Court Opinion

ID: 2757215
Source: CourtListenerOpinion
Date Created: 2014-12-03 19:08:42.419467+00
Date Added: 2024-06-11T11:11:41.567597
License: Public Domain

FILED
 1                         ORDERED PUBLISHED              SEP 20 2011
                                                      SUSAN M SPRAUL, CLERK
 2                                                      U.S. BKCY. APP. PANEL
                                                        O F TH E N IN TH C IR C U IT

 3                   UNITED STATES BANKRUPTCY APPELLATE PANEL
 4                             OF THE NINTH CIRCUIT
 5   In re:                        )      BAP No.      CC-10-1466-KiSaPa
                                   )
 6   ONTSON FITZGERALD PLACIDE and )      Bk. No.      LA 10-36656 AA
     LORI ANN PLACIDE,             )
 7                                 )
                    Debtors.       )
 8                                 )
                                   )
 9   THE MARGULIES LAW FIRM, APLC, )
                                   )
10                  Appellant,     )
                                   )
11   v.                            )      O P I N I O N
                                   )
12   ONTSON FITZGERALD PLACIDE;    )
     LORI ANN PLACIDE,             )
13                                 )
                    Appellees.     )
14   ______________________________)
15                    Argued and Submitted on May 13, 2011,
                             at Pasadena, California
16
                            Filed - September 20, 2011
17                     Ordered Published - October 5, 2011
18                Appeal from the United States Bankruptcy Court
                      for the Central District of California
19
               Honorable Alan M. Ahart, Bankruptcy Judge, Presiding
20
     Appearances:     Craig G. Margulies argued for appellant The
21                    Margulies Law Firm, APLC;
                      Eric M. Sasahara argued for appellees Ontson
22                    Fitzgerald Placide and Lori Ann Placide.
23
     Before:    KIRSCHER, SARGIS1 and PAPPAS, Bankruptcy Judges.
24
25
26
27
          1
            Hon. Ronald H. Sargis, Bankruptcy Judge for the Eastern
28   District of California, sitting by designation.
 1   KIRSCHER, Bankruptcy Judge:
 2
 3        Appellant, The Margulies Law Firm, APLC (f/k/a Law Offices of
 4   Craig G. Margulies, APLC) (“MLF”), appeals an order from the
 5   bankruptcy court sustaining appellees’ objection to MLF’s claim
 6   for prepetition attorney’s fees and costs MLF incurred
 7   representing appellees against chapter 72 debtor, Lamar Edison
 8   (“Edison”).   The bankruptcy court found that MLF’s claim for
 9   $80,869.33 was unreasonable, and it disallowed the claim in its
10   entirety.   We AFFIRM.
11                   I. FACTUAL AND PROCEDURAL BACKGROUND
12   A.   Placides’s suit against Edison.
13        In 2004, appellees, Ontson F. Placide and Lori A. Placide
14   (“Placides”), entered into a contract with Edison for construction
15   and remodeling services on their home.   The relationship soured,
16   and in February 2005 Placides sued Edison in state court for
17   breach of contract and various other claims.   Before trial,
18   Placides entered into a stipulation with Edison, agreeing to
19   settle the matter for $82,000, plus attorney’s fees and costs
20   should any be incurred to enforce the stipulation.     Edison soon
21   defaulted under the stipulation, which entitled Placides to a
22   judgment of $82,000 plus attorney’s fees and/or costs.    Edison
23   filed a chapter 7 petition for relief on November 21, 2006, before
24   the judgment could be entered.
25        In February 2007, Placides retained MLF to file an adversary
26
27        2
            Unless otherwise indicated, all chapter, section and rule
     references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1532, and
28   to the Federal Rules of Bankruptcy Procedure, Rules 1001-9037.

                                      -2-
 1   proceeding against Edison.      According to the terms of the
 2   Engagement Letter, dated and signed by Placides on February 13,
 3   2007, Placides agreed to pay all of MLF’s fees and costs,
 4   regardless of the outcome of the case.      Craig Margulies
 5   (“Margulies”), the firm’s sole attorney, charged an hourly rate of
 6   $300.       Payments were due upon receipt of invoice and, in the
 7   absence of any written objection by Placides within seven days of
 8   receipt, Placides were deemed to have accepted and acknowledged
 9   the invoice as correct for the relevant period.      The Engagement
10   Letter states that it consists of the “entire agreement” between
11   Placides and MLF.
12        In the adversary complaint filed on February 16, 2007,
13   Placides sought to except their debt from Edison’s discharge under
14   sections 523(a)(2)(A), (a)(4), and (a)(6), and to deny Edison’s
15   discharge pursuant to sections 727(a)(2), (a)(4)(A), (a)(5), and
16   (a)(7).      In connection with their claims against Edison, Placides
17   also sued Edison’s non-debtor spouse, Viola, in order to attempt
18   to recover an alleged fraudulent transfer of Edison’s interest in
19   their marital residence, which Placides believed had significant
20   equity.3      As Edison’s largest unsecured creditor (holding $82,000
21   out of the $85,128 of debt listed in Edison’s Schedule F),
22   Placides stood to gain from any recovery by the estate of the
23   residence, subject to administrative costs and a $6,000 priority
24   IRS claim.
25
             3
            In a Joint Pre-Trial Stipulation filed in December 2007,
26   Edison and Viola, who were still married at the time of the
     adversary proceeding, admitted at least $300,000 in equity existed
27   in the residence, which was purchased in 1972 with community
     funds. This stipulation was included as an exhibit to MLF’s
28   opposition to Placides’s objection to MLF’s proof of claim.

                                         -3-
 1        Timothy Yoo, the chapter 7 trustee in Edison’s case
 2   (“Trustee”), was named as a co-plaintiff in the adversary
 3   proceeding.   Trustee later filed a First Amended Application to
 4   employ MLF as his special bankruptcy counsel in the Edison/Viola
 5   adversary proceeding.   The application stated that because the
 6   estate had no assets available for litigation expenses, Placides,
 7   pursuant to the Engagement Letter with MLF, would be paying all
 8   fees and costs incurred.   The application also provided that MLF
 9   would receive a 40% contingency fee on all sums recovered for the
10   estate.   An order approving MLF’s employment was entered on
11   December 6, 2007.    Placides were served a copy of the employment
12   order.
13        A two-day trial against Edison and Viola took place on
14   February 7 and 8, 2008.4   The bankruptcy court entered a judgment
15   on May 9, 2008.   Plaintiffs succeeded in denying Edison’s
16   discharge under sections 727(a)(4)(A) and (D), including
17   Placides’s debt of $82,000.   However, the court found that the
18   residence had been transmuted from community property to Viola’s
19   separate property.   Hence, the estate recovered nothing.    Since
20   Edison was denied a discharge, Placides opted to not pursue their
21   nondischargeability claims against him.
22        For the suit against Edison and Viola, MLF’s fees and costs
23   totaled $124,161.80 ($106,631.25 in fees and $17,530.55 in costs).
24   The vast majority of the fees were incurred by February 2008,
25   which includes MLF’s time billed for trial.   Until January 2008,
26   Placides had made regular payments to MLF totaling approximately
27
          4
            The presiding bankruptcy judge bifurcated the trial and
28   only the 727 action went forward.

                                      -4-
 1   $39,000.   After that, Placides’s payments to MLF became sporadic.
 2   Between March and July 2008, Placides made four $5,000 payments by
 3   check to MLF, but they later stopped payment on two of the checks.
 4   All payments ceased after July 2008.     Ultimately, Placides paid
 5   MLF $49,123.96.5   About 18 months later, in January 2010, MLF sent
 6   Placides a final demand letter attempting to collect the
 7   outstanding balance, to no avail.      In May 2010, MLF sued Placides
 8   in state court for the unpaid fees and costs.     MLF incurred an
 9   additional $6,075.00 in attorney’s fees and costs for prosecuting
10   the collection action.   MLF’s collection action was stayed once
11   Placides filed a chapter 13 petition for relief on June 29, 2010.
12   B.   MLF’s proof of claim.
13        MLF timely filed its proof of claim in Placides’s bankruptcy
14   case for the unpaid attorney’s fees and costs.     MLF asserted an
15   unsecured claim for $80,869.33 ($65,061.80 in principal, plus
16   $9,732.53 interest to date, plus $6,075.00 in attorney’s fees and
17   costs incurred for the collection action).
18        Placides objected to MLF’s claim in its entirety as grossly
19   unreasonable under section 502(b)(4).     Specifically, Placides
20   contended that MLF’s total billed fees and costs of $124,161.80
21   were grossly disproportionate to their potential $82,000 recovery
22   from Edison, and MLF was not entitled to more than one third, or
23   $27,000.   As such, contended Placides, the $49,000 already paid to
24   MLF was more than sufficient to satisfy its claim.     While Placides
25   did not contest the enforceability of the Engagement Letter, they
26
27        5
            In their objection to MLF’s proof of claim, Placides
     asserted they paid MLF approximately $60,000. Placides concede on
28   appeal that they paid only $49,123.96.

                                      -5-
 1   claimed that Margulies orally represented to them that Trustee
 2   would absorb one-half of MLF’s attorney’s fees and costs.
 3   Placides also asserted that, just before trial, Margulies informed
 4   them that trial could cost them up to approximately $15,000, at
 5   which point they agreed to proceed.    Placides further argued that
 6   MLF’s collection action fees were not recoverable under California
 7   law, and that MLF’s interest figure was unsupported.
 8        MLF opposed Placides’s objection, arguing that its claim
 9   should be allowed in its entirety.     According to MLF, Placides
10   knew Edison’s estate had no assets, which is why they pursued
11   Viola and the residence; it was the only way they could get paid.
12   Yet, despite the risks, Placides wished to continue.     MLF rejected
13   Placides’s allegation that Trustee was liable for half of the fees
14   and costs.   Per the terms of the Engagement Letter, Placides knew
15   they were liable for all fees and costs whether or not the
16   residence became an asset of the estate.    MLF further contended
17   that it properly scaled its fees; they were not extravagant given
18   the complexity of the adversary with two defendants and difficult
19   family law issues.   Plus, MLF obtained a judgment for Placides.
20   Finally, MLF argued that it was entitled to attorney’s fees
21   incurred in the collection action under CAL . CIV . CODE § 1717.
22        In response, Placides argued that their lack of objection to
23   MLF’s fees and costs incurred in Edison’s adversary, or the fact
24   that MLF succeeded in representing them, was irrelevant to the
25   issue of whether MLF’s claim was unreasonable under section
26   502(b)(4).   Placides admitted to accepting the risks of
27   litigation, but argued that this did not give MLF an unlimited
28   license to bill them with unreasonable attorney’s fees and costs.

                                      -6-
 1   Placides further argued that, whether or not Trustee was to pay
 2   half of the fees and costs, no reasonable party would agree to
 3   bear all of the costs of litigation on behalf of two parties.
 4        The bankruptcy court held a hearing on Placides’s claim
 5   objection on October 28, 2010.   MLF argued that its hourly rate of
 6   $300, which it never raised during the 18 months it represented
 7   Placides, was reasonable, and Placides never objected to any
 8   invoices.   MLF further noted that it would never have represented
 9   Trustee and Edison’s estate but for the fact that it was the
10   source of funds for Placides; the residence had over $100,0006 in
11   equity, which MLF contended would have paid Placides’s $82,000
12   claim against Edison in full.    The court inquired whether all or
13   only Edison’s half of the equity was available, upon which MLF
14   responded that if the residence had been deemed community
15   property, all of the equity would have been available for Edison’s
16   estate as he did not claim an exemption.   MLF clarified that the
17   contingency arrangement was with Trustee only, if the residence
18   were recovered, but otherwise Placides agreed to pay, and were
19   responsible for, all attorney’s fees and costs.
20        In the bankruptcy court’s opinion, Placides’s silence as to
21   MLF’s fees was irrelevant to whether MLF’s fees were reasonable
22   under section 502(b)(4):
23        That’s the question. It’s not what the Debtors did or
          did not do. . . .[Y]ou are in a situation where under
24        502(b)(4), it’s sort of -- it’s almost like a strict
          scrutiny standard . . . . It’s almost like looking at
25        what an insider would charge the party, the client. So
26
          6
            Of course, the Joint Pre-Trial Stipulation indicated that
27   $300,000 of equity potentially existed, assuming plaintiffs were
     successful in recovering the residence as part of Edison’s estate.
28   See fn. 3.

                                      -7-
 1        that is your problem.   That is your burden.
 2   Hr’g Tr. (Oct. 28, 2010) at 7:15-21.
 3        MLF then argued that the cases cited by Placides, where the
 4   fees were found to be unreasonable, were cases in which debtor’s
 5   counsel was employed under sections 327 or 330, and counsel was
 6   severely depleting estate funds, which was not the case here.   The
 7   bankruptcy court rejected this argument and sustained Placides’s
 8   objection to MLF’s claim:
 9        . . . [T]he difficulty you have here now is that the
          only way you [were] ever going to recover anything close
10        to . . . the [$]82,000, was to get that real property
          brought back into the estate in some fashion, and sold
11        and enough paid off -- net . . . of all the expenses of
          sale . . . and the priority claims ahead of your client,
12        including the trustee[’s] expenses, as well as your
          attorney’s fees for the trustee . . . . Only if -- only
13        if all those things got paid, there was enough there to
          pay those and your clients. That’s the only way.
14        Otherwise, this was a losing proposition from the get
          go, I’m afraid. That’s your problem here. That’s your
15        difficulty.
16   Id. at 8:18-9:8.
17        Because at most, if you didn’t get that -- you got
          really, at most, what you could otherwise get,
18        essentially. You objected to the discharge. Well, I
          would say, okay, that’s fine, you did it. But, it
19        doesn’t result in any dollar recovery to your clients
          whatsoever. Nothing. Zero. Where are they? They are
20        just kind of back where they started. So they still
          have a claim that continues to exist against Mr. Edison.
21        But, they have not recovered anything. Nothing. No
          dollars.
22
          That is the problem. That is why you are going to lose
23        here this morning . . . . You have been paid the
          [$]49,000, it is at least [$]49,000. . . . I think
24        under the facts, I think that is reasonable.
25   Id. at 9:10-10:1.
26        . . . .
27        And you just can’t sustain your burden here to show that
          you are entitled to anything more, based on these facts.
28        Based on what the Debtors had -- the prospect of winning

                                     -8-
 1        it from the get go.
 2   Id. at 10:15-18.
          . . . .
 3
          So, I am going to find that [the claim] is unreasonable
 4        to the extent you want any more monies than what you’re
          [sic] firm has been paid, so I am going to sustain the
 5        objection.
 6   Id. at 12:1-3.
 7        In response to the court’s decision, MLF reiterated that the
 8   equity in the residence was significant and would have paid
 9   Placides in full.   The court paused and asked where in the record
10   was the evidence to prove this fact.   MLF responded that it was in
11   the complaint, which was attached as an exhibit to MLF’s
12   opposition.   The court rejected an allegation in a complaint as
13   evidence; it needed to know the value of the residence, the
14   existing liens, and the amount of administrative expenses
15   involved.
16        MLF then inquired if the court was holding that attorneys
17   should never be entitled to fees when representing creditors in
18   discharge actions because all that can be recovered is a judgment,
19   which the court valued as worthless and a “pyrrhic victory.”    The
20   court rejected MLF’s assumption and expressed its understanding of
21   MLF’s plight, but stated that attorneys in such actions must
22   assume the risk of not getting paid.
23        The bankruptcy court entered an order on November 5, 2010,
24   sustaining Placides’s objection to MLF’s claim for $80,869.33 and
25   disallowing it in its entirety pursuant to section 502(b)(4).
26   This timely appeal followed.
27                              II. JURISDICTION
28        The bankruptcy court had jurisdiction pursuant to 28 U.S.C.

                                      -9-
 1   §§ 1334 and 157(b)(2)(B).   We have jurisdiction pursuant to
 2   28 U.S.C. § 158.
 3                                III. ISSUES
 4   1.   Was the bankruptcy court correct to apply section 502(b)(4)
 5   to MLF’s claim and impose a reasonableness standard to its fees?
 6   2.   Did the bankruptcy court err by shifting the burden to MLF to
 7   prove the validity of its claim?
 8   3.   Did the bankruptcy court abuse its discretion in disallowing
 9   as unreasonable MLF’s $80,869.33 claim for prepetition attorney's
10   fees?
11                          IV. STANDARDS OF REVIEW
12        The proper interpretations of statutes and rules are legal
13   questions that we review de novo.   Heath v. Am. Express Travel
14   Related Servs. Co., Inc. (In re Heath), 331 B.R. 424, 428 (9th
15   Cir. BAP 2005).    Whether compliance with a given statute or rule
16   has been established is generally a question of fact, which we
17   review for clear error.   Id.
18        The bankruptcy court’s allocation of the burden of proof is a
19   conclusion of law we review de novo.     People’s Ins. Co. of China
20   v. M/V Damodar Tanabe, 903 F.2d 675, 682 (9th Cir. 1990).
21        We review an order disallowing as unreasonable claims for
22   prepetition attorney’s fees or insider payments under section
23   502(b)(4) for an abuse of discretion.7     To determine whether the
24   bankruptcy court abused its discretion, we conduct a two-step
25
             7
            We, like the Panel in Segovia v. Bach Constr., Inc. (In re
26   Segovia), 2008 WL 8462967, at *4 n.16 (9th Cir. BAP Oct. 22,
     2008), could not locate a standard of review for orders
27   disallowing as unreasonable claims for prepetition attorney’s fees
     or insider payments under section 502(b)(4). However, we agree
28   that an abuse of discretion standard would apply.

                                      -10-
 1   inquiry: (1) we review de novo whether the bankruptcy court
 2   “identified the correct legal rule to apply to the relief
 3   requested” and (2) if it did, whether the bankruptcy court's
 4   application of the legal standard was illogical, implausible or
 5   “without support in inferences that may be drawn from the facts in
 6   the record.”    United States v. Hinkson, 585 F.3d 1247, 1261-62
 7   (9th Cir. 2009) (en banc).
 8                                V. DISCUSSION
 9   A.   MLF’s claim for prepetition attorney’s fees was subject to
          section 502(b)(4).
10
11         A proof of claim is deemed allowed and constitutes prima
12   facie evidence of the claim's validity and amount unless a party
13   in interest objects.   Section 502(a); Lundell v. Anchor Constr.
14   Specialists, Inc. (In re Lundell), 223 F.3d 1035, 1039 (9th Cir.
15   2000); Rule 3001(f).   Placides never disputed MLF’s right to
16   attorney’s fees and costs under the Engagement Letter.   “Because a
17   pre-bankruptcy contractual obligation of a debtor to an attorney
18   is like any other contract claim against the estate, the attorney
19   can assert the claim in bankruptcy.”    Yermakov v. Fitzsimmons
20   (In re Yermakov), 718 F.2d 1465, 1470 (9th Cir. 1983).   While
21   state law governs MLF’s rights under the Engagement Letter,
22   bankruptcy law governs the allowance of MLF’s claim against
23   Placides’s estate.   See Butner v. United States, 440 U.S. 48,
24   54-55 (1979).
25        MLF’s claim for attorney’s fees and costs may be allowed only
26   to the extent they are reasonable as determined under federal law.
27   Landsing Diversified Props.–II v. First Nat'l Bank & Trust Co. of
28   Tulsa (In re W. Real Estate Fund, Inc.), 922 F.2d 592, 597 (10th

                                      -11-
 1   Cir. 1991).   Section 502(b)(4) provides that a prepetition claim
 2   for services performed by an attorney or insider of the debtor
 3   shall be disallowed to the extent the claim exceeds the reasonable
 4   value of the services provided.      Thus, “the excess amount of the
 5   claim beyond such reasonable value fixed by the court is simply
 6   disallowed and may not, therefore, share in the distribution of
 7   the debtor’s assets.”   4 COLLIER   ON   BANKRUPTCY ¶ 502.03[5][c] (Alan N.
 8   Resnick & Henry J. Sommer eds., 16th ed. 2009).
 9        On appeal, MLF contends that a reasonableness standard does
10   not apply to its fees, but rather the contract amount controls.
11   Specifically, MLF argues that a reasonableness standard should not
12   apply because it provided services to Placides almost two years
13   prepetition, the services had nothing to do with Placides’s
14   bankruptcy, and Placides represented that they had every intention
15   of paying.    Like the bankruptcy court, we reject this argument.
16        Contrary to MLF’s contention, section 502(b)(4) covers unpaid
17   claims for services of an attorney “whether or not the services
18   were rendered in contemplation of the filing of the petition or,
19   indeed, whether those services had even anything to do with
20   bankruptcy or the debtor’s financial affairs.”         Id. at
21   ¶ 502.03[5][c][I]; In re Gutierrez, 309 B.R. 488, 493 (Bankr. W.D.
22   Tex. 2004) (a reasonableness standard under “[s]ection 502(b)(4)
23   applies to all claims for attorneys’ fees owed by a debtor prior
24   to the filing of the case in which the claim is made, whether that
25   claim be for representing the debtor in a prior bankruptcy case,
26   or for representing the debtor in any other capacity (personal
27   injury, state court litigation, probate matters, tax advice, etc.
28   etc.”) (emphasis in original); Sticka v. Geller (In re Stratton),

                                         -12-
 1   299 B.R. 616, 623 (Bankr. D. Or. 2003) (same).    Thus, MLF’s claim
 2   for prepetition attorney’s fees falls squarely under section
 3   502(b)(4) and is subject to a reasonableness determination,
 4   regardless of the amount to which MLF is entitled under the
 5   Engagement Letter.
 6
     B.   The bankruptcy court properly shifted the burden of proof to
 7        MLF.
 8        MLF contends that the bankruptcy court erred by improperly
 9   shifting the burden to MLF to support the validity of its claim
10   because Placides merely lodged an objection without providing any
11   evidence to defeat it.   We disagree.
12        To defeat a prima facie valid claim under section 502, “the
13   objector must come forward with sufficient evidence and ‘show
14   facts tending to defeat the claim by probative force equal to that
15   of the allegations of the proofs of claim themselves.’” In re
16   Lundell, 223 F.3d at 1039 (quoting Wright v. Holm (In re Holm),
17   931 F.2d 620, 623 (9th Cir. 1991)).     “‘If the objector produces
18   sufficient evidence to negate one or more of the sworn facts in
19   the proof of claim, the burden reverts to the claimant to prove
20   the validity of the claim by a preponderance of the evidence.’”
21   Id. (citations omitted).   “The ultimate burden of persuasion
22   remains at all times upon the claimant.”    Id.
23        Under section 502(b)(4), the claimant attorney or insider
24   bears the burden of proof on the question of reasonableness of
25   compensation for services.   In re Siller, 427 B.R. 872, 881
26   (Bankr. E.D. Cal. 2010); In re Boulder Crossroads, LLC, 2010 WL
27   4924745, at *13 (Bankr. W.D. Tex. Dec. 1, 2010); Faulkner v.
28   Canada (In re Heritage Org., LLC), 2006 WL 6508182, at *8 (Bankr

                                     -13-
 1   N.D. Tex. Jan. 6, 2006) (citing cases).   Mr. Placide, in his
 2   declaration in support of Placides’s objection to MLF’s claim,
 3   testified that Margulies had represented that the attorney’s fees
 4   and costs in Edison’s adversary proceeding would be distributed
 5   equally between Placides and Trustee.   Trustee, as near as we can
 6   tell, has not affirmed or disputed this fact.   Further, Placides
 7   put at issue the reasonableness of MLF’s fees, which were
 8   significantly in excess of the amount of Placides’s maximum
 9   possible recovery of $82,000.    These facts provided probative
10   evidence to negate the legal sufficiency of MLF’s claim, or at
11   least sufficiently question the reasonableness of MLF’s fees.
12   Accordingly, the bankruptcy court did not impermissibly shift the
13   burden of proof to MLF.
14   C.   Determination of Reasonableness of Attorney’s Fees.
15        The reasonableness of attorney’s fees under section 502(b)(4)
16   is a question of federal law.    Schoenmann v. Bach Constr., Inc.
17   (In re Segovia), 387 B.R. 773, 779 (Bankr. N.D. Cal. 2008), aff’d,
18   2008 WL 8462967, at *6 (9th Cir. BAP Oct. 22, 2008); In re W. Real
19   Estate Fund, 922 F.2d at 597; In re Siller, 427 B.R. at 880.
20   Bankruptcy courts have wide discretion in determining the
21   reasonableness of fees, and the appellate court will not overturn
22   the bankruptcy court's decision unless it abused its discretion.
23   Law Offices of David A. Boone v. Derham–Burk (In re Eliapo), 468
24   F.3d 592, 596 (9th Cir. 2006).
25        In the Ninth Circuit, the primary method used to determine a
26   reasonable fee in bankruptcy cases is to calculate the lodestar.
27   In re Yermakov, 718 F.2d at 1471.   A court computes the lodestar
28   by multiplying the number of hours reasonably expended by a

                                      -14-
 1   reasonable hourly rate.   Id.   However, the Ninth Circuit and this
 2   Panel have made it clear that a court may depart from the lodestar
 3   method where appropriate.   See Unsecured Creditors’ Comm. v. Puget
 4   Sound Plywood, Inc., 924 F.2d 955, 960, 961 (9th Cir. 1991)
 5   (lodestar approach not mandated in all cases and court may employ
 6   alternative approaches where appropriate); Digesti & Peck v.
 7   Kitchen Factors, Inc. (In re Kitchen Factors, Inc.), 143 B.R. 560,
 8   562 (9th Cir. BAP 1992) (lodestar method is primary approach but
 9   is not exclusive method).
10          In Kitchen Factors, the Panel held that a court may abandon
11   the lodestar approach in determining reasonable fees where the
12   “time spent by counsel is not helpful because it is grossly
13   disproportionate to the amounts at stake.”   143 B.R. at 562.
14   “‘Absent unusual circumstances, an attorney must scale his or her
15   fee at least to the reasonably expected recovery.’”   Id. (quoting
16   Puget Sound Plywood, 924 F.2d at 961).   “A claim for attorneys
17   fees is unreasonable under federal law to the extent the attorney
18   seeks fees that are disproportionate to the likely recovery.”
19   Segovia, 387 B.R. at 779.
20          We recognize that Puget Sound Plywood and Kitchen Factors
21   were dealing with reasonableness of attorney’s fees under section
22   330.   We also recognize the difference between being an attorney
23   employed by the estate and being an attorney employed by a non-
24   debtor private client.    Under the former, counsel is seeking
25   payment from the estate; under the latter, counsel is seeking
26   payment from a private client.   If a private client wishes to
27   waste his own money pursuing litigation which may not be cost-
28   effective, that is his choice.   See In re Kitchen Factors,

                                      -15-
 1   143 B.R. at 562-63.   However, once that client files a bankruptcy
 2   petition, counsel’s claim for fees is limited to a reasonable
 3   amount, in the same fashion as the claim for an estate
 4   professional under section 330.    Therefore, we believe the same
 5   reasonableness standard set forth in section 330 should govern an
 6   attorney’s claim for fees under 502(b)(4).   See In re Segovia,
 7   387 B.R. at 779, aff’d, 2008 WL 8462967, at *6 (reasoning same);
 8   In re Nelson, 206 B.R. 869, 882 (Bankr. N.D. Ohio 1997) (same).
 9        Although not expressly stated, the bankruptcy court departed
10   from the lodestar method and employed a method more like the one
11   set forth in Puget Sound Plywood and Kitchen Factors.    It focused
12   on the $82,000 at stake for Placides and the approximate $125,000-
13   plus MLF billed Placides in its effort to recover that $82,000.
14   To the extent MLF argues that the bankruptcy court erred in
15   choosing an alternative method to determine the reasonableness of
16   its fee, we disagree.   Because of the disproportionate nature of
17   MLF’s fees to Placides’s reasonably expected recovery, the court
18   was free to depart from lodestar and use an alternative method.
19   In re Kitchen Factors, 143 B.R. at 562; Puget Sound Plywood,
20   924 F.2d at 961.
21        In its reasonableness determination, the bankruptcy court
22   found that, prepetition, Placides paid MLF approximately $49,000.
23   It further found that $49,000 was the reasonable value of MLF’s
24   services for representing Placides in pursuing their $82,000 claim
25   against Edison, considering that Placides had no prospect of
26   recovering anything from Edison unless they could get the
27   residence into the estate, and, even then, insufficient equity
28   (net of costs) existed to pay Placides’s $82,000 claim in full.

                                       -16-
 1   The court considered Placides’s preserved $82,000 judgment against
 2   Edison to be valueless because they had not recovered any money.
 3   Ultimately, the court found MLF’s claim for an additional
 4   $80,869.33 in prepetition attorney’s fees and costs was
 5   unreasonable, and it disallowed MLF’s claim in its entirety.
 6        MLF contends that its fees were reasonable and proper given
 7   the complexity of the adversary, and that it exercised appropriate
 8   billing judgment.   MLF asserts that Placides wanted to proceed
 9   against Edison and Viola because they had a significant chance, if
10   not 100%, of recovering on their $82,000 claim if the estate
11   recovered the residence.   Therefore, MLF contends that its claim
12   should be allowed in its entirety, particularly since Placides
13   never objected to MLF’s fees throughout the course of the
14   litigation.   In sum, MLF contends that the bankruptcy court erred
15   by awarding MLF only $49,000, almost $18,000 of which was
16   attributable to costs, for 375 hours of work that resulted in
17   success for Placides.   MLF also contends that the bankruptcy court
18   did not know what amount Placides had paid to MLF, what amount
19   remained due, and what sums were only reimbursements for costs MLF
20   advanced on behalf of Placides; thus, it could not make a
21   reasonableness determination.
22        We reject MLF’s contention that the bankruptcy court was
23   unable to make a reasonableness determination because it had
24   insufficient information about the accounting of the fees and
25   costs.   At the hearing, the court correctly found that Placides
26   had paid MLF approximately $49,000.    MLF clearly stated in its
27   opposition to Placides’s claim objection what amount remained
28   unpaid, and Margulies further stated at the hearing how the

                                     -17-
 1   $49,000 was allocated between costs and fees.   The record reflects
 2   that the bankruptcy court knew exactly what amount had been paid,
 3   how much was outstanding, and that it considered Margulies’
 4   statement regarding the allocation of the $49,000.   As such, it
 5   was able to make a reasonableness determination.    It simply
 6   rejected MLF’s argument.
 7        We also reject, as did the bankruptcy court, MLF’s contention
 8   that Placides’s lack of prepetition objection to MLF’s fees means
 9   that its claim should be allowed in its entirety.    As we stated
10   above, regardless of what MLF may be entitled to under the
11   Engagement Letter, its fees are subject to a reasonableness
12   determination under section 502(b)(4).   In re W. Real Estate Fund,
13   Inc., 922 F.2d at 597; In re Segovia, 387 B.R. at 779, aff'd, 2008
14   WL 8462967; In re Siller, 427 B.R. at 880.
15        However, we disagree with the bankruptcy court that
16   Placides’s suit against Edison and Viola was a “losing proposition
17   from the get go.”   In the Joint Pre-Trial Stipulation filed in
18   December 2007, Edison and Viola, who were still married at the
19   time, admitted at least $300,000 in equity existed in the
20   residence, which was purchased in 1972 with community funds.    The
21   only encumbrance on the residence was a mortgage for $104,000.
22   Placides were Edison’s largest unsecured creditor holding 96% of
23   the unsecured debt.   Edison had a priority IRS tax claim for about
24   $6,000.   MLF included the Joint Pre-Trial Stipulation in its
25   opposition to Placides’s claim objection.
26        Given the above facts, at the time Placides and Trustee filed
27   suit against Edison and Viola the case looked very promising.     Had
28   the estate recovered the residence, Placides’s claim for $82,000

                                     -18-
 1   against Edison, plus any attorney’s fees and costs preserved in
 2   the judgment, likely would have been satisfied.   Unfortunately,
 3   MLF never articulated in its opposition brief how much equity was
 4   in the residence, but stated merely that it had “significant”
 5   equity.   For reasons unknown, Margulies stated at the claim
 6   objection hearing that the residence had only $100,000 in equity.8
 7   When asked where this evidence was in the record, Margulies
 8   erroneously stated that it was in the adversary complaint, which
 9   the court correctly rejected as evidence.
10        The bankruptcy court was faced with a factual issue of how
11   much equity existed in the residence, $100,000 or $300,000, in
12   determining the reasonableness of MLF’s attorney’s fees.   Based on
13   the evidence presented to the bankruptcy court on this matter,
14   considering the reasonableness of the fees in connection with a
15   potential $100,000 recovery by Placides was not clear error.    Even
16   if Placides had been paid in full, MLF still failed to scale its
17   fees to something more in proportion with what Placides could
18   reasonably recover.   In re Kitchen Factors, 143 B.R. at 562; Puget
19   Sound Plywood, 924 F.2d at 961.    Therefore, the bankruptcy court
20   did not clearly err in finding that $125,000-plus in attorney’s
21   fees and costs incurred for a recovery that could never have been
22   more than $82,000 was unreasonable, and that $49,000 was a
23   reasonable fee.
24                              VI. CONCLUSION
25        No one disputes the excellent work by MLF, and perhaps we
26
          8
            Margulies asserted to the Panel at oral argument that
27   $300,000 equity existed in the residence, and the evidence to
     support this fact could be found in the Joint Pre-Trial
28   Stipulation.

                                       -19-
 1   each individually would have arrived at a different figure and
 2   allowed MLF’s claim in part.   However, given the wide discretion
 3   afforded bankruptcy courts in determining reasonableness of
 4   prepetition attorney’s fees under section 502(b)(4), we cannot say
 5   that the court here abused its discretion in disallowing as
 6   unreasonable MLF’s claim for $80,869.33.   In re Eliapo, 468 F.3d
 7   at 596.   Accordingly, we AFFIRM.
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