By: Donald L Swanson
Here is a hard-knocks rule (i.e., a rule learned the hard way) on fees for a court-approved professional in bankruptcy:
- representing a debtor, committee or trustee in bankruptcy has all the downside of a contingent fee case—but none of the upside.
Here is what that means:
- an attorney with a contingent fee practice will lose on some cases (i.e., will get paid less than the hourly time invested, or paid nothing) but will make up for such losses by winning on other cases (i.e., will get paid far more than the hourly time invested); but
- court-approved bankruptcy representations have the same loss element as a contingent fee case (i.e., getting paid less than the hourly time invested, or paid nothing), but it is not possible to get paid more than the hourly time invested.
I’ve even tried (once) to get an enhanced fee awarded in a case where the results achieved from an auction sale were far-above what everyone expected. But that effort failed.
Award of a Discretionary Fee Over and Above Hourly Fees
So . . . it is with great interest that I see an appellate opinion approving a $1,750,000 “discretionary fee” award, over-and-above hourly fees of $1,363,709.68, to a court-approved professional in a Chapter 11 bankruptcy:
- the appellate opinion is, LTL Management, LLC v. Houlihan Lokey Capital, Inc., Case No. 24-82 in U.S. District Court for New Jersey (decided on December 31, 2024; Doc. 24; “Not for Publication”); and
- such opinion affirms the New Jersey Bankruptcy Court ruling in the case of In re LTL Management, LLC, Case No. 23-12825 (decided November 14, 2023; Doc. 1579).
Observations About the Discretionary Fee Award
Here are some observations about the discretionary fee awarded in that case:
- the professional receiving the discretionary fee award is an “investment banker” retained by the Official Committee of tort claimants and “tasked with undertaking ‘an in-depth review and analysis of’” Debtor’s “newly-restructured business forms and relationships”;
- there are dozens of court-approved professionals in the In re LTL case, but only this one professional receives the opportunity for a discretionary fee;
- the discretionary fee possibility was included in the professional’s engagement agreement with the Official Committee, and the Bankruptcy Court approved that engagement and the terms thereof at the conclusion of a notice and hearing process;
- at the end of the case, the Official Committee exercised its business judgment in agreeing to a $2,000,000 discretionary fee for this professional—which the Bankruptcy Court then reduced to $1,750,000;
- the fee agreement terms, between this professional and the Official Committee, specify that the discretionary fee is not a “bonus,” and the Bankruptcy Court did not treat it’s award as a “bonus”—finding, instead, that the discretionary fee was one part “of a bundle of agreed-to fees”; and
- the substance of the Bankruptcy Court’s award (in Doc. 1628) of both the hourly ($1,363,709.68) and discretionary ($1,750,000) fees to this professional is contained on a single page, with the supporting rationale apparently given orally in open court.
Affirmed by District Court
The U.S. District Court, in affirming the discretionary fee award on appeal, rules that the Bankruptcy Court:
- properly found that the discretionary fee was not a “bonus”;
- did not abuse its broad discretion in finding, under § 330, the total amount of fees awarded to this professional to be “reasonable,” even though the Bankruptcy Court “did not strictly follow the lodestar analysis”;
- properly noted that (i) the party opposing the discretionary fee failed to object to the terms of the Official Committee’s retention of this professional, during the notice and hearing process, and (ii) entry of the Bankruptcy Court’s order approving the professional’s retention (and the terms thereof) under § 328 was, itself, a final order that was not appealed; and
- properly noted that § 328 authorizes the Official Committee to employ a professional “on any terms and conditions” that the Bankruptcy Court “finds necessary to satisfy the requirement of reasonableness,” which terms may be subsequently modified, if they prove to be “improvident” in light of unforeseen events.
A Road Map?
It seems unlikely that I’ll ever be able to get a “discretionary fee” award, above and beyond an hourly fee, as a court-approved bankruptcy professional.
But others might want to try. And for those who do, the LTL Management professionals who pulled it off provide a roadmap. What follows is a summary of the progress on that map.
–First Step
The engagement agreement between the professional and the Official Committee appears as Exhibit A to the Doc. 742 “Declaration,” which explains the fee arrangement (in par. 6) like this:
- “compensation includes: (i) a monthly fee of $400,000 for each of the first four months; (ii) a monthly fee of $175,000 for each month thereafter; (iii) . . . , and; (iv) a discretionary fee based upon the Committee’s business judgement.”
Plagiarizing that engagement agreement and declaration could be a good first step.
–Next Step
The engagement agreement between the professional and the Official Committee (including the compensation provisions between them), went through a notice and hearing process, which included the filing of an objection, before being approved by the Bankruptcy Court (see Docs. 538, 603, 742 & 899).
- This step proved to be an important factor in the later-approval of the professional’s discretionary fee.
Following that same process would be a good next step.
–Absence of Earlier Response from Objecting Party
During the notice and hearing process for approving the In re LTL professional and its fee arrangement with the Official Committee, the party who later objected to the fee request failed to object to the employment arrangement.
- The result is that the order approving the employment of this professional and its compensation arrangement became a final order because it wasn’t appealed.
This isn’t a “step” over which the professional has any control. But the lack (or overruling) of an objection, and without any appeal being filed, is important for the ultimate approval of the discretionary fee.
–Official Committee Exercising Business Judgment
Before filing its final fee application (Doc. 1347), the professional met with the Official Committee and negotiated the terms of the final fee details.
Such fee details included a total hourly fee. Such details also included the $2,000,000 discretionary fee amount (which the Bankruptcy Court subsequently reduced to $1,750,000).
The exercise of the Official Committee’s business judgment, in approving both the hourly fee amount and the discretionary fee, is an important factor in the approval of the discretionary fee by the Bankruptcy Court and in getting it affirmed by the appellate court.
Following this same approach would be a good final step, before filing a final fee application that requests approval of the discretionary fee.
Conclusion
Getting an award of a discretionary fee, over and above hourly fees, is an unusual thing.
But for anyone wanting to make the attempt, the In re LTL circumstances provide a road map to follow.
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