That Attorneys’ Fee Clause In Your Loan Documents Is Not A Blank Check in Bankruptcy

By Nina Javan

There have recently been some drastically different outcomes for secured lenders seeking to recover their attorneys’ fees in bankruptcy matters.  In a January case before a Texas Bankruptcy Court, a fully secured (i.e., not undersecured) lender had two clauses in the loan agreement which shifted fees to the debtor-borrower. One required the borrower to pay all of the lender’s “reasonable expenses” in connection with the loan agreement, and the other called on the borrower to pay “all costs and expenses,” including attorneys’ fees, in “any action” to enforce the lender’s rights following default.  Due to its fully secured status, the lender was entitled to recover its “reasonable” fees and costs under Section 506(b) of the Bankruptcy Code.

When the time came to seek approval of fees, the debtor’s counsel sought approximately $36,000 for attorney’s fees, while the equivalent request by the lender was more than $62,000. While the court acknowledged that the discrepancy would normally be problematic, the judge noted that it was the debtor’s own actions that prompted the need for the lender to take such an active role and allowed the fees.

In contrast, in a February decision coming from a Colorado Bankruptcy Court, a comfortably oversecured lender with a lien on all real and personal property (which was thus entitled to the same allowance of fees under Section 506(b) of the Bankruptcy Code to which the lender in Texas case was entitled).  At the end of the case, the lender sought allowance of $158,000.00 in attorneys’ fees, which the judge cut by seventy percent (70%), noting that there was

“little evidence of billing judgment exercised by the Law Firm.” She recounted how the firm “used two partner-level attorneys to appear at hearings in which there was no real dispute, and neither attorney’s time was discounted to avoid duplication.” She also said that the firm “aggressively pursued matters that had a low likelihood of success and did not discount the fees incurred to reflect the ultimate lack of success and lack of benefit to either the bankruptcy estate or the Bank.”

Regarding client oversight, . . . [the Judge] said that the bank “exercised no judgment when deciding whether to approve the Law Firm’s work and payment of the Law Firm’s fees . . . . The Bank is not free to abandon that review when it is passing along the costs to its customers.”

In re Sirios, 20-16709 (Bankr. D. Colo. Jan. 5, 2024).

The takeaway for financial institutions is that, even if they’re protected by a robust attorneys’ fee provision and have equity to spare, they need to be sure that the actions they’re taking in terms of approving legal work and strategy are necessary and warranted under the circumstances.

Subscribe for Updates

Want the latest news and insights from the world of financial institutions delivered directly to your inbox? Enter your information below to be notified by email whenever SWM Lessons is updated.

  • This field is for validation purposes and should be left unchanged.
Search the Blog
Want to Learn more?

Reach out today to discover how we can help.