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Recently, in an important decision on professional fees under 11 U.S.C. §330, the U.S. Bankruptcy Court for the
District of Delaware in the case of In re Fleming Companies Inc.2 questioned the wisdom of George Orwell in
Animal Farm,3 holding that bankruptcy attorneys for a debtor could not charge hourly rates that were higher than
the hourly rates charged by attorneys in other practice areas of their firm who have the same amount of legal
experience. This article will address this critical legal issue raised by the Fleming decision,4 and the history of how
reasonable professional fee rates are determined under 11 U.S.C. §330 of the Bankruptcy Code.
From Small Objections, Mighty Problems Grow: The Background of the Fleming Companies Decision
The origin of the hourly-rate issue raised by the Fleming decision is found in the U.S. Trustee's objection5 to the
First Interim Application filed by the debtor's counsel. As a part of that objection, the U.S. Trustee's Office noted
that the "blended" hourly rates of debtor's counsel appeared to be excessive, as the blended rate for all professionals
working on the debtor's case was approximately the rates charged by the counsel junior to mid-level bankruptcy
partners.6
As part of the U.S. Trustee's objection on the possible excessive billing rates, the Trustee noted that the bankruptcy
attorneys at one of the debtor's firms, Kirkland & Ellis, billed at higher rates than many other attorneys practicing
in non-bankruptcy disciplines at Kirkland.7 The U.S. Trustee did admit that Kirkland tax attorneys generally
charged higher rates than the Kirkland bankruptcy attorneys. The U.S. Trustee argued that the Third Circuit's
decision in In re Busy Beaver Building Centers Inc., 19 F.3d 833, 850-51 (3rd Cir. 1994), prohibited bankruptcy
attorneys from receiving higher hourly billing rates than non-bankruptcy attorneys with similar experience "absent a
satisfactory explanation of Kirkland's rate structure."8 The U.S. Trustee's reliance on Busy Beaver's statement that
"§330(a) does not entitle debtor's attorneys to any higher compensation than that earned by non-bankruptcy
attorneys" for this argument is questionable, as the Busy Beaver court was addressing what services could be billed
as professional services and not the question of limiting the rates charged by bankruptcy attorneys for professional
services.
Nevertheless, the bankruptcy court accepted the U.S. Trustee's argument and held:
In enacting the Bankruptcy Code provisions which allow compensation to attorneys, Congress sought to
encourage qualified attorneys to develop bankruptcy expertise by assuring that they would be compensated
at the same level as their peers in other practice areas. "Section 330(a) does not entitle debtor's attorneys to
any higher compensation than that earned by non-bankruptcy attorneys," and the court must ensure that the
applicant "exercises the same 'billing judgment' as do non-bankruptcy attorneys." Busy Beaver, 19 F.3d at 855-56 (quoting In re Manoa Fin. Co., 853 F.2d 687,
690 (9th Cir. 1988). Thus, we conclude that the hourly rates of bankruptcy practitioners must be commensurate
with the hourly rates charged by their peers in other practice areas. To assess this, we will require that Kirkland
provide a schedule of the hourly rates of all of its attorneys and paralegals in all practice areas and offices.9
Although the exact meaning of this language can be subject to some debate, the apparent intention of the court
seems to be to limit the hourly rates chargeable by a bankruptcy attorney to the hourly rates charged by other
members of their firms, who have the same amount of legal experience, and practice in non-bankruptcy areas. The
effect of such a cap on bankruptcy attorney's fees would mark a significant departure from how 11 U.S.C. §330 has
been interpreted since the passage of the Bankruptcy Code.
People Who Are Broke Shouldn't Pay Attorneys: The Notions of Economy of the Estate under the Bankruptcy Act
Prior to the passage of the Bankruptcy Code in 1978, compensation in business bankruptcy cases under
chapters XI and XII of the Bankruptcy Act were governed by notions of "economy of the estate," and
attorney and receiver/trustee professional fees were generally limited to below-market values. See, generally,
Matter of Beverly Crest Convalescent Hospital Inc., 548 F.2d 817 (9th Cir. 1977); Official Creditors'
Committee of Fox Market Inc. v. Ely, 337 F.2d 461, 462 (9th Cir. 1964). Beverly Crest and similar cases
were overruled with the passage of the Bankruptcy Code and 11 U.S.C. §330.10 In fact, one of the key
pieces of legislative history behind 11 U.S.C. §330 stated:
Attorneys' fees in bankruptcy cases can be quite large and should be closely examined by the court. However,
bankruptcy legal services are entitled to command the same competency of counsel as other cases. In that light, the
policy of this section is to compensate attorneys and other professionals serving in the case under Title 11 at the
same rate as the attorney or other professional would be compensated for performing comparable services other than
in a case under Title 11... Notions of economy of the estate in fixing fees are outdated and have no place in a
Bankruptcy Code.11
The purpose of this change was to ensure that bankruptcy lawyers would earn "the same compensation they would
earn in performing similar services outside of the context of bankruptcy."12
And How Do You Determine What Is Reasonable? Current Case Law
Under 11 U.S.C. §330, the vast majority of courts that have considered the issue of awarding fees under 11 U.S.C.
§330 have held that the lodestar method—i.e., multiplying the attorneys' reasonable hourly rate by the number of
hours reasonably expended13—is the appropriate measure of reasonable fees in a bankruptcy proceeding. However,
while the reasonable number of hours in this calculation can be determined with a minimal amount of difficulty, the
more challenging question is how to determine the reasonable hourly rate in a particular bankruptcy proceeding.14
While there is no definitive test for determining what is a reasonable hourly rate that will be charged by a
professional, all courts that have considered the question have held two factors to be of critical importance: (1) the
rate at which the attorney in question charges comparable clients and (2) the rates that equivalent attorneys charge
similar clients in the market in question.15 While courts have looked to various factors in determining what
constitutes reasonable market rates, no reported decision has limited the hourly rates charged by an attorney to the
hourly rates charged by different professionals in his firm.
To Market to Market: A Return to Economy of the Estate?
While it is clear that attorneys in bankruptcy proceedings do not have the absolute right to set their own hourly rates
of compensation under 11 U.S.C. §§327, 328 and 330,16 and there is no definite test of reasonable hourly rates, the
Fleming decision does not provide a solution to this problem.17 The bright-line caps on hourly rates suggested in
the Fleming decision do not provide the detailed review of what constitutes reasonable hourly rates contemplated by
11 U.S.C. §330 and raise numerous practical problems in that process.
Initially, the Fleming cap assumes that all attorneys who graduated law school (or are deemed by their firms to have
graduated) in a certain year are of equal skill and merit, with equal hourly rates in the marketplace. Such arbitrary
uniformity ignores the realities of legal practice, as well as the economics of the legal marketplace. While all
attorneys try to be the best attorney that they can be, it is clear that certain attorneys have higher legal skills and
therefore can command higher hourly rates from their clients.
Second, the Fleming cap ignores differences in practice areas. For example, certain highly specialized legal
practices,18 such as taxation, patent law and, in some cases, sophisticated bankruptcy practice, command higher
hourly rates than do equally skilled practitioners in other specialities, such as insurance defense work, where, due to
the marketplace, attorneys charge much lower hourly rates in return for larger volumes of work.
The third problem with the uniform Fleming cap is that it ignores the billing practices of most firms. While most
law firms charge a particular attorney's time at the same rate for all clients, the firm may charge different rates for
different attorneys with the same legal experience. Further, many firms will charge discount rates to certain clients
based on the volume of business they provide the firm. These economic billing issues were not addressed by the
Fleming court and would pose serious problems to implementing a Fleming cap.
Finally, by establishing an arbitrary cap, the Fleming decision takes a giant step toward returning bankruptcy courts
to the old days of economy of the estate. As noted in the discussion above, one of the basic elements courts must
look at to determine what is a reasonable hourly fee rate is to determine what the "market" pays for similar services
by comparable attorneys as hourly legal fees. However, under Fleming, this process would become circular in
bankruptcy proceedings, as all fees of a debtor's professionals must be approved by a bankruptcy court under 11
U.S.C. §330, thereby establishing the market. If bankruptcy courts can arbitrarily cap the reasonable hourly rate of
bankruptcy attorneys to the hourly rate charged by other attorneys in that bankruptcy attorney's firm who graduated
with the attorney in the same year, the courts will have effectively established the market rate for that attorney and,
therefore, eliminated any outside non-bankruptcy court market forces or the rate the attorney charges his non-debtor
or committee from the determination of reasonable hourly rates.
Courts, however, do not need to artificially make the market for bankruptcy attorneys. Effective markets clearly
exist for almost all bankruptcy attorneys outside of the world of court-approved fees, either through the
representation of creditors, the representation of debtors in non-bankruptcy workouts or other legal work that the
bankruptcy attorneys may perform. That market is readily ascertainable and should be used rather than a Fleming
cap.
Conclusion
As noted above, it is uncertain whether the final decision in Fleming on the initial interim fee applications will
impose a cap on the hourly rates chargeable by bankruptcy professionals. A careful review by a court of the facts
and circumstances of a particular case is a far better approach to determining the reasonable hourly rates of
professionals. While such a process would certainly be more lengthy and place great burdens on an
already-overworked bankruptcy judiciary, this approach would appear to be more in line with the underlying
principles of 11 U.S.C. §330, and more fair both to the bankruptcy estates and to the professionals who represent
them.
Footnotes
1 Board-certified in business bankruptcy by the American Board of Certification. Return to article
2 ___ B.R. ___ 2003 WL 23018828 (Bankr. D. Del. Dec. 23, 2003). Return to article
3 "All animals are equal, but some animals are more equal than others." Orwell, George, Animal Farm (1996 ed.). Return to article
4 While the court's decision in Fleming Companies is one of the most important fee decisions on professional fees issued in a number of years, this article will not provide a
comprehensive review of this decision in light of the fact that a further hearing on many of the issues raised by that decision are currently scheduled for Feb. 10, 2004. Pleadings
related to the Fleming Companies decision can be found on paper at the Delaware bankruptcy court's web site. Return to article
5 The U.S. Trustee's calculations were disputed by the debtor's counsel. Return to article
6 See "The Acting U.S. Trustee's Report on, and Objections to, the First Interim Fee Applications of Certain Debtor Professionals" filed in Fleming Companies Inc.'s chapter 11
case on or about Sept. 22, 2003. Return to article
7 Id. Return to article
8 Id. Return to article
9 2003 WL 23018828. Return to article
10 11 U.S.C. §330(a)(1)-(3) provides:
(a)(1) After notice to the parties in interest and the U.S. Trustee and a hearing, and subject to §§326, 328 and 329, the court may award to a trustee, an examiner or a
professional person employed under §327 or 1103—(A) reasonable compensation for actual, necessary services rendered by the trustee, examiner, 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 U.S. Trustee, the U.S. 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)(A) 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—(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. Return to article
11 124 Cong. Rec. 33,994 (1978), reprinted in 1978 U.S. Code Cong. & Admin. News 6505, 6511. Return to article
12 Matter of UNR Industries Inc., 986 F.2d 207, 210 (7th Cir. 1993). Return to article
13 See, generally, In re Busy Beaver Building Centers Inc., 19 F.3d 833 (3rd Cir. 1994); In re Boddy, 950 F.2d 334 (6th Cir. 1991); Matter of UNR Industries Inc., 986 F.2d 207 (7th
Cir. 1993); In re Manoa Finance Co. Inc., 853 F.2d 687 (9th Cir. 1988). Return to article
14 See In re Atwell, 148 B.R. 483, 489 (Bankr. W.D. Ky. 1993) (describing the difficulty in calculating reasonable hourly rate). Return to article
15 See, generally, Zolfo, Cooper & Co. v. Sunbeam-Oster Co., 50 F.3d 253 (3rd Cir. 1995); In re UNR Industries Inc., 986 F.2d 207, 211 (discussing hourly rates charged in market
where law firm was located); see, also, In re Atwell, 148 B.R. at 483, where the court set forth six factors to determine the reasonable hourly rate: (1) attorney's customary
hourly rate charged to similar clients, (2) rates charged by comparable attorneys to comparable clients in the appropriate market, (3) quality of legal services and skill of
attorney, (4) novelty/difficulty of issues addressed by attorney, (5) whether task in question was performed by appropriate person and (6) whether attorney exercised billing
judgment in adequate hourly rate to reflect the circumstances of the case. Return to article
16 See Matter of Geraci, 138 F.3d 314, 320 (7th Cir. 1998) (chapter 7 case where Seventh Circuit noted, "The reasonable value [of the attorney's services] is not...always the price
that a willing debtor has agreed to pay a willing attorney in the marketplace, for by enacting §§329 and 330 of the Code, Congress placed limits on the role the market will be
permitted to play in setting professional fees in bankruptcy cases."). Return to article
17 See Matter of Geraci, 138 F.3d at 314, 320, and In re Boddy, 950 F.2d 334, 338 (noting facts and circumstances of the bankruptcy case determining the reasonable hourly rates
charged by the debtors' counsel). Return to article
18 If you consider the effective hourly rate of certain plaintiff tort lawyers, they are the highest paid attorneys in the United States. Return to article
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