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Professional Fees Case Analysis

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

Professional Fees Case Analysis

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

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The decision is beneficial for attorneys, inasmuch as the professionals employed by trustees and creditor committees are frequently attorneys.

Earlier this year, the bankruptcy community in the Eastern District of Wisconsin was thrown for a loop when a bankruptcy judge held, as in the case at bar, that the fee of an attorney employed pursuant to sec. 328 was reviewable for reasonableness, even though there was no event that could not have been anticipated that made the fee improvident. In re Gilbertson, 340 B.R. 618 (E.D.Wis.2006)(In the case at bar, none of the attorneys defended the bankruptcy court’s decision to review the reasonableness of the fee; they disagreed only on the application of sec. 328(a)).

In Gilbertson, the trustee employed an attorney to recover money that he contended was a fraudulent transfer by the debtor. The order, pursuant to sec. 328(a), provided that the attorney was to receive 33 1/3 percent of his recovery plus expenses. The attorney recovered $10,000, with only 2.7 billable hours.

Because the funds were recovered so easily, the bankruptcy court declined to award the entire amount sought by the attorney under the order — $3,333.

The court concluded, “Such an early and easy result could not have been foreseen by the Trustee when he applied to employ the Applicant; otherwise the application to employ counsel never would have been approved in the first place.” Gilbertson, 340 B.R. at 622. Accordingly, the court calculated the attorney’s fee by multiplying the 2.7 hours by $700 per hour, and awarded $1,890. Id., at 623-24.

This holding is problematic in itself, because what the court found could not be anticipated is actually very easy to anticipate. Some recoveries come easy; some come hard. There is nothing about it that is “not capable of being anticipated at the time of the fixing of such terms and conditions.”

Obviously, as the court found, the parties did not “anticipate” the money would be recovered so quickly and easily. That is not the relevant question, however; the issue is whether it was “capable of being anticipated.” In a contingency fee situation, it is always capable of anticipation that the fee will far exceed what anyone would pay on an hourly basis for the work. Thus, the fee should not have been reduced pursuant to sec. 328(a).

Even more problematic, however, was dicta by the court in Gilbertson, stating that, even if a bankruptcy court approves a contingency fee pursuant to sec.328(a), and even if there is no event that could not be anticipated and which renders the agreement improvident, the court may still review the fee for reasonableness under sec. 330.

Rejecting the attorney’s argument that, once a court has approved a contingency fee under sec. 328(a), it has no discretion to review for reasonableness, the court wrote, “If a sec. 328(a) appointment forecloses a court from reviewing the reasonableness of compensation under sec. 330, there would be no need to require an applicant to submit detailed fee applications giving the hours worked and services rendered and no point in the ‘notice and hearing’ provisions noted by the Seventh Circuit Court of Appeals in Lytton’s.” Id., at 621-22.

The decision in the case at bar correctly rejects this reasoning, concluding, “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.”

The decision is therefore a boon to all attorneys and other professionals who may be employed by a trustee or creditor committee to recover funds for a bankruptcy estate. Only if an event occurs that is not capable of being anticipated arises can the fees of an attorney or other professional be reduced, if the appointment is pursuant to sec. 328(a).

Unfortunately, the court’s decision contains other language that will permit bankruptcy courts to undermine this rule.

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The court quoted with approval the following language by the Ninth Circuit in In re Circle K Corp., 279 F.3d 669, 671, fn. 2 (9th Cir. 2002): “The bankruptcy court is free to make clear that it is only conditionally approving the professionals’ retention
application such that sec. 330 is applicable.”

Adopting this conclusion, the court wrote, “even if the engagement letter and/or retention application expressly contemplate review under sec. 328(a), a bankruptcy court may in its retention order specify that it will review the fee application under sec. 330. . . [A] bankruptcy court may not review a fee application for reasonableness under sec. 330 unless it unambiguously states in the retention order that it intends to do so.”

Thus, a bankruptcy court can easily avoid the rule in this case by sua sponte including in its order language that it intends to review the fee for reasonableness pursuant to sec. 330.

Arguably, such a reservation of power is not consistent with the core holding of the court in the case at bar — “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.”

However, that is an issue that will require a different case for resolution. For now, attorneys and other professionals appointed in bankruptcy court can take heart that, at least their fees won’t be reduced pursuant to sec. 330, even when the order did not reserve the court’s power to do so.

– David Ziemer

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David Ziemer can be reached by email.

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