So, you are a plaintiffs’ lawyer with an ironclad contingency fee agreement and you have done significant work. Should you feel good about your potential fee even with a great case? Maybe not.
What happens if a bankruptcy intervenes? In these circumstances, the bankruptcy trustee or parties granted standing may be substituted in as the “real party in interest” to prosecute pre-bankruptcy litigation claims constituting property of the bankruptcy estate through bankruptcy court-appointed litigation counsel. Pre-petition plaintiffs’ litigation counsel might attempt to recover fees and costs from the estate under the “common fund doctrine,” in contravention of the Bankruptcy Code distribution scheme. This article examines the application of the common fund doctrine in this context and suggests options available to pre-petition and bankruptcy litigation counsel.
The Common Fund Doctrine Cannot Circumvent Bankruptcy Code Distribution Scheme
Generally, under the common fund doctrine, “a litigant or a lawyer who recovers a common fund for the benefit of persons other than himself or his client is entitled to a reasonable attorney’s fee from the fund as a whole.” Boeing Co. v. Van Gemert, 444 U.S. 472, 478 (1980). “The [common fund] doctrine rests on the perception that persons who obtain the benefit of a lawsuit without contributing to its cost are unjustly enriched.” Id.; Mills v. Electric Auto-Lite Co., 396 U.S. 375, 392 (1970).
However, the vast majority of courts have consistently found that the common fund doctrine cannot be utilized to circumvent the Bankruptcy Code priority distribution scheme. See, e.g., In re J.H. Inv. Servs., Inc., 418 B.R. 413 (M.D. Fla. 2009) aff’d in part, rev’d in part on other grounds, 413 F. App’x 142 (11th Cir. 2011); In re Patton, 358 B.R. 911 (Bankr. S.D. Tex. 2007); In re Plaza, 363 B.R. 517 (Bankr. S.D. Tex. 2007); In re Coron, Inc., 161 B.R. 449 (Bankr. N.D. Ill. 1993); In re Darby Lumber, Inc., 2007 WL 2253568 (Bankr. D. Mont. Aug. 2, 2007); In re Camp, 2008 WL 2002742 at *3 (Bankr. M.D. Ala. May 8, 2008).
Indeed, the “common fund doctrine only determines whether and how much an attorney should be paid for the work that produced the common fund. It does not establish the priority of that entitlement vis-à-vis other creditors of a bankrupt estate . . . [A]warding priority based on the common fund doctrine is not consistent with the priority scheme set out in the Bankruptcy Code. Any such inconsistency must be settled in favor of the Code.” J.H. Inv. Servs., 418 B.R. at 426 (quoting Patton, 358 B.R. at 915).
Pre-petition attorneys’ fees and costs generally do not qualify as administrative expenses entitled to priority under Section 503(b) of the Bankruptcy Code. Rather, “only postpetition expenses, not prepetition expenses, may qualify as administrative expenses.” In re Hackney, 351 B.R. 179, 184 (Bankr. N.D. Ala. 2006) (citing Alchar Hardware, 759 F.2d 867 (11th Cir. 1985); N.P. Mining, 963 F.2d 1449 (11th Cir. 1992)); Camp, 2008 WL 2002742 at *2 (same).
In Chapter 11 cases, some latitude may exist to award fees and costs to pre-petition plaintiffs’ counsel for a “substantial contribution” to the Chapter 11 case.
Substantial contribution, however, cannot exist in a Chapter 7 case pursuant to the express language of Section 503(b)(3)(D) of the Bankruptcy Code, which limits substantial contribution to Chapter 9 and 11 cases because successful “reorganizations” frequently involve contributions of multiple parties. Hackney, 351 B.R. at 202-205 (citing cases). In Chapter 7 liquidation cases, “it is ultimately immaterial whether the common fund doctrine applies” — “the result would be the same. If the doctrine applies, [the attorney] is entitled to a claim against the fund amount for his … fee. Such a claim would still be pre-petition and unsecured.” Patton, 358 B.R. at 915; see also Camp, 2008 WL 2002742 at *3. Equity does not change this result, as bankruptcy creditors are often not paid in full. Patton, 358 B.R. at 916; J.H. Inv. Servs., 418 B.R. at 426; Plaza, 363 B.R. at 524.
Thus, even if pre-petition plaintiffs’ litigation counsel can satisfy the requirements for application of the common fund doctrine outside of bankruptcy, the Bankruptcy Code priority scheme controls. In a Chapter 7 case, at best, pre-petition plaintiffs’ counsel may have a general unsecured claim.
Practical Tips for Pre-Petition Plaintiffs’ Litigation Counsel
Based on the foregoing, pre-petition plaintiffs’ litigation counsel may maximize recovery of attorneys’ fees and costs from the bankruptcy estate by:
- Filing an appearance or requesting service to ensure notice of material matters, including the claims bar date
- Timely filing a proof of claim
- In Chapter 11 or 9 cases, analyzing any basis for a “substantial contribution” claim pursuant to Bankruptcy Code Section 503(b)(3)(D)
- Analyzing the possibility of obtaining derivative standing to pursue pre-petition litigation claims under certain limited circumstances
Practical Tips for Bankruptcy Litigation Counsel
Bankruptcy litigation counsel, on behalf of the estate or trustee, may maximize recovery and avoid objection to payment of attorneys’ fees and costs earned pursuant to a bankruptcy court-approved fee arrangement, and ensure proper classification of pre-petition plaintiffs’ litigation counsel attorneys’ fees and costs, by:
- Filing a suggestion of bankruptcy in pending pre-petition litigation and/or enforcing the automatic stay injunction
- Serving pre-petition plaintiffs’ litigation counsel with all pleadings, filings, notices, and orders in the bankruptcy case and any removed litigation actions constituting property of the estate, including those relating to employment of and payment of compensation to estate professionals and bankruptcy litigation counsel, even if counsel is not listed as a creditor of the estate and has not filed a proof of claim
- Analyzing pre-petition plaintiffs litigation counsel’s proof of claim to ensure compliance with the Bankruptcy Code distribution scheme.
By Marilee A. Mark
Genovese Joblove & Battista
100 SE 2nd St., 44th Floor
Miami, FL 33131
South Florida Legal Guide 2015 Edition