Contributed by Katherine Doorley
As part of the Weil Bankruptcy Blog’s series on the recently released ABI Commission Report, we previously discussed the ABI Commissions’ recommendations on management and oversight of cases in chapter 11. In this entry we turn to the often debated topic of professional fees and the costs of complex chapter 11 cases.
Professionals and Compensation Issues
The ABI Commission made several proposals concerning “nonbankruptcy professionals,” defined as professionals who do not work on matters that affect the rights of creditors and other stakeholders in the estate and do not address the claims of these parties or the allocation of estate assets. These are professionals the debtor company would likely have retained even if the debtor had not filed for, or been preparing to file for, chapter 11. Currently, such professionals are generally retained as “ordinary course professionals” and have their fees subject to outside limits for both monthly periods and the case as a whole. If an ordinary course professional exceeds those caps, the debtor generally is required to seek to retain the professional under section 327 of the Bankruptcy Code, and the professional is then subject to the same fee application requirements as estate professionals.
The ABI Commission recommended that the Bankruptcy Code be amended to specifically provide that only chapter 11 professionals, and not nonbankruptcy professionals, be subject to the retention and compensation standards of sections 327 and 330 of the Bankruptcy Code. The Commissioners did not believe that the services provided by nonbankruptcy professionals and the typical compensation provided to those professionals warranted the time and expenses associated with complying with sections 327 and 330. Recognizing, however, that the work of nonbankruptcy professionals could potentially have an impact on the value of the estate or the debtor, the ABI Commission would continue to require disclosure of the name of and nature of services provided by each nonbankruptcy professional. Parties in interest would also have an opportunity to object to the classification of a professional as a nonbankruptcy professional.
The ABI Commission also recommended that professionals retained by the debtor or any statutory committee should not be considered fiduciaries of the estate; rather, they owe fiduciary duties to their respective clients.
Finally, the ABI Commission considered whether professionals retained by secured creditors or ad hoc committees and whose fees are paid by the chapter 11 estates should have their professional fees and expenses subject to the fee application process. The Commissioners ultimately concluded that, while these professionals should not be subject to the formal fee application process, their fees should be subject to the same reasonableness standard of section 330(a) of the Bankruptcy Code as the fees of other professionals.
The ABI Commission supported codifying the Barton doctrine, which stems out of the case of Barton v. Barbour, where the U.S. Supreme Court confirmed the “general rule that before [a] suit is brought against a receiver leave of the court by which he was appointed must be obtained.” Courts have subsequently extended the Barton rule to other officers of the court, including trustees in bankruptcy. The Commission would clarify its scope and application to trustees, estate neutrals, and statutory committees and extend the Barton doctrine to any professionals retained by any trustee, estate neutral or statutory committee or its members, to the extent that the litigation involves the professionals’ representation of such party in a fiduciary capacity.
Costs in Chapter 11 Cases
Attorneys’ fees and costs of large chapter 11 cases have been reported on and criticized in the media and elsewhere. Indeed, last year the U.S. Trustee released newly revised fee guidelines, as an effort, at least in part, to control fees and provide for additional disclosure in so-called “mega cases.” The ABI Commission acknowledged that the cost associated with chapter 11 and the desires to make the chapter 11 process more efficient and cost-effective were among the “central themes” of the Commission’s process.
The Report notes that several of the other reforms suggested by the ABI Commission would serve to improve the efficiency and certainty of the process, reducing litigation and likely decreasing costs. These include recommendations that would resolve court splits, the requirement to disclose valuation-related information earlier in the case, a clearer set of rules governing the sale of substantially all of a debtor’s assets, the elimination of the need to have an impaired accepting class, and the refinements to the absolute priority rule (all of which we will, of course, be discussing in future Weil Bankruptcy Blog entries).
One reform the ABI Commission rejected (for which bankruptcy professionals are grateful) is a return to the “economy of administration” standard under the former Bankruptcy Act, which many believe kept the “best and brightest” out of the profession and led to the characterization of bankruptcy professionals as “second class citizens.” The ABI Commission also considered, but failed to adopt, a formal process to review the results achieved by professionals when determining final fees and expenses (for example a process that would enhance fee awards for exceptional results and reduce compensation in the event of certain inefficiencies or outcomes).
Dovetailing another current “hot topic” in today’s legal market, the ABI Commission did agree that professionals could develop more cost-effective ways to provide services, including moving away from hourly billing to alternative fee arrangements to the traditional lodestar method, such as fixed-fees for certain tasks, contingent fees, or flat-rate fees. To that end, they proposed that Congress amend sections 328 and 330 to clarify that alternative fee arrangements based in whole or in part on non-hourly billing models are permitted and subject to review solely under section 328. Professionals, however, would bear the burden of proving by a preponderance of the evidence that the arrangement is reasonable, has been thoroughly reviewed with the client, and is reasonably likely to be beneficial to the estate. The Commission concluded that any proposed alternative fee structure should be approved by the court at the beginning of the case or the engagement to give the professional and all parties in interest the comfort that the fee arrangement would not be overturned.
Overall, despite the issue being an important component of the Commission’s work, the Commission did not recommend drastic changes to the Bankruptcy Code on the issues of professionals and costs. Professional fees and administration costs will likely remain areas of heightened scrutiny so long as large chapter 11 cases are being filed. It remains to be seen, even if the ABI Commission’s recommendations are adopted by Congress, what, if any, changes will actually be adopted by the market on the issue of professional fees, including whether more professionals make the switch to various alternative fee structures.
11 USC Sec. 330
Sec. 330. Compensation of officers
(a)(1) After notice to the parties in interest and the United States Trustee and a hearing, and subject to sections 326, 328, and 329, the court may award to a trustee, a consumer privacy ombudsman appointed under section 332, an examiner, an ombudsman appointed under section 333, or a professional person employed under section 327 or 1103 -
(A) reasonable compensation for actual, necessary services rendered by the trustee, examiner, ombudsman, professional person, or attorney and by any paraprofessional person employed by any such person; and
(B) reimbursement for actual, necessary expenses.
(2) The court may, on its own motion or on the motion of the United States Trustee, the United States Trustee for the District or Region, the trustee for the estate, or any other party in interest, award compensation that is less than the amount of compensation that is requested.
(3) In determining the amount of reasonable compensation to be awarded to an examiner, trustee under chapter 11, or professional person, the court shall consider the nature, the extent, and the value of such services, taking into account all relevant factors, including -
(A) the time spent on such services;
(B) the rates charged for such services;
(C) whether the services were necessary to the administration of, or beneficial at the time at which the service was rendered toward the completion of, a case under this title;
(D) whether the services were performed within a reasonable amount of time commensurate with the complexity, importance, and nature of the problem, issue, or task addressed;
(E) with respect to a professional person, whether the person is board certified or otherwise has demonstrated skill and experience in the bankruptcy field; and
(F) whether the compensation is reasonable based on the customary compensation charged by comparably skilled practitioners in cases other than cases under this title.
(4)(A) Except as provided in subparagraph (B), the court shall not allow compensation for -
(i) unnecessary duplication of services; or
(ii) services that were not -
hps (I) reasonably likely to benefit the debtor's estate; or
(II) necessary to the administration of the case.
(B) In a chapter 12 or chapter 13 case in which the debtor is an individual, the court may allow reasonable compensation to the debtor's attorney for representing the interests of the debtor in connection with the bankruptcy case based on a consideration of the benefit and necessity of such services to the debtor and the other factors set forth in this section.
(5) The court shall reduce the amount of compensation awarded under this section by the amount of any interim compensation awarded under section 331, and, if the amount of such interim compensation exceeds the amount of compensation awarded under this section, may order the return of the excess to the estate.
(6) Any compensation awarded for the preparation of a fee application shall be based on the level and skill reasonably required to prepare the application.
(7) In determining the amount of reasonable compensation to be awarded to a trustee, the court shall treat such compensation as a commission, based on section 326.
(b)(1) There shall be paid from the filing fee in a case under chapter 7 of this title $45 to the trustee serving in such case, after such trustee's services are rendered.
(2) The Judicial Conference of the United States -
(A) shall prescribe additional fees of the same kind as prescribed under section 1914(b) of title 28; and
(B) may prescribe notice of appearance fees and fees charged against distributions in cases under this title; to pay $15 to trustees serving in cases after such trustees' services are rendered. Beginning 1 year after the date of the enactment of the Bankruptcy Reform Act of 1994, such $15 shall be paid in addition to the amount paid under paragraph (1).
(c) Unless the court orders otherwise, in a case under chapter 12 or 13 of this title the compensation paid to the trustee serving in the case shall not be less than $5 per month from any distribution under the plan during the administration of the plan.
(d) In a case in which the United States trustee serves as trustee, the compensation of the trustee under this section shall be paid to the clerk of the bankruptcy court and deposited by the clerk into the United States Trustee System Fund established by section 589a of title 28.
Sec. 327. Employment of professional persons
(a) Except as otherwise provided in this section, the trustee, with the court's approval, may employ one or more attorneys, accountants, appraisers, auctioneers, or other professional persons, that do not hold or represent an interest adverse to the estate, and that are disinterested persons, to represent or assist the trustee in carrying out the trustee's duties under this title.
(b) If the trustee is authorized to operate the business of the debtor under section 721, 1202, or 1108 of this title, and if the debtor has regularly employed attorneys, accountants, or other professional persons on salary, the trustee may retain or replace such professional persons if necessary in the operation of such business.
(c) In a case under chapter 7, 12, or 11 of this title, a person is not disqualified for employment under this section solely because of such person's employment by or representation of a creditor, unless there is objection by another creditor or the United States trustee, in which case the court shall disapprove such employment if there is an actual conflict of interest.
(d) The court may authorize the trustee to act as attorney or accountant for the estate if such authorization is in the best interest of the estate.
(e) The trustee, with the court's approval, may employ, for a specified special purpose, other than to represent the trustee in conducting the case, an attorney that has represented the debtor, if in the best interest of the estate, and if such attorney does not represent or hold any interest adverse to the debtor or to the estate with respect to the matter on which such attorney is to be employed.
(f) The trustee may not employ a person that has served as an examiner in the case.
104 U.S. 126 (1881).
See, e.g., “$1,000/Hour Bankruptcies: Attorneys Justify Their Fees,” Jacqueline Palank, Wall Street Journal (June 3, 2012); “Time for a Fresh Approach to Bankruptcy Fees,” Stephen J. Lubben, Dealbook: New York Times (January 20, 2012).
Sec. 328. Limitation on compensation of professional persons
(a) The trustee, or a committee appointed under section 1102 of this title, with the court's approval, may employ or authorize the employment of a professional person under section 327 or 1103 of this title, as the case may be, on any reasonable terms and conditions of employment, including on a retainer, on an hourly basis, on a fixed or percentage fee basis, or on a contingent fee basis. Notwithstanding such terms and conditions, the court may allow compensation different from the compensation provided under such terms and conditions after the conclusion of such employment, if such terms and conditions prove to have been improvident in light of developments not capable of being anticipated at the time of the fixing of such terms and conditions.
(b) If the court has authorized a trustee to serve as an attorney or accountant for the estate under section 327(d) of this title, the court may allow compensation for the trustee's services as such attorney or accountant only to the extent that the trustee performed services as attorney or accountant for the estate and not for performance of any of the trustee's duties that are generally performed by a trustee without the assistance of an attorney or accountant for the estate.
(c) Except as provided in section 327(c), 327(e), or 1107(b) of this title, the court may deny allowance of compensation for services and reimbursement of expenses of a professional person employed under section 327 or 1103 of this title if, at any time during such professional person's employment under section 327 or 1103 of this title, such professional person is not a disinterested person, or represents or holds an interest adverse to the interest of the estate with respect to the matter on which such professional person is employed.