Please ensure Javascript is enabled for purposes of website accessibility

Court approves $2 million fee

By: dmc-admin//October 4, 2006//

Court approves $2 million fee

By: dmc-admin//October 4, 2006//

Listen to this article

What the court held

Case: F.V. Steel & Wire Co. v. Houlihan Lokey Howard & Zukin Capital, L.P., No. 05-C-1297

Issue: Can a bankruptcy court review for reasonableness the fee of a professional employed pursuant to sec. 328(a)?

Holding: No. Unless the court expressly reserved authority to do so in its order, the court can only reduce the fee if it is improvident as a result of an event that was not capable of being anticipated at the time of the order.

A federal trial court judge’s ruling is a positive development for professionals retained in bankruptcy proceedings, such as attorneys. U.S. District Judge Lynn Adelman held on Sept. 6 that the fees of a professional appointed pursuant to 11 U.S.C. 328(a) cannot be reduced based on the reasonableness standard in sec. 330.

In so holding, the court rejected the conclusion of the bankruptcy court that it could review such a fee for reasonableness, a conclusion that also was recently expressed in a published opinion by the bankruptcy court in the Eastern District, In re Gilbertson, 340 B.R. 618 (E.D.Wis.2006).

In February 2004, F. V. Steel & Wire Co. filed for bankruptcy. The trustee appointed a committee of unsecured creditors, which in turn, selected Houlihan Lokey Howard & Zukin Capital, L.P., to serve as financial advisors.

The committee agreed to pay Houlihan $80,000 a month plus a percentage of the “unsecured creditor recoveries” as a transaction fee. The engagement letter defined unsecured creditor recoveries as “the consideration received by all unsecured creditors in respect of their claims, including without limitations, cash, securities (debt or equity) property or other interests or consideration.”

Court Approves Agreement

The bankruptcy court approved the application to retain Houlihan pursuant to sec. 328(a).

The order provided, “Houlihan’s compensation is expressly subject to the provisions of the Bankruptcy Code, which provide that the Court may allow compensation agreed to in the engagement letter or described in the Application, if, in light of developments in the case, the terms of the compensation later prove improvident.”

The court added language stating that “[a]ny and all compensation paid to Houlihan, including the Transaction Fee and the monthly advisory fee, is subject to the final approval of this Court.”

In October 2005, Houlihan filed its final fee application, consisting of the monthly advisory fees, plus a transaction fee of $2,066,540. The debtors objected to the transaction fee, arguing that in calculating it, Houlihan wrongly treated retiree recoveries as unsecured creditor recoveries.

Houlihan argued that the court had no authority to reduce the fee unless it had proved improvident in light of developments that could not have been anticipated; and that it had properly calculated the transaction fee.

The bankruptcy court rejected Houlihan’s first argument, stating that it “would strip the court of the ability to review the reasonableness of professional fee requests,” and it reviewed Houlihan’s fee application for reasonableness.

However, the court concluded that Houlihan had properly treated retiree recoveries as unsecured creditor recoveries and that the fee was reasonable.

The debtor appealed, but the district court affirmed, although it disagreed with the court’s first holding.

No Review for Reasonableness

The district court held that the bankruptcy judge had no authority to review the fee for reasonableness under sec. 330.

Pursuant to sec. 328(a) a professional may obtain pre-approval of a compensation arrangement such that a bankruptcy court may subsequently modify the package only if its initial approval proved “improvident in light of developments not capable of being anticipated at the time.”

Related Article

Case Analysis

Citing cases from other circuits — In re Fed. Mogul-Global, Inc., 348 F.3d 390, 397 (3d Cir.2003), and In re B.U.M. Int’l, Inc., 229 F.3d 824, 829 (9th Cir.2000) — as well as 3 Collier on Bankruptcy, sec. 328.03[1](15th ed. rev. 2002), the court held that a bankruptcy court may not inquire into the reasonableness of a fee, if it has already approved it pursuant to sec. 328.

The court ruled, “a bankruptcy court must approve a professional’s application for compensation either under the ‘improvident’ standard of sec. 328(a) or the reasonableness standard of sec. 330(a)(1) — not both.”

Reconciling its decision with the Seventh Circuit’s decision in In re Lyttons, 832 F.2d 395, 400 (7th Cir.1987), the court wrote, “The Lyttons court stated only that a bankruptcy court which approved a compensation arrangement under sec. 328 could subsequently modify it, not that it could do so under a standard other than that provided in sec. 328(a). Lyttons does not authorize a bankruptcy court that pre-approved a compensation arrangement under sec. 328(a) to subsequently review a request for compensation for reasonableness under sec. 330.”

Applying sec. 328(a), the court then concluded that the debtor failed to establish that Houlihan’s treatment of the retiree recoveries as unsecured recovery was a development that could not have been anticipated at the time of the order. While such claims are priority claims, they are nevertheless classified as unsecured claims under the Bankruptcy Code, and thus, fall within the language of the order retaining Houlihan.

Accordingly, the court affirmed the ultimate decision of the bankruptcy court — awarding the $2 million in transaction fees — although the reasoning was different.

Click here for Case Analysis.

Polls

Should Steven Avery be granted a new evidentiary hearing?

View Results

Loading ... Loading ...

Legal News

See All Legal News

WLJ People

Sea all WLJ People

Opinion Digests