In re Hines, 147 F.3d 1185 (9th Cir. 1998)

Decided July 16, 1998 by the Bankruptcy Appellate Panel in the Ninth Circuit

In this case, the Ninth Circuit appellate court asserted a “doctrine of necessity” to hold that if legal services are rendered after the petition is filed, the resulting attorney’s fees are not subject to the automatic stay or discharge injunction:

Needless to say, the optimum solution to the problem would call for action by Congress to provide express statutory authority and an express procedure for the compensation of Chapter 7 debtors’ attorneys who render post-petition services.

But because Congress has failed to correct that oversight in express terms, we are compelled to consider an appropriate judicial response — one that recognizes that the very administration of the bankruptcy system requires that attorneys for Chapter 7 debtors must have a legally enforceable right for their post-petition services that were contracted for before filing of the petition. If the absence of such a right were to become the law, it does not require much thought to recognize that the entire system would suffer a massive breakdown. In our view the required recognition of such a right, essentially a doctrine of necessity, is best implemented by a holding that all claims for lawyers’ compensation stemming from such post-petition services actually provided to the debtor really do not fall within the automatic stay provisions of Section 362(a)(6) or the discharge provisions of Section 727.

Only the Ninth Circuit relies upon a “doctrine of necessity” to hold that postpetition attorney fees are not dischargeable, so this precedent only holds in the Ninth Circuit.

Indeed, one of the judges in the Hines case, Judge A. Wallace Tashima, while concurring in his opinion, disagreed with the majority’s assertion of a “doctrine of necessity.” Indeed, his concurring opinion reached the same conclusion as the majority, without relying on that doctrine:

What is so strange about today’s opinion is that this judicial legislating is unnecessary. Indeed, … the majority… concedes that “[t]here is a possible alternative that could lead to the same destination.” Section 727 permits the discharge only of claims against the estate, and §362(a)(6) stays efforts to collect only on claims against the estate. As the majority acknowledges, a prepetition contract for post-petition legal services does not give the attorney a claim against the estate. Under 11 U.S.C. §101(5)(A), a “claim” includes any contingent right to payment, but it is a plausible reading of that section that the contingency referred to cannot be one party’s decision to perform on the contract. Thus, the attorney in this case accrued a “claim” only when he actually provided the post-petition services for which the debtor agreed to pay him; therefore, his “claim” is not a prepetition claim against the estate but a post-petition claim against the debtor herself. Accordingly, it is entirely unnecessary to manufacture an exception to §362(a)(6) and 727 because those sections are not even implicated. …

Thus, I concur only in the court’s ultimate holding that the BAP’s finding that [the bankruptcy attorney] willfully violated the automatic stay must be reversed. … The automatic stay simply does not apply to this postpetition claim.

This decision has often been criticized, including by the Seventh Circuit Court of Appeals in the Bethea v. Robert J. Adams Associates, 352 F.3d 1125 (7th Cir. 2003) case:

[W]e do not conceive revision of the Code as a proper part of the judicial job. The Bankruptcy Code is a complex compromise among debtors and different kinds of creditors; tilting it to help one of these interests is unwarranted. … Judges are not entitled to override the legislative approach with a lawyer-centric public policy that puts members of their own social class higher in the priority list at the expense of other creditors, or of the debtors themselves.

Since other circuits have not relied on a “doctrine of necessity” to support the non-dischargeability of postpetition attorney fees, this case is mainly cited as a general sign of judicial support of postpetition payment for postpetition services.

However, in the Ninth Circuit, this precedent can allow attorneys to charge postpetition for services done postpetition, even if the attorney only has a single contract that the debtor signs prepetition. For instance, in the EDCA, Local Rule 2016-3 states that as long as certain conditions are met, “It shall be deemed presumptively reasonable to charge one-third of the total attorneys’ fees pre-petition for pre-petition services,” leaving two-thirds of total attorneys’ fees available to be paid by the debtor postpetition.

Here is the full Hines opinion to read or download: