A Cautionary Tale on Attorneys' Fees

Fee shifting provisions requiring one party to a commercial agreement to pay the other side's attorneys' fees in the event of litigation over a breach of the agreement have become ubiquitous in New York commercial practice. Suffolk County Commercial Division Justice Thomas F. Whelan’s September 11, 2013, decision in RMP Capital, Corp. v. Victory Jet, LLC, 2013 NY Slip Op. 51543(U), provides a textbook example of what happens when a party wins the liability battle but loses the fee shifting war due to an insufficiently documented fee application, and provides commercial litigators in New York with a road map for submitting a properly documented fee application.

The plaintiff is a factoring company that obtained summary judgment against individuals who had guaranteed the debt of a corporation that filed for Chapter 7 bankruptcy protection. The guaranty instruments required the guarantors to pay the plaintiff's attorneys' fees in any successful litigation to enforce the guaranties. Plaintiff submitted a fee application for $68,389; Justice Whelan reduced the application by roughly 36%, to $43,563.

Justice Whelan identified several deficiencies in plaintiff’s fee application, which consisted of an affidavit from plaintiff's counsel and counsel's bills. First, because plaintiff failed to submit any documentation concerning the prevailing hourly rates of attorneys in the Suffolk County legal community, Justice Whelan reduced the hourly rates of two partners from $415 and $400 to $375 and $350, reduced the hourly rates of three associates from $385, $375, $350, to $280, $250, and $250, reduced the hourly rate of a newly admitted associate from $325 to $150, and reduced the hourly rate of a paralegal from $150 to $80. In making these reductions, Justice Whelan relied on federal cases from the Eastern District of New York discussing hourly rates for similarly situated attorneys. This should serve as a valuable reminder to attorneys based in New York County that the reasonable hourly rate applied by New York courts in deciding fee applications is not the prevailing rate in the county where the prevailing party's counsel is located but the prevailing rate in the county where the case is venued.

Second, Justice Whelan directed an across-the-board 25% reduction in the amount of hours billed by plaintiff's counsel. This reduction was attributed to the facts that (i) while plaintiff prevailed on liability, it was only partially successful in obtaining the damages it sought, (ii) plaintiff's legal bills used "block billing," i.e. the daily entries for each timekeeper that contained multiple tasks did not indicate how much time was spent on each task, (iii) travel time should be reimbursed at half of counsel's normal billing rate, and (iv) several billing entries were so vague as to make it impossible to determine exactly what the timekeeper did or whether what was done was reasonable (e.g., "issues," "work on case," "litigation," "e-mails," "phone calls," etc.).

In counsel’s defense, the bills submitted to Justice Whelan were apparently paid by plaintiff without objection. Indeed, the bills submitted were likely similar to the bills sent by most commercial litigators in New York. The valuable lesson to be learned from Justice Whelan's decision is that when a New York commercial litigator knows that he will likely be seeking fees in a case based on a fee shifting provision, his or her bills will not only be reviewed by the client but will also be heavily scrutinized by the Court and opposing counsel. Under these circumstances, attorneys should avoid block billing, and instead provide written descriptions that are far more detailed than most clients require. In the absence of such prior planning, a commercial litigator risks the court issuing a decision like Justice Whelan's, in which the court finds that a substantial portion of the fee claimed is unreasonable and in which the court repeatedly criticizes the reasonableness of the hourly rates and hours billed, which could in turn lead to the client requesting a refund of the disallowed fees. Indeed, before submitting a fee application, the attorney should decide whether the amount of time spent litigating the reasonableness of the fees sought may exceed the amount of fees ultimately recovered. In some cases, it may be more cost effective not to apply for the fees or to try to reach an agreement with opposing counsel on the amount of the fees even if doing so requires accepting a reduced fee amount.