Fee Enhancements How Do You Get One Part I

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Jun 2001

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Sections 327 and 328 of the Bankruptcy Code<a href="#2" name="2a">2</a> authorize debtors-in-possession,
trustees and committees to employ attorneys and other professionals on reasonable terms
and conditions of employment. Such employment terms may include, inter alia, the
payment of a retainer and the payment of fees on either an hourly or contingent
basis. Occasionally, such attorneys and professionals will seek a premium or an
"enhancement" to their base fees on grounds of superior service, superlative results and
other reasons.

Whether one is employed on behalf of a debtor, trustee or a committee, lawyers and
other professionals must know the legal basis of, and the issues and objections that
may be raised in opposition to, requests for fee enhancements. Although fee
enhancements are routinely characterized as "rare," a substantial number of reported
decisions reflect the willingness of bankruptcy courts to award such premiums in
appropriate cases. This article identifies and sets forth the relevant standards for
determining what constitutes "an appropriate case" and what circumstances will justify
an award of a fee enhancement.

<h3>Bankruptcy Code §330(a): The Governing Statute</h3>

Bankruptcy Code §330(a) governs the payment of fees to estate professionals and
is the starting point for determining the propriety of all professional fee requests.
That Code section provides:

<blockquote>
(1) After notice to the parties in interest and the U.S. Trustee and
a hearing...the court may award to a...professional person employed under
§327 or 1103—

<blockquote>
(A) Reasonable compensation for actual, necessary services rendered
by...the professional person...; and

(B) reimbursement for actual, necessary expenses.
</blockquote>

(2) The court may...award compensation that is less than the amount of
compensation that is requested. 
(3) In determining the amount of reasonable compensation to be awarded, the
court shall consider the nature, the extent and the value of such services,

taking into account all relevant factors, including—

<blockquote>
(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; and 
(E) whether the compensation is reasonable based on the customary
compensation charged by comparably skilled practitioners in cases other
than cases under this title...<a href="#3" name="3a">3</a>
</blockquote>
</blockquote>

The enactment of Bankruptcy Code §330(a)(1) substantially changed the prior
Bankruptcy Act's "spirit of economy" principle under which estate professionals were
entitled to only minimum compensation. The new provision is intended to allow estate
professionals to receive compensation that is commensurate with the fees received by
professionals providing comparable services in non-bankruptcy cases. Section 330's
twofold goal is therefore to ensure that compensation is "reasonable" and that future
lawyers will not be deterred from taking bankruptcy cases due to a failure to pay
adequate compensation.<a href="#4" name="4a">4</a>

In effectuating the two-pronged purpose of §330, bankruptcy courts have grappled with
whether to analyze fee requests under precedents involving "common fund" or "fee-shifting
statutes."<a href="#5" name="5a">5</a> The Seventh Circuit has commented, "[a]lthough bankruptcy situations certainly
share many attributes of common fund cases—most fundamentally, the existence of a fund in
the court's control—courts have viewed fee-shifting statutes as providing a more suitable
analogy."<a href="#6" name="6a">6</a> Because there is substantial similarity of purpose between §330 and the
typical fee-shifting statute, Supreme Court and other precedents involving fee-shifting
statutes have been widely applied to fee enhancement determinations in bankruptcy, even
though the analogy is imperfect and the principles may require some accommodation to the
peculiarities of bankruptcy matters.<a href="#7" name="7a">7</a> Because the non-bankruptcy Supreme Court and other
authorities pertaining to fee enhancements are essential for such determinations in
bankruptcy, such authorities are summarized below.

<h3>Early Standards Under Fee-shifting Statutes</h3>

Under the "American Rule," a prevailing litigant is not ordinarily entitled to
collect a reasonable attorney's fee from the loser.<a href="#8" name="8a">8</a> Even so, there are more than
100 statutes under which Congress has authorized courts to require one party to
award fees to the other.<a href="#9" name="9a">9</a> The benchmark for an award under nearly all of these
fee-shifting statutes, including Bankruptcy Code §330, is that the attorney's fee
must be "reasonable."<a href="#10" name="10a">10</a> One of the earliest and most widely cited measures of
"reasonableness" was developed by the Fifth Circuit in Johnson v. Georgia Highway
Express.<a href="#11" name="11a">11</a> Under the Johnson test, courts consider 12 factors in determining the
reasonableness of a fee:

<ol>
<li>the time and labor required

</li><li>the novelty and difficulty of the question

</li><li>the skill required to perform the legal service

</li><li>the preclusion of other employment by the attorney

</li><li>the customary fee

</li><li>the fixed or contingent nature of the fee

</li><li>the time limitations imposed by the client or the circumstances

</li><li>the amount involved and the results obtained

</li><li>the experience, reputation and ability of the attorney

</li><li>the undesirability of the case

</li><li>the nature and length of the professional relationship, and

</li><li>awards in similar cases.
</li></ol>

Although the Johnson factors have been widely adopted, the Supreme Court has
nonetheless criticized the subjective nature of the test, which places "unlimited
discretion in the trial court and produce[s] disparate results."<a href="#12" name="12a">12</a>

The Third Circuit's alternative test for determining the "reasonableness" of fee awards
under fee-shifting statutes was first articulated in Lindy I.<a href="#13" name="13a">13</a> Pursuant to this
approach, the number of hours expended on a case is multiplied by a reasonable hourly
rate of compensation, and then using this "lodestar" amount as a starting point, the
court may then adjust the fees based on (1) the contingent nature of the case,
specifically, the investment of hours and expenses without any assurance of compensation;
and (2) the quality of the work performed, as evidenced by the complexity of the
issues and the recovery obtained.<a href="#14" name="14a">14</a> Although the Supreme Court has applauded the
lodestar approach for providing lower courts with somewhat more guidance than the Johnson
factors, it has also criticized the "risk" and "quality" adjustments for continuing to
produce arbitrary fee awards.<a href="#15" name="15a">15</a>

<h3>Supreme Court Standards Under Fee-shifting Statutes</h3>

In response to the perceived arbitrariness of the Johnson and lodestar adjustments,
the Supreme Court issued a series of decisions that adopted, but substantially
refined, the standards developed by the Third and Fifth Circuits. In the first of
those decisions, Hensley v. Eckerhart,<a href="#16" name="16a">16</a> the Supreme Court held that
<blockquote>
[t]he most useful starting point for determining the amount of a reasonable fee
is the number of hours reasonably expended on the litigation multiplied by a
reasonable hourly rate...[however] the product of reasonable hours times a
reasonable rate does not end the inquiry. There remain other considerations that
may lead the district court to adjust the fee upward or downward, including the
important factor of 'results obtained.' The district court may also consider other
factors identified in Johnson v. Georgia Highway (citation omitted), though
it should note that many of these factors usually are subsumed within the initial
calculation of hours reasonably expended at a reasonable hourly rate.<a href="#17" name="17a">17</a>

</blockquote>

Although the Hensley decision did not discuss which Johnson factors are properly
subsumed within the lodestar, the Supreme Court did opine that the "results obtained"
factor is a "crucial" consideration in determining the propriety of an upward fee
adjustment because the overriding purpose of a fee-shifting statute is to limit fee
awards to prevailing parties and to deny fee awards to non-prevailing parties.<a href="#18" name="18a">18</a>

In its second decision, Blum v. Stenson,<a href="#19" name="19a">19</a> the Supreme Court reaffirmed that
the proper starting point in determining a reasonable attorney's fee is to calculate the
lodestar.<a href="#20" name="20a">20</a> In Blum, however, the Supreme Court furthered this holding by
requiring that when an applicant "has carried his burden of showing that the claimed
rate and number of hours are reasonable, the resulting product is presumed to be the
reasonable fee."<a href="#21" name="21a">21</a> In order to overcome the presumption that the lodestar is the
proper fee award, an applicant must produce specific evidence that an upward enhancement
is otherwise necessary to provide fair and reasonable compensation.<a href="#22" name="22a">22</a> Blum also
answered, as Hensley had not, what Johnson factors are properly subsumed within the
lodestar and should therefore not be considered as a basis for an upward fee
adjustment. In particular, Blum held that "complexity [and] novelty of the issues,"
"the special skill and experience of counsel," the "quality of representation," and the
"results obtained" from the litigation are presumptively reflected in the lodestar amount
and thus cannot serve as independent bases for increasing the basic fee award.<a href="#23" name="23a">23</a>

Although the conclusion that "results obtained" are presumptively subsumed within the
lodestar departs from the prior Hensley decision, the Blum court massaged this
discrepancy by relying on its earlier statement in Hensley that, "[w]here a plaintiff
has obtained excellent results, his attorney should recover a fully compensatory fee
[and] [n]ormally this will encompass all hours reasonably expended on the litigation,
[although] indeed in some cases of exceptional success, an enhanced award may be
justified."<a href="#24" name="24a">24</a> The Blum court seized this "exceptional success" language, emphasizing
that although results-based fee enhancements are not per se impermissible, they are
reserved for "rare" and "exceptional" cases supported by "specific evidence" on the record
and detailed findings that the quality of the service rendered was superior to what
one would reasonably expect in light of the rates charged.<a href="#25" name="25a">25</a>

In the third decision of the sequence, Delaware I, the Supreme Court transformed
the Blum "presumption" in favor of the lodestar to a "strong presumption"<a href="#26" name="26a">26</a> and
further limited results-based enhancements by explaining the rationale underlying the usual
fee-shifting statute as follows:

<blockquote>
[t]hese statutes were not designed as a form of economic relief to improve the
financial lot of attorneys...Instead, the aim of such statutes is to enable
private parties to obtain legal help in seeking redress for injuries resulting from
the actual or threatened violation of specific federal laws. Hence, if
plaintiffs...find it possible to engage a lawyer based on the statutory assurance
that he will be paid a "reasonable fee," the purpose behind the fee-shifting
statute has been satisfied...In short, the lodestar figure includes most, if
not all, of the relevant factors constituting a "reasonable" attorney's fee, and
it is unnecessary to enhance the fee for superior performance in order to serve
the statutory purpose of enabling plaintiffs to secure legal assistance.<a href="#27" name="27a">27</a>
</blockquote>

In yet a further retreat from Hensley's "results obtained" focus, the Delaware
I court emphasized that "when an attorney first accepts a case and agrees to represent
the client, he obligates himself to perform to the best of his ability and to produce
the best possible results commensurate with his skill...and [the lodestar] therefore
adequately compensates the attorney and leaves very little room for enhancing the award
based on his post-engagement performance..."<a href="#28" name="28a">28</a> Although Delaware I reinforced the
conclusion that superior performance should not generally warrant a fee enhancement, it
did not resolve whether an attorney's risk of loss should justify such an enhancement.

Risk enhancement was, however, addressed by the Supreme Court in Delaware
II,<a href="#29" name="29a">29</a> wherein the majority concluded that although the risk of loss enhancements
are not per se impermissible,<a href="#30" name="30a">30</a> under Blum, such enhancements should only be awarded
in "exceptional" cases where there are specific findings and evidence regarding the
existence of such risk of loss. Such specific findings must be based on evidence that
demonstrates that absent an opportunity for risk-related fee enhancements, the plaintiff
would have faced substantial difficulties in finding counsel in the relevant professional
market.<a href="#31" name="31a">31</a>

In a subsequent decision,<a href="#32" name="32a">32</a> however, a majority of the Supreme Court
definitively held that under a fee-shifting statute, an attorney's lodestar fees may
not be risk-enhanced.<a href="#33" name="33a">33</a> The court grounded this holding on several rationales.
First, the court reasoned that risk enhancements duplicate factors already subsumed
in the lodestar because the greater the risk of loss due to deficiencies in the
merits of the underlying claim, the greater the number of hours the attorney must
expend in order to overcome those deficiencies.<a href="#34" name="34a">34</a> Second, awarding risk enhancements
encourages attorneys to pursue unmeritous litigation because the lower the attorney's
probability of success in litigation, the greater the enhancement to which he is
entitled.<a href="#35" name="35a">35</a> Third, although risk enhancements may be appropriate in contingency-fee
arrangements, engrafting such premiums onto lodestar determinations under fee-shifting
statutes creates a hybrid scheme that inconsistently borrows from the contingency model
only to increase, but not to decrease, fee awards.<a href="#36" name="36a">36</a> Fourth, the allowance of
risk enhancements under fee-shifting statutes makes fee determinations more complex,
arbitrary and unpredictable, and thereby results in more fee-related litigation.<a href="#37" name="37a">37</a>

Although the Supreme Court has now squarely concluded that risk enhancements under
fee-shifting statutes, without more, are per se impermissible, only two bankruptcy
decisions appear to have thus far considered this holding in the context of
bankruptcy-related fee determinations.<a href="#38" name="38a">38</a>

<hr>
<h3>Footnotes</h3>

<a name="1">1</a> The author is an attorney with Vinson & Elkins L.L.P. in Houston. She received her B.B.A. from the University of Houston
in 1990, her M.B.A. from the University of Illinois in 1992 and her J.D. from the University of Houston Law Center in 1996. The views expressed herein are not necessarily those of Vinson & Elkins L.L.P. <a href="#1a">Return to article</a>

<a name="2">2</a> All references to the "Bankruptcy Code" are to <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… U.S.C. §101</a>, et seq. <a href="#2a">Return to article</a>

<a name="3">3</a> Bankruptcy Code §330(a) (emphasis added). <a href="#3a">Return to article</a>

<a name="4">4</a> <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re UNR Indus. Inc., 986 F.2d 207, 209-10 (7th Cir. 1993)</a>. <a href="#4a">Return to article</a>

<a name="5">5</a> Unlike a fee-shifting statute, where the intent is "to encourage private enforcement of substantive statutory rights" by allowing a
prevailing party to recover from a defendant, a common fund provision allows for the award of an attorney's fee from a fund established for
the benefit of plaintiffs on the theory that "those who have benefitted from litigation should share its costs." <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… v. General Motors
Corp., 860 F.2d 250, 252-53 (7th Cir. 1988), cert. denied, 493 U.S. 810 (1989)</a>. <a href="#5a">Return to article</a>

<a name="6">6</a> <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…; 986 F.2d at 209</a>. <a href="#6a">Return to article</a>

<a name="7">7</a> <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…; at 210</a>, citing <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Apex Oil Co., 960 F.2d 728, 731-32 (8th Cir. 1992)</a>; see, also, <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…
re Manoa Finance Co., 853 F.2d 687, 690-91 (9th Cir. 1988)</a>. <a href="#7a">Return to article</a>

<a name="8">8</a> <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… Pipeline Service Co. v. Wilderness Soc'y., 421 U.S. 240 (1975)</a>. <a href="#8a">Return to article</a>

<a name="9">9</a> <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… v. Delaware Valley Citizens' Council for Clean Air, 478 U.S. 546, 562 (1986)</a> (Delaware I). <a href="#9a">Return to article</a>

<a name="10">10</a> <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…; <a href="#10a">Return to article</a>

<a name="11">11</a> <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… v. Georgia Highway Express Inc., 488 F.2d 714 (5th Cir. 1974)</a>. <a href="#11a">Return to article</a>

<a name="12">12</a> <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… I, 478 U.S. at 562</a>. <a href="#12a">Return to article</a>

<a name="13">13</a> <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… Bros. Builders Inc. v. American Radiator & Standard Sanitary Corp., 487 F.2d 161, 167 (3d Cir.
1973)</a> (Lindy I). <a href="#13a">Return to article</a>

<a name="14">14</a> <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… v. Atlantic Richfield Co., 515 F.2d 165, 168 (3d Cir. 1975)</a>. <a href="#14a">Return to article</a>

<a name="15">15</a> <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… I, 478 U.S. at 563</a>. <a href="#15a">Return to article</a>

<a name="16">16</a> <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… v. Eckerhart, 461 U.S. 424 (1983)</a>. <a href="#16a">Return to article</a>

<a name="17">17</a> <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…; at 433-34</a> and n.9 (emphasis added, citations omitted). <a href="#17a">Return to article</a>

<a name="18">18</a> Note that because Bankruptcy Code §330(a) does not differentiate between "prevailing" and "non-prevailing" parties, this "prevailing
party" consideration is largely irrelevant to an analysis of fee awards in bankruptcy. <a href="#18a">Return to article</a>

<a name="19">19</a> <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… v. Stenson, 465 U.S. 886 (1984)</a>. <a href="#19a">Return to article</a>

<a name="20">20</a> <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…; at 888</a>. <a href="#20a">Return to article</a>

<a name="21">21</a> <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…; at 897</a> (emphasis added). <a href="#21a">Return to article</a>

<a name="22">22</a> <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…; at 898</a>. <a href="#22a">Return to article</a>

<a name="23">23</a> <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…; at 898-900</a>. <a href="#23a">Return to article</a>

<a name="24">24</a> <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…; 461 U.S. at 435</a> (emphasis added). <a href="#24a">Return to article</a>

<a name="25">25</a> <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…; at 899</a>. <a href="#25a">Return to article</a>

<a name="26">26</a> <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… I, 478 U.S. at 565</a>. <a href="#26a">Return to article</a>

<a name="27">27</a> <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…; at 565-66</a>. <a href="#27a">Return to article</a>

<a name="28">28</a> <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…; <a href="#28a">Return to article</a>

<a name="29">29</a> <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… v. Delaware Valley Citizens' Council for Clean Air, 483 U.S. 711 (1987)</a> (Delaware II). <a href="#29a">Return to article</a>

<a name="30">30</a> A four-justice plurality concluded to the contrary. <a href="#30a">Return to article</a>

<a name="31">31</a> <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…; at 731</a>, 733. <a href="#31a">Return to article</a>

<a name="32">32</a> <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… of Burlington v. Dague, 505 U.S. 557 (1992)</a>. <a href="#32a">Return to article</a>

<a name="33">33</a> <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…; at 565</a>, 567. The City of Burlington decision was rendered in the context of the fee-shifting provisions of the Clean
Water Act. <a href="#33a">Return to article</a>

<a name="34">34</a> <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…; at 562</a>. In the bankruptcy context, the parallel rationale would be that the greater the risk of non-payment due to the
administrative insolvency of an estate, the greater the number of hours that an attorney must expend in order to transform the insolvent estate
into a solvent one and/or the higher the hourly rate that must be paid to an attorney who is experienced and capable enough to transform
the insolvent estate into a solvent one. <a href="#34a">Return to article</a>

<a name="35">35</a> <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…; at 563</a>. <a href="#35a">Return to article</a>

<a name="36">36</a> <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…; at 566</a>. <a href="#36a">Return to article</a>

<a name="37">37</a> <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…; <a href="#37a">Return to article</a>

<a name="38">38</a> See <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Cedic Dev. Co. Inc., 219 F.3d 1115, 1117 (9th Cir. 2000)</a> (holding that City of Burlington

was not controlling because the risk of non-payment in the underlying case was not created by any contingency in the merits of the litigation
but by the debtor's conduct,, which suggested that it did not like to pay its lawyers); <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Vista Foods USA Inc., 234 B.R.
121, 128 n.29 (Bankr. W.D. Okla. 1999)</a> (recognizing that the Supreme Court has rejected fee enhancements based on the single
Johnson factor of contingency, but applying the holding only to counsel who are employed on a contingency- rather than an hourly-fee basis. <a href="#38a">Return to article</a>

Journal Authors

Lydia T. Protopapas

Journal Date

Friday, June 1, 2001 - 12:00

Bankruptcy Rule

2001