Section 330 of the Bankruptcy Code permits a court to authorize reasonable compensation for actual and necessary services. Courts within the Fifth Circuit are bound by In re Pro-Snax Distributors Inc., which held that services are compensable under § 330, but only if the applicant proves that the services resulted in a benefit to the bankruptcy estate.[1] A recent decision by a panel of the Fifth Circuit demonstrates that Pro-Snax continues to be binding precedent, but the panel took the extraordinary step of unanimously recommending that the Fifth Circuit revisit Pro-Snax en banc.[2] As of the publication of this newsletter, the appellant has moved for rehearing en banc, the U.S. Trustee has signaled its opposition and the Fifth Circuit has not yet issued a ruling as to whether it will rehear the case.[3]
The Pro-Snax standard focuses on the beneficial results of the services submitted for § 330 review and ignores the reasonableness of the decision to perform services that provided no benefit; this Pro-Snax standard is referred to as the “hindsight” approach. The panel that decided Pro-Snax held that “whether the services were objectively beneficial toward the completion of the case at the time they were performed” has no relevance in reviewing a fee application.[4]
In re Woerner
Applying the Pro-Snax standard in Woerner, the Fifth Circuit panel affirmed the bankruptcy court’s order disallowing most of a law firm’s fee based on a finding that certain services did not result in identifiable benefits to the estate. Thus, the three-judge panel followed the “hindsight” approach adopted by the Fifth Circuit in Pro-Snax. In rejecting the appellant’s argument that Pro-Snax was wrongly decided, the panel in Woerner noted that it could not overrule past precedent and quoted from the district court’s order, which had affirmed the bankruptcy court’s reliance on Pro-Snax. This panel also commented that “whether ‘Pro-Snax was a wrongly decided, errant opinion … is an argument more properly addressed to higher tribunals.’”[5] In addition, the panel characterized the Pro-Snax decision as including “little analysis or explanation” and recognized that the decision included citation to only one case.[6]
Adhering to Pro-Snax, the panel concluded that the bankruptcy court did not abuse its discretion in disallowing fees for services that did not result in benefit to the estate, without regard to the reasonableness of the services. However, the panel carefully noted that it was constrained from reconsidering the ruling in Pro-Snax and even seemed to suggest that Pro-Snax may have been ill considered. Indeed, the three-judge panel joined in a special concurrence that urged reconsideration of the Pro-Snax standard by the Circuit sitting en banc.
Concurrence Identifies Issues with Pro-Snax Standard
The special concurrence in Woerner provides a detailed argument for concluding that the “reasonableness” standard should apply to the review of a fee application under § 330, based on statutory construction and decisions from other circuits. Notably, the special concurrence refers to the “hindsight” approach as the “actual-benefit test.”
In examining the statute and legislative history, the concurrence refers to § 330(a)(3)(C) and (a)(4)(A)(ii)(I) and concludes that “[r]ead together, 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.’”[7] Based on this reading, the concurrence concludes that § 330 “then, explicitly contemplates compensation for attorneys whose services were reasonable when rendered but … ultimately may fail to produce an actual benefit.”[8] In the legislative history, the concurrence cites further support for its reading of these subsections and concludes that “Congress specifically considered and rejected an actual-benefit test” when § 338 was enact in 1978 and amended in 1994.[9]
With respect to the law of other circuits, the concurrence first recognizes a conflict between the Fifth Circuit and the Second, Third and Ninth Circuits, and then cites cases in which other circuit courts have rejected the actual-benefit test.[10] The concurrence also noted that the only other circuit courts seeming to have adopted this approach did so either before § 330 was amended or in reliance on precedent pre-dating the 1994 amendments.[11]
Lastly, the concurrence cited an article in the ABI Journal and bankruptcy court cases indicating that the Pro-Snax standard has caused confusion in the Fifth Circuit. In the article, the author commented that “the Pro-Snax decision is of constant discussion and concern among practitioners.”[12] Similarly, the bankruptcy court in one of the cited bankruptcy cases surveyed post-Pro-Snax rulings and commented on the differing views that bankruptcy courts have adopted in applying a retrospective analysis.[13] In light of this anecdotal evidence, the concurrence concluded its analysis of the statutory construction issue by stating that “[t]he splintered approaches to applying Pro-Snax underscore the difficulty of squaring that decision with the statute, and the practical importance of doing so.”[14]
The motion for en banc rehearing quoted the concurrence in full. The U.S. Trustee has sought additional time to oppose to the motion for rehearing.[15] Thus, it may be some time before the Fifth Circuit rules on the motion for rehearing, let alone the underlying issues with Pro-Snax. Practitioners, particularly those who practice within the Fifth Circuit, will be watching closely to see how these issues progress.
[1] In re Pro-Snax Distribs. Inc., 157 F.3d 414 (5th Cir. 1998).
[2] Barron & Newberger PC v. Tex. Skyline Ltd. (In re Woerner), 758 F.3d 693, 706 (5th Cir. 2014).
[3] See Mot. for R’hg En Banc, filed in Barron & Newberger PC v. Tex. Skyline Ltd. (In re Woerner), Case No. 13-50075 (5th Cir.), Doc. No. 00512715834 (filed July 29, 2014).
[4] Woerner, 758 F.3d at 701 (discussing Pro-Snax, 157 F.3d at 426).
[5] Id. at 702
[6] Id. (discussing In re Melp, Ltd., 179 B.R. 636, 640 (E.D. Mo. 1995)).
[7] Id. at 703.
[8] Id.
[9] Id. at 704.
[10] Id. at 705 (discussing In re Ames Dep’t Stores, Inc., 76 F.3d 66, 71 (2d Cir. 1996); In re Top Grade Sausage Inc., 227 F.3d 123, 132 (3d Cir. 2000); and In re Smith, 317 F.3d 918, 926 (9th Cir. 2002)).
[11] Id. (discussing In re Kohl, 95 F.3d 713, 714 (8th Cir. 1996), In re Lederman Enters. Inc., 997 F.2d 1321, 1323 (10th Cir. 1993), and Grant v. George Schumann Tire & Battery Co., 908 F.2d 874, 883 (11th Cir. 1990)).
[12] Id. at 705-06 (quoting William L. Medford, “Further Evolution of Professional Compensation under Pro-Snax: The New and Improved Standard for Getting Paid,” XXXI ABI Journal 6, 16-17, 61, July 2012, http://journal.abi.org/content/further-evolution-of-professional-compen…- (quotation marks omitted)).
[13] Id. at 706 (discussing In re Boughton Ltd. P’ship, 474 B.R. 206, 209-10 n.5 (Bankr. N.D. Tex. 2012)).
[14] Id.
[15] See U. S. Trustee’s Unopposed Mot. to Extend Time for Responding to Petition for R’hg En Banc, filed in Barron & Newberger PC v. Tex. Skyline Ltd. (In re Woerner), Case No. 13-50075 (5th Cir.), Doc. No. 00512764408 (filed Sept. 11, 2014).