Prior to the enactment of the Bankruptcy Code in 1978, the Fifth Circuit took a stringent approach to the payment of attorney’s fees – holding that public policy supported restricting attorney compensation in bankruptcy cases and that attorneys should not expect to receive the same compensation as if working for a non-bankrupt concern. Congress enacted section 330 of the Bankruptcy Code to address this policy and to allow bankruptcy attorneys to receive reasonable compensation comparable to compensation allowed in non-bankruptcy cases. Congress, however, did not initially provide guidance on what constituted reasonable compensation, and courts developed the actual, or material, benefit standard under which compensation was awarded if the services provided actually resulted in an identifiable benefit to the bankruptcy estate.
Congress stepped in, again, in 1994, amending section 330 to foreclose the actual benefit test. Following the 1994 amendments to section 330, the Second, Third and Ninth Circuits all dropped the actual benefit standard. On the other hand, in the 1998 In re Pro-Snax decision, the Fifth Circuit adopted the actual benefit standard and, since that decision, applications for compensation under section 330 of the Bankruptcy Code in the Fifth Circuit have been evaluated retrospectively under the “hindsight” or “material benefit” standard.
Recently recognizing that In re Pro-Snax conflicts with the plain language of section 330 and has “sown confusion” in lower courts within the circuit, the Fifth Circuit overturned the material benefit standard in In re Pro-Snax. Going forward, following the Fifth Circuit’s recent decision in Barron & Newburger, P.C. v. Texas Skyline Ltd., et al. (In re Woerner), attorney compensation will be evaluated prospectively based on, among other factors, whether the services rendered were reasonably likely to benefit the estate at the time the services were performed.
Facing an imminent state court judgment against him, Clifford Woerner, with the assistance of Barron & Newburger, P.C. (“B&N”), filed a voluntary petition for relief under chapter 11 of the Bankruptcy Code. For the next eleven months, B&N, among other things, filed mandatory disclosure documents with the bankruptcy court, defended Woerner in various adversary proceedings, identified additional estate assets, and assisted Woerner in negotiating with his creditors – services for which B&N sought approximately $130,000 in fees and $6,000 in expenses following the conversion of Woerner’s bankruptcy case to chapter 7.
Applying the Pro-Snax standard, the bankruptcy court awarded only 15% of the fees sought by B&N, finding that most of B&N’s services did not reflect an identifiable benefit to the estate and denying B&N’s fees due to lack of success in the case. On appeal, the district court affirmed the bankruptcy court’s findings that B&N’s fees were unreasonable under section 330 and Pro-Snax.
On further appeal, a panel of the Fifth Circuit affirmed the district court’s ruling, but called for an en banc review of the Pro-Snax decision.
Reconsideration of Pro-Snax
In the en banc decision In re Woerner, the Fifth Circuit overturned the retrospective, material benefit standard from In re Pro-Snax, recognizing that the standard “conflicts with the language and legislative history of [section] 330, diverges from the decisions of other circuits, and has sown confusion in our circuit.”
The Fifth Circuit first looked to the language of the Bankruptcy Code regarding compensation of professionals. Under section 330, professionals, including attorneys, employed by a debtor under section 327 of the Bankruptcy Code may be awarded reasonable compensation for actual and necessary services and reimbursement for actual and necessary expenses. In determining reasonable compensation, courts are required by section 330(a)(3) to weigh all relevant factors including the skill and experience of the practitioner; the time spent on, and the rate charged for, the services; and, “whether the services were necessary to the administration of, or beneficial at the time at which the service was rendered toward the completion of,” the bankruptcy case. Moreover, section 330(a)(4)(A) specifies that compensation should not be allowed for services that were not reasonably likely to benefit the estate or necessary for administration of the bankruptcy case. Taking these sections together, the Fifth Circuit held that “a court may compensate an attorney for services that are ‘reasonably likely to benefit’ the estate and adjudge that reasonableness ‘at the time at which the service was rendered.’” Notably, the Fifth Circuit now recognizes that attorneys can be compensated for “good gambles” – choices to pursue courses of action that may not ultimately be successful, but that were reasonable at the time they were made.
In addition to the statutory language, the Fifth Circuit also found support for the more lenient standard in the legislative history of section 330. Before 1994, section 330 provided little guidance on what constituted reasonable compensation. The 1994 amendments to section 330 included a codification of many of the relevant factors that had been considered by courts in determining reasonable compensation. Critically, the Senate specifically added the language “at the time at which the service was rendered” to section 330(a)(3)(C). Based on this legislative record, the Fifth Circuit found that the inclusion of “at the time at which the service was rendered” in the 1994 amendments strongly suggests that Congress did not intend for attorney compensation to be viewed through a retrospective, material benefit standard.
Finally, the Fifth Circuit recognized that overturning the material benefit standard and adopting the prospective view would bring the Fifth Circuit in step with the Second, Third and Ninth Circuits. In addition to adopting the prospective standard, the Fifth Circuit, relying on decisions in the Second, Third and Ninth Circuits, further articulated the method for applying the standard. Specifically, in determining the likelihood that the services will benefit the estate, the Fifth Circuit notes that courts applying the prospective standard should consider, among other things, the probability of success, the reasonable cost of pursuing a particular course of action and the potential benefit to the estate. Now, instead of being largely dispositive, success in pursuing a particular course of action is only one factor in the analysis.
On remand, the bankruptcy court will determine whether B&N’s services were for “good gambles” or ultimately unreasonable at the time they were provided. In re Woerner is a significant decision that brings the Fifth Circuit in line with other powerhouse bankruptcy circuits on the issue of reasonable compensation for attorneys. For every attorney advising on a particular course of action in a Fifth Circuit bankruptcy case, In re Woerner finally provides much needed clarity.
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.
In re Pro-Snax Distributors, Inc., 157 F.3d 414 (5th Cir. 1998).
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.