In the context of five firms’ fee applications exceeding $5.7 million, the U.S. Bankruptcy Court for the Northern District of Texas in Amarillo thoughtfully reviewed the cases applying the Fifth Circuit’s Pro-Snax[1] decision that fees may be awarded under Bankruptcy Code § 330(a)[2] when the services “resulted in an identifiable, tangible, and material benefit” to the estate. The court rejected the idea that success must be proven as a condition of a fee award. Instead the fees may be allowed where they provided an enhancement or benefit to the estate at the direction of an estate representative acting within its sound business judgment.[3]
Section 330(a)(1)(A) authorizes “reasonable compensation for actual, necessary services rendered by the ... professional person.”[4] When applying § 330(a)(1)(A), the court must consider, among other things, “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.”[5] In Pro-Snax, the Fifth Circuit held that debtor’s counsel could not be compensated under § 330 after appointment of a trustee, a holding later confirmed in Lamie v. U.S. Trustee.[6] In addition, the circuit held that the court must determine “whether [the applicant]’s services resulted in an identifiable, tangible, and material benefit to the bankruptcy estate.”[7] The circuit court left it to the bankruptcy court to reconcile this directive with § 330.
In American Housing Foundation, Hon. Robert Jones noted three general approaches in the cases applying the Pro-Snax requirement of an “identifiable, tangible, and material benefit to the estate” to the cases:
(1) those applying a pure hindsight test, (2) those saying they apply a pure hindsight approach, but “implicitly employ a prospective analysis,” and (3) those applying a hybrid approach to combine both prospective and retrospective analysis.[8]
The court found that a pure hindsight approach to applying the material-benefit test created a strong clash with the law in the other circuits, and so rejected the argument that the test compensates only those services “that directly augmented the estate.”[9] Instead, Judge Jones found the test in Broughton helpful:
Success cannot be a prerequisite to compensation outside of a contingency arrangement. Rather, the conclusion that a professional was justifiably pursuing a legitimate, realizable goal of the fiduciary client should be enough benefit to the estate to satisfy Pro Snax.” Id. at 218. The court held that an “identifiable, tangible and material benefit” is provided if the services help administer a bankruptcy estate's asset, “whether or not the effect of administration of the asset is enhancement of the estate, so long as the professional's services are performed at the direction of the estate representative and the estate representative is acting in accordance with the Code and its sound business judgment.” Id.[10]
Judge Jones applied this “nuanced, less strict reading of the Pro-Snax" standard in Broughton and considered the objections (or lack thereof) in lieu of the overwhelming challenge of reviewing all of the billing entries supporting more than $5.7 million requested in five fee applications. It disallowed $62,000 of the $102,000 that counsel for the unsecured creditors’ committee spent unsuccessfully opposing the appointment of a chapter 11 trustee, as well as the $25,000 spent fighting with the trustee over administrative matters, and allowed only $14,000 of the $34,473 spent preparing the fee applications, for an award of 95 percent of the almost $2 million in fees sought. All of the other applications were allowed in full.
The trial court’s effort in articulating the standard is helpful, particularly in rejecting a requirement that services are compensable only to the extent that they result in quantifiable benefit to the estate. What is less helpful is that application of the standard seems to reflect an arbitrary reduction of time allowed for certain tasks, and judicial unwillingness or inability to carefully review the bulk of the fee applications. The court’s explanation introduced a new word to this author: “As stated, the Court does not atomistically review the Trustee's time entries in an attempt to quantify the benefit achieved by each entry. The Trustee's services were necessary at the time they were provided, and the Court is satisfied that such services benefited the estate.”[11] This seems to mean that if a credible objector does not detail the offensive time entries for the court, the court really lacks the ability to tear apart huge fee applications looking for unreasonable entries.
[1] Andrews & Kurth L.L.P. v. Family Snacks Inc. (In re Pro-Snax Distributors Inc.), 157 F.3d 414 (5th Cir. 1998).
[2] 11 U.S.C. § 330(a)(1).
[3] In re American Housing Foundation, 498 B.R. 713 (Bankr. N.D. Tex. Sept. 30, 2013).
[4] 11 U.S.C. § 330(a)(1).
[5] 11 U.S.C. § 330(a)(3)(C).
[6] Lamie v. U.S. Trustee, 540 U.S. 526 (2004).
[7] Pro-Snax Distributors, 157 F.3d at 426.
[8] American Housing Foundation, 498 B.R. at 719, citing In re Broughton Ltd. Partnership, 474 B.R. 206, 209 n. 5 (Bankr. N.D. Tex. 2012) (citing various Texas lower courts for each approach).
[9] Id., citing Broughton Ltd. Partnership, 474 B.R. at 213.
[10] Id. at 719, quoting Broughton Ltd. Partnership, 474 B.R. at 218.
[11] Id. at 727.