The amendments to Section 330(a) in 1994 do not bar courts from considering “results obtained” when making allowances of professional compensation, the Sixth Circuit held in an opinion on August 16.
The chapter 7 trustee for a corporate debtor hired a law firm as special counsel to investigate and pursue claims of the estate. After a year’s investigation, the lawyers identified $1.6 million in possible claims against the debtor’s principal for fraudulent transfers and breach of fiduciary duty.
Before filing suit, the lawyers for the trustee held negotiations with counsel for the defendant and learned that the principal had substantial defenses. With advice from special counsel, the trustee obtained bankruptcy court approval to release claims in return for a $38,000 payment by the principal.
In addition to the $38,000, the estate only had $3,000 in other assets.
Special counsel filed a $37,000 fee application. Considering also the fee applications by the trustee and the trustee’s general counsel, the entire estate could have been exhausted by professional fees alone.
The bankruptcy court cut special counsel’s fee in half. The district court affirmed, leading special counsel to appeal to the Sixth Circuit. The Court of Appeals affirmed.
Circuit Judge John B. Nalbandian identified two issues on appeal: (1) May the court consider results obtained when making an award under Section 330(a)(3); and (2) did the bankruptcy court abuse its discretion by cutting the fees in half?
The History of Section 330(a)
Before adoption of the Bankruptcy Code in 1978, fee awards in bankruptcy cases were governed by the so-called spirit of economy, which usually resulted in lower fees in bankruptcy cases. An overarching purpose in Section 330(a) was to abandon the spirit of economy by paying bankruptcy lawyers the same as specialists in other areas.
Before the amendments in 1994, Judge Nalbandian explained that Section 330(a) called for the court “to look at ‘the time, the nature, the extent, and the value’ of the services as well as the costs of ‘comparable services.’” With no better guidance, courts adopted different approaches, the judge said.
Some courts applied the Fifth Circuit’s 12 Johnson factors. One Johnson factor considered results obtained.
Before the 1994 amendments, the Sixth Circuit adopted the so-called lodestar method, where the court first determines an hourly rate and multiplies the rate by the number of hours reasonably expended. Only then, Judge Nalbandian said, could the court modify the award in view of the Johnson factors.
Section 330 was amended in 1994 by codifying some but not all of the Johnson factors. Section 330(a)(1)(A) now awards “reasonable compensation for actual, necessary services.” In determining the amount of “reasonable compensation,” subsection (a)(3) requires the court to “consider the nature, the extent, and the value of such services, taking into account all relevant factors, including” six factors such as time spent and rates charged outside of bankruptcy.
Judge Nalbandian observed that the “results obtained” factor from Johnson was not included in subsection (a)(3).
In the amendment, special counsel argued that the omission of “results obtained” bars the bankruptcy court from considering that factor. Instead, special counsel contended that the court, under subsection (a)(3)(C), could only consider whether the services appeared “beneficial at the time at which the service was rendered.”
‘Results Obtained’ Survived
Judge Nalbandian focused on the statute’s use of the word “including” and the command that the court take “into account all relevant factors.” In addition, he said that the statutory language makes awards discretionary, not mandatory.
Judge Nalbandian therefore held that “the text of § 330(a)(3) permits courts to consider factors not listed, including ‘results obtained.’”
But wait, special counsel said, the services seemed beneficial at the time they were rendered, and considering results obtained would bring back the spirit of economy.
Citing decisions from other circuits considering results obtained, Judge Nalbandian once again said that the court may consider results obtained.
No Abuse of Discretion
Special counsel argued that a 50% reduction was an abuse of discretion.
In response, Judge Nalbandian trotted out a Ninth Circuit opinion upholding a 50% reduction. He went on to say that “reducing the fees by half based on the value of the work to the estate is consistent with what other courts have done.”
“So,” Judge Nalbandian said, “the court did not abuse its discretion in reducing the fees by half . . . . based on the minimal results . . . obtained.”
Commentary
Prof. Nancy Rapoport told ABI that it was “an awesome opinion.” She saw the court as “signaling” that “if this were a situation in which a law firm was billing its client directly, there’s no way the firm would have sent a bill for $37,000 for bringing in $38,000.”
Prof. Rapoport is a UNLV Distinguished Professor and the Garman Turner Gordon Professor of Law at the Univ. of Nevada at Las Vegas William S. Boyd School of Law. An expert on ethics and fee allowances in bankruptcy cases, she is often appointed as a fee examiner in large chapter 11 cases.
The amendments to Section 330(a) in 1994 do not bar courts from considering “results obtained” when making allowances of professional compensation, the Sixth Circuit held in an opinion on August 16.
The chapter 7 trustee for a corporate debtor hired a law firm as special counsel to investigate and pursue claims of the estate. After a year’s investigation, the lawyers identified $1.6 million in possible claims against the debtor’s principal for fraudulent transfers and breach of fiduciary duty.
Before filing suit, the lawyers for the trustee held negotiations with counsel for the defendant and learned that the principal had substantial defenses. With advice from special counsel, the trustee obtained bankruptcy court approval to release claims in return for a $38,000 payment by the principal.
In addition to the $38,000, the estate only had $3,000 in other assets.