In this column in March 2018, we said:
In years past, a debate raged over “local vs. national rates.” The controversy subsided, because courts outside of New York and Delaware generally began allowing compensation to counsel at the rates ubiquitous in their home districts, even when the rates were higher than those prevailing in the venue where the case was located.
The debate also subsided because so many reorganizations are filed in Delaware or New York, where there is no observable cap on hourly rates.
Bankruptcy Judge Selene D. Maddox of Aberdeen, Miss., stifled a reinvigoration of the “local vs. national” debate in an opinion on December 21. In addition, she rejected the idea that compensation for all chapter 11 cases in her district was frozen at rates set by another bankruptcy judge in 2015.
For lawyers from out of town whose rates are higher than prevailing rates in the district where a case is pending, the 52-page opinion by Judge Maddox contains a helpful hint: Lock in your rates with a retention order approving higher rates under Section 328(a).
To read ABI reports about “local vs. national rates,” click here, here and here.
Out-of-Town Debtor’s Counsel
The corporate debtor was a furniture manufacturer. For its primary bankruptcy advisors, the debtor selected its long-time outside counsel, a Philadelphia-based firm with 825 lawyers spread across 27 offices in the U.S. For local counsel, the debtor tapped a Houston-based firm with 325 lawyers in nine U.S. offices.
In their retention affidavits, both firms said that the debtor had agreed to pay their normal rates. For primary counsel, hourly rates for partners were shown be $640 to $940 an hour. Local counsel’s lead partner would charge $650 per hour. There were no objections to the retention applications.
The retention orders authorized the debtor to retain the firms under Sections 327(a) and 328(a). The retention orders did not explicitly approve the hourly rates contained in the retention affidavits. The retention orders did say that compensation was approved as set forth in the retention applications.
On the first interim fee application, general bankruptcy counsel sought less than $110,000 in fees, while local counsel’s request was for about $30,000.
The U.S. Trustee objected, mainly because the hourly rates were higher than those for Mississippi counsel. The U.S. Trustee in substance wanted the court to impose what might be understood as a $425 hourly cap espoused in 2015 by another bankruptcy judge in the district in In re Sanderson Plumbing Prods., Inc., 13-14506, 2015 BL 345100 (Bankr. N.D. Miss. Oct. 20, 2015).
The U.S. Trustee said that the case was not complex and that fees should not be so high. The U.S. Trustee also claimed there were duplications of services because local counsel had appeared at hearings alongside primary counsel.
The Significance of Section 328(a) Retention
Both firms countered the objections by asserting that the court had preapproved their rates under Section 328(a). The section allows a debtor or trustee to engage a professional “on any reasonable terms and conditions of employment, including on a retainer, on an hourly basis, on a fixed or percentage fee basis, or on a contingent fee basis.” [Emphasis added.]
When allowing compensation for retentions approved under Section 328(a), the court may depart from the approved terms of engagement “if such terms and conditions prove to have been improvident in light of developments not capable of being anticipated at the time of the fixing of such terms and conditions.”
Approval of compensation is different for a professional person retained under Sections 327 or 1103. Section 330(a) permits a court to grant “reasonable compensation for actual, necessary services rendered.”
Judge Maddox said that professionals have the option of having their retentions approved under either Section 330(a) or Section 328(a). She began her analysis by deciding whether the retention orders had approved hourly rates under Section 328(a).
Citing the Fifth Circuit, Judge Maddox explained that “Section 328(a) applies when the court approves a fee as part of the employment application at the outset of the engagement, while § 330(a) applies when the court has yet to do so.”
If retention was under Section 328(a), Judge Maddox said it’s a “high hurdle” to revise the terms of compensation. However, she said that the Fifth Circuit had not clarified “how a court determines whether an applicant’s hourly rate or contingency fee has been preapproved under § 328.” There are “competing tests” in other circuits “governing preapproval,” she said.
The Test for Section 328(a) Retention
Judge Maddox said that the Third and Ninth Circuits require that retention orders must have specifically approved hourly rates. The Second and Sixth Circuits, she said, take “a more relaxed approach” by employing “the totality of the circumstances” to decide whether compensation has been approved under Section 328(a).
For herself, Judge Maddox adopted “a totality of the circumstances test . . . to determine whether an applicant’s fee arrangement was preapproved under § 328.”
Applying the test, Judge Maddox noted that the retention orders “explicitly” approved employment under Section 328 and that there was sufficient information regarding the firms’ hourly rates.
After considering the “totality of the circumstances,” Judge Maddox concluded that she had approved hourly rates under Section 328. The “thoroughness” of the retention applications, she said, gave “more than sufficient information to put all parties on notice of the agreement between [the debtor] and the Applicants concerning their agreed upon hourly rates.”
Judge Maddox then turned to the question of whether the rates should be reduced as “improvident.” She noted how the U.S. Trustee had not claimed that the terms of engagement were improvident. Rather, the U.S. Trustee contended that the case was not sufficiently complex to justify counsel’s higher rates.
A case that’s not so complex does not “meet the improvident standard,” Judge Maddox said. In those circumstances, she said that “a professional whose compensation has been fixed under § 328 should have their expectations protected.”
Duplication of Services
The U.S. Trustee claimed there were duplications of services because local counsel attended hearings alongside general bankruptcy counsel. Judge Maddox countered by quoting a local rule that requires local counsel to “participate in all trials . . . and other proceedings conducted in open court.”
Judge Maddox overruled the duplication objection, saying that local counsel’s “attendance at these hearings was neither unnecessary nor duplicative.”
Sanderson Plumbing
Although she had decided that fees could not be reduced under Section 328(a), Judge Maddox said she was
concerned by the UST’s reliance on Sanderson Plumbing and § 330 not only in this bankruptcy case where § 328 is applicable, but also in other cases where a professional’s hourly rate would be subject to review at the compensation stage under § 330’s reasonableness factors and the Johnson factors.
Judge Maddox went on to say that she “continues” to see the U.S. Trustee invoking Sanderson Plumbing whenever hourly rates are more than $425 to $450 per hour. However, she noted that “the prevailing hourly rate in Sanderson Plumbing was only applicable under the facts as known to the court in that bankruptcy case at that time.” She said it was “not proper to simply point to that case in an objection to an applicant’s fees.”
“In other words,” Judge Maddox said,
a fee award in other cases is just one of the many factors this Court utilizes in a § 330 analysis, and it certainly should not be the only metric the UST uses in responding or objecting to fee applications.
Next, Judge Maddox analyzed the fee requests under the so-called Johnson factors, noting the U.S. Trustee’s objection that the requested rates were higher than what firms charge in Mississippi.
If the rates of $425 to $450 per hour as allowed in Sanderson Plumbing were adjusted for inflation, Judge Maddox said that range today would be $567 to $640 an hour.
Although there was no evidence that the debtor could not have obtained lead counsel from Mississippi, Judge Maddox agreed “that debtors should be able to choose their own representation.” Still, she said that “the appropriate prevailing rates in this community would be in the range of $550.00 to $600.00 per hour for partners or counsel and $350.00 to $400.00 per hour for associates.”
If prevailing local rates were applied to the fee applications, Judge Maddox said that counsel would have been granted allowances lower than they requested. Because there were no grounds under Section 328(a) for reducing hourly rates, Judge Maddox said she would not lower the awards.
Using “hindsight,” Judge Maddox said, is “a tool not available when hourly rates are preapproved under § 328.”
Judge Maddox allowed the fees as requested but required counsel to apply their remaining retainers to the awards before receiving compensation from the debtor.
In this column in March 2018, we said:
In years past, a debate raged over “local vs. national rates.” The controversy subsided, because courts outside of New York and Delaware generally began allowing compensation to counsel at the rates ubiquitous in their home districts, even when the rates were higher than those prevailing in the venue where the case was located.
The debate also subsided because so many reorganizations are filed in Delaware or New York, where there is no observable cap on hourly rates.
Bankruptcy Judge Selene D. Maddox of Aberdeen, Miss., stifled a reinvigoration of the “local vs. national” debate in an opinion on December 21. In addition, she rejected the idea that compensation for all chapter 11 cases in her district was frozen at rates set by another bankruptcy judge in 2015.