A reverse contingency can be an acceptable form of compensation, according to Bankruptcy Judge Neil P. Olack of Jackson, Miss. In other words, counsel may be compensated based on what the estate saves, not what it receives. Judge Olack has announced his intention to retire on July 1.
The chapter 7 trustee wanted to retain special counsel to pursue an equitable subordination claim against the secured creditor who held a valid security interest against all estate assets. The proposed counsel refused to accept the engagement based on a conventional contingency arrangement calling for compensation based only on a recovery for the estate.
The trustee and counsel agreed on a hybrid compensation arrangement calling for the lawyers to be paid a reduced hourly fee of $150 an hour plus “a contingency fee of 27.5% of all sums recovered on behalf of the estate.”
Special counsel were successful. Judge Olack approved a settlement where the secured creditor agreed to subordinate its secured claim to the claims of all other creditors.
At the time of the hearing on special counsel’s final application for compensation, the trustee was holding about $356,000. The attorneys sought about $97,900 (i.e., $356,000 x 27.5%) plus some $58,750 in time charges at the reduced rate of $150 an hour.
The chapter 7 trustee fully supported the fee application, but the U.S. Trustee objected, contending, among other things, that reverse contingencies are prohibited per se. In his February 26 opinion, Judge Olack overruled the objection and granted the fee application in full.
Judge Olack found no controlling authority in the Fifth Circuit on reverse contingencies. The closest nonbinding authority was a 2015 opinion by a district court in Denver upholding the bankruptcy court’s approval of fees based on a reverse contingency.
The retention order in the Denver case approved a hybrid fee arrangement that called for a reduced hourly rate plus a 15% contingency based on “any gross amount recovered.” The agreement defined the amount recovered to include “any reduction in [the debtor’s] liability to the [secured creditor].”
The creditor eventually agreed to subordinate its claim, and the bankruptcy court based the compensation award on the amount that the estate did not pay the creditor. The Denver district court affirmed, deciding it was not irrational to base an allowance on the reduction of liability. The district court also concluded that a contingency need not be based on an influx of cash but can be based on a reduction of liability “so long as the reduction or ‘savings’ can be reasonably determined.” Adam v. Weinman (In re Adam Aircraft Industries, Inc.), 532 B.R. 814, 826 (D. Colo. 2015).
The Denver case was not “wholly analogous,” Judge Olack said, because the fee agreement in his court did not include a definition of “recovery” to include a reduction in liability. He therefore analyzed the meaning of “any gross amount recovered” and decided that the “ordinary meaning of ‘recover’ is broad enough to include more than just the receipt of cash.”
Having decided that the retention order included the possibility of a reverse contingency, Judge Olack next decided that reverse contingencies are not prohibited per se.
Mississippi law, Judge Olack said, is based on the ABA’s Model Rules of Professional Conduct. He cited an ABA committee opinion saying that the model rule does not prohibit reverse contingencies, so long as the amount can be “reasonably determinable” and is reasonable in the circumstances.
Combining the ABA opinion with Adam Aircraft, Judge Olack decided that reverse contingencies are not invalid per se.
To close the circle, Judge Olack applied the so-called Johnson factors. He observed that the hybrid fee of about $156,000 was only $19,000 more than what the fee would have been under the firm’s $350,000 customary hourly rate. He found that the “difference is a reasonable reward for accepting some of the risk of nonpayment.” He also noted that the firm’s customary hourly rate of $350 was lower than the $400 maximum the court had allowed in other cases.
Judge Olack upheld the award as reasonable under Section 330(a)(3) and the Johnson factors.
A reverse contingency can be an acceptable form of compensation, according to Bankruptcy Judge Neil P. Olack of Jackson, Miss. In other words, counsel may be compensated based on what the estate saves, not what it receives. Judge Olack has announced his intention to retire on July 1.
The chapter 7 trustee wanted to retain special counsel to pursue an equitable subordination claim against the secured creditor who held a valid security interest against all estate assets. The proposed counsel refused to accept the engagement based on a conventional contingency arrangement calling for compensation based only on a recovery for the estate.
The trustee and counsel agreed on a hybrid compensation arrangement calling for the lawyers to be paid a reduced hourly fee of $150 an hour plus “a contingency fee of 27.5% of all sums recovered on behalf of the estate.”
Special counsel were successful. Judge Olack approved a settlement where the secured creditor agreed to subordinate its secured claim to the claims of all other creditors.