Professional Fees: Under Increased and Continuing Scrutiny

Professional fees are increasingly a hot-button issue in bankruptcy cases. This article examines three recent ongoing, high-profile bankruptcy cases that reflect the growing scrutiny of professional fees: Caesars Entertainment Operating Co. Inc., et al.,[1] SunEdison Inc., et al.[2] and Sabine Oil & Gas Corp., et al.[3]

Section 330 of the Bankruptcy Code provides, in relevant part, that estate professionals may be awarded “reasonable compensation for actual, necessary services rendered” and “reimbursement for actual, necessary expenses.”[4] When determining whether the requested compensation is reasonable, the court may take into account many factors, including “the rates charged for such services”[5] and “whether the compensation is reasonable based on the customary compensation charged by comparably skilled practitioners in cases other than [bankruptcy cases].”[6] Although controversial, courts have long held that rates for restructuring professionals should not be higher than those for nonbankruptcy professionals, and this argument has been raised by those analyzing fee applications.[7]

In Caesars, a fee committee was appointed[8] to analyze and opine on the fees of various estate professionals, including professionals for debtor’s counsel, the court-appointed examiner, the UCC and a second-lien noteholder committee. The fee committee concluded that rate increases in the 3-4 percent range were reasonable, but increases above that range were not. The fee committee rejected as insufficient the argument that higher increases were justified because a firm “raised all of its rates as part of a regular annual or semi-annual adjustment.”[9]

When firms (including Kirkland & Ellis LLP, Proskauer Rose LLP, Winston & Strawn LLP, FTI Consulting, Inc., Alvarez & Marsal and Zolfo Cooper LLC) raised their rates above the 3-4 percent safe harbor, the fee committee required that the firms demonstrate that (1) the client consented to the specific rate increases, (2) both their bankruptcy and nonbankruptcy clients are generally paying such increased rates without a discount, and (3) such increases were reasonable.[10] The fee committee indicated that it would provide its opinion with respect to any increases above 4 percent either as part of or before the next report.[11]

In SunEdison, pre-petition, Skadden Arps Slate Meagher & Flom LLP provided certain discounts to the now-debtors, including a 15 percent discount on the first $2.5 million in fees billed, a 17 percent discount on the next $2.5 million in fees billed and a 19 percent discount on fees billed above $5 million, as well as 75 hours of free legal advice each calendar year.[12] However, less than three weeks before the debtors filed for bankruptcy, the debtors entered into a new engagement letter for services in connection with a financial restructuring.[13] Notably, the new engagement terms provided that pre-petition discounts would not apply.[14] Rather, Skadden would “continue to apply voluntary accommodations as warranted consistent with [its] past billing practices.”[15]

Once the petition was filed, the U.S. Trustee filed a reservation of rights in connection with Skadden’s, noting that the U.S. Trustee would need to conduct discovery to determine whether the new fee arrangement was consistent with the firm’s other billing practices and the effect of such a billing arrangement on the case.[16] However, the U.S. Trustee indicated that it would conduct this inquiry in connection with future fee applications,[17] and the court ultimately authorized the retention of Skadden.[18]

In Sabine, the U.S. Trustee filed a reservation of rights in connection with the retention of Kirkland & Ellis LLP, noting that (1) the blended hourly rate charged to the estate is higher than the blended hourly rate charged to nonbankruptcy clients and (2) the hourly rates for bankruptcy professionals is higher than the hourly rates for nonbankruptcy professionals graduating in the same class year.[19] The U.S. Trustee indicated that he may need to conduct discovery on this matter, and may raise this inquiry in connection with Kirkland & Ellis LLP’s final fee application.[20]

Because these cases are still developing, it is unclear whether the underlying fee applications with fee increases and differentials will ultimately be approved by the respective courts. However, each of these recent examples should serve as a caution to firms representing estate professionals of the dangers of “inappropriate premium billing,”[21] and the need to prepare for increased challenges to and scrutiny of retention and fee applications.