper given

the complexity of the adversary, and that it exercised appropriate

billing judgment. MLF asserts that Placides wanted to proceed

against Edison and Viola because they had a significant chance, if

not 100%, of recovering on their $82,000 claim if the estate

recovered the residence. Therefore, MLF contends that its claim

should be allowed in its entirety, particularly since Placides

never objected to MLF’s fees throughout the course of the

litigation. In sum, MLF contends that the bankruptcy court erred

by awarding MLF only $49,000, almost $18,000 of which was

attributable to costs, for 375 hours of work that resulted in

success for Placides. MLF also contends that the bankruptcy court

did not know what amount Placides had paid to MLF, what amount

remained due, and what sums were only reimbursements for costs MLF

advanced on behalf of Placides; thus, it could not make a

reasonableness determination.

We reject MLF’s contention that the bankruptcy court was

unable to make a reasonableness determination because it had

insufficient information about the accounting of the fees and

costs. At the hearing, the court correctly found that Placides

had paid MLF approximately $49,000. MLF clearly stated in its

opposition to Placides’s claim objection what amount remained

unpaid, and Margulies further stated at the hearing how the
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$49,000 was allocated between costs and fees. The record reflects

that the bankruptcy court knew exactly what amount had been paid,

how much was outstanding, and that it considered Margulies’

statement regarding the allocation of the $49,000. As such, it

was able to make a reasonableness determination. It simply

rejected MLF’s argument.

We also reject, as did the bankruptcy court, MLF’s contention

that Placides’s lack of prepetition objection to MLF’s fees means

that its claim should be allowed in its entirety. As we stated

above, regardless of what MLF may be entitled to under the

Engagement Letter, its fees are subject to a reasonableness

determination under section 502(b)(4). In re W. Real Estate Fund,

Inc., 922 F.2d at 597; In re Segovia, 387 B.R. at 779, aff'd, 2008

WL 8462967; In re Siller, 427 B.R. at 880.

However, we disagree with the bankruptcy court that

Placides’s suit against Edison and Viola was a “losing proposition

from the get go.” In the Joint Pre-Trial Stipulation filed in

December 2007, Edison and Viola, who were still married at the

time, admitted at least $300,000 in equity existed in the

residence, which was purchased in 1972 with community funds. The

only encumbrance on the residence was a mortgage for $104,000. 

Placides were Edison’s largest unsecured creditor holding 96% of

the unsecured debt. Edison had a priority IRS tax claim for about

$6,000. MLF included the Joint Pre-Trial Stipulation in its

opposition to Placides’s claim objection.

Given the above facts, at the time Placides and Trustee filed

suit against Edison and Viola the case looked very promising. Had

the estate recovered the residence, Placides’s claim for $82,000
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$300,000 equity existed in the residence, and the evidence to

support this fact could be found in the Joint Pre-Trial

Stipulation.

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against Edison, plus any attorney’s fees and costs preserved in

the judgment, likely would have been satisfied. Unfortunately,

MLF never articulated in its opposition brief how much equity was

in the residence, but stated merely that it had “significant”

equity. For reasons unknown, Margulies stated at the claim

objection hearing that the residence had only $100,000 in equity.8

When asked where this evidence was in the record, Margulies 

erroneously stated that it was in the adversary complaint, which

the court correctly rejected as evidence.

The bankruptcy court was faced with a factual issue of how

much equity existed in the residence, $100,000 or $300,000, in

determining the reasonableness of MLF’s attorney’s fees. Based on

the evidence presented to the bankruptcy court on this matter,

considering the reasonableness of the fees in connection with a

potential $100,000 recovery by Placides was not clear error. Even

if Placides had been paid in full, MLF still failed to scale its

fees to something more in proportion with what Placides could

reasonably recover. In re Kitchen Factors, 143 B.R. at 562; Puget

Sound Plywood, 924 F.2d at 961. Therefore, the bankruptcy court

did not clearly err in finding that $125,000-plus in attorney’s

fees and costs incurred for a recovery that could never have been

more than $82,000 was unreasonable, and that $49,000 was a

reasonable fee.

VI. CONCLUSION

No one disputes the excellent work by MLF, and perhaps we
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each individually would have arrived at a different figure and

allowed MLF’s claim in part. However, given the wide discretion

afforded bankruptcy courts in determining reasonableness of

prepetition attorney’s fees under section 502(b)(4), we cannot say

that the court here abused its discretion in disallowing as

unreasonable MLF’s claim for $80,869.33. In re Eliapo, 468 F.3d

at 596. Accordingly, we AFFIRM.