IN THE UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

 

No. 99-11012

 

In The Matter Of: TEXAS SECURITIES, INC.,

Debtor

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M. BRUCE PEELE,

Appellant,

versus

JAMES CUNNINGHAM,

Appellee.

 

Appeal from the United States District Court

For the Northern District of Texas

 

July 7, 2000

Before REYNALDO G. GARZA, JOLLY, and HIGGINBOTHAM, Circuit Judges.

HIGGINBOTHAM, Circuit Judge:

M. Bruce Peele seeks review of the bankruptcy court's ruling

on his final application for fees. Because we find that the ruling

was inconsistent with 11 U.S.C. § 328(a), we REVERSE and REMAND for

the recalculation of Peele's fees. 

Hill, Held, Metzger, Lofgren & Peele, P.C., ("Hill & Held")

was employed as special litigation counsel to represent the trustee

for Texas Securities, Inc. The original Employment Order, dated
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April 6, 1994, provided that the law firm was to be employed on a

contingent fee basis, giving it a 40% fee for assets recovered for

the debtor Texas Securities. Peele is the successor to the law

firm. The original Employment Order did not specify whether the

fee provision was governed by 11 U.S.C. § 328 or 11 U.S.C. § 330.

On October 20, 1995, the bankruptcy court entered an order

modifying the original order that approved Hill & Held's

employment. The modifying Order provides that the Hill & Held firm

shall, consistently with the applicable provisions of the

Bankruptcy Code, including but not limited to Sections 327 and

328, submit all interim and final fee applications on the

following basis: (i) all work completed prior to September 8,

1995, shall be submitted in accordance with the April 6, 1994

Order authorizing employment of Hill & Held on a contingency

fee basis; (ii) as to all work pending as of September 8,

1995, the fees associated with said work shall be calculated

using a blended formula which Hill & Held contends represents

reasonable compensation based upon the April 6th contingency

fee arrangement for work performed prior to September 8th and

the hourly fee arrangement for work performed after September

8th; and (iii) as to all new work commenced after September

8th, Hill & Held shall submit its fee applications based upon

hourly rates in effect as of September 8, 1995. 

The Order further states that it "does not modify, in any respect,

this Court's authority to review this and all employment orders in

accordance with Section 328 of the Bankruptcy Code." The only

Bankruptcy Code sections referenced in the Order are §§ 327 and

328.

When Peele submitted his final fee request, the bankruptcy

court reduced the amount from that requested by $ 40,102.32. The

bankruptcy court's order on final applications for fees, dated

March 24, 1999, states that it analyzed the fee requests in
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accordance with the "lodestar" formula provided for by 11 U.S.C. §

330(a)(1). Peele requested contingent fees of $591,234 and hourly

fees of $69,503. He billed the hourly fees at a rate of $201.19

per hour. The bankruptcy court approved payment of $620,634.68,

without distinguishing between contingent and hourly fees and

without explaining the reason for the reduction from the amount

Peele requested.

Peele appealed the order on final applications for fees to the

district court, arguing that the bankruptcy court erred in

reviewing his fee application under 11 U.S.C. § 330 rather than §

328. The district court affirmed the bankruptcy court's ruling,

and Peele appealed that order to this court. 

The bankruptcy court's conclusions of law are reviewed de

novo. See In the Matter of Pro-Snax Distributors, Inc., 157 F.3d

414, 421 (5th Cir. 1998). 

Peele argues that the hourly rate for work performed after

September 8, 1995 is not subject to the lodestar formula of §

330(a). Section 328(a) provides for retainer, hourly or contingent

fee compensation, and Peele contends that the modifying Order

established that he would be compensated in part on a contingent

fee basis and in part on an hourly fee basis. Consequently, the

bankruptcy court could not shift his compensation to the lodestar
1The dissent of our able colleague emphasizes the court's

stated intention in the introductory paragraph of the Order to

adopt Hill & Held's recommendation that included a "lodestar

approach" for future work. The court's Order, however, specified

an hourly rate in providing that "as to all new work commenced

after September 8th, Hill & Held shall submit its fee applications

based upon hourly rates in effect as of September 8, 1995." The

suggestion of counsel notwithstanding, the bankruptcy court ordered

the specific hourly rate in effect as of September 8, 1995, and the

court specified that the Order was entered under § 328.

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formula of § 330. We agree.1 The modifying Order establishes a

combination of contingent fee and hourly fee compensation pursuant

to § 328(a).

We have interpreted § 328 to limit the power of the bankruptcy

court to alter the compensation of professionals: "[t]he court must

therefore set the compensation award either according to § 328 or

§ 330. If prior approval is given to a certain compensation, § 328

controls and the court starts with that approved compensation,

modifying it only for developments unforeseen when originally

approved." In the Matter of National Gypsum Co. v. Donaldson

Lufkin & Jenrette Securities Corp., 123 F.3d 861, 862-63 (5th Cir.

1997); see also United States v. Ruff, 99 F.3d 1559, 1567 (5th Cir.

1996)(holding that commission of business broker was fixed under §

328 where agreement was approved by court and underlying service

had been completed). Section 328 applies when the bankruptcy court

approves a particular rate or means of payment, and § 330 applies

when the court does not do so. See Unsecured Creditors' Comm. v.

Puget Sound Plywood, 924 F.2d 955, 960 (9th Cir. 1991). Once the
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bankruptcy court has approved a rate or means of payment, such as

a contingent fee, the court cannot on the submission of the final

fee application instead approve a "reasonable" fee under § 330(a),

unless the bankruptcy court finds that the original arrangement was

improvident due to unanticipated circumstances as required by §

328(a). See National Gypsum, 123 F.3d at 862; In re Reimers, 972

F.2d 1127, 1128 (9th Cir. 1992).

In this case, the court approved a contingent fee arrangement

in the original Employment Order and in the modifying Order of

October 20, 1995 approved the contingent fee basis for work

performed prior to September 8, 1995 and an hourly rate for work

performed thereafter. The modifying Order establishes a mode of

compensation governed by § 328, and the bankruptcy court could not

alter that compensation on Peele's submission of the final fee

application without making a finding that the modifying Order was

improvident due to unanticipated circumstances. Since the

bankruptcy court made no such finding, the court could not shift

any part of Peele's compensation to the lodestar formula of §

330(a)(1).

We REVERSE and REMAND with instructions that the bankruptcy

court redetermine Peele's fees in accordance with § 328 rather than

the lodestar formula of § 330(a)(1). On remand, the court should

apply the contingent fee at the rate originally agreed to, the

blended rate described in the modifying Order, and the hourly rate
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specified in the modifying Order, which is that in effect at Hill

& Held on September 8, 1995.

REVERSED and REMANDED.
REYNALDO G. GARZA, Circuit Judge, dissenting:

The majority reverses the district and bankruptcy courts and

remands with instructions that the bankruptcy court redetermine

Peele’s fees in accordance with § 328 rather than § 330. The

majority found that the district court should apply the contingent

fee at the rate originally agreed to, the blended rate described in

the modifying order, and the hourly rate specified in the modifying

Order. I must respectfully dissent, however, because the

bankruptcy court in the present case did not approve a specific

rate to be used in calculating fees based on the blended or hourly

method of compensation. Rather, the bankruptcy court’s Modified

Employment Order differentiated between types of compensation based

upon the date that services were performed for the bankruptcy

estate. Under the Modified Employment Order, pre-September 8

matters would be paid on a contingency fee basis, post-September 8

matters would be paid on an hourly fee basis, and matters pending

as of September 8 would be paid on either a contingent or hourly

fee basis. 

The first method of compensation consisted of a 40% contingent

basis for services completed prior to September 8, 1995. The

parties would be able to calculate with certainty the amount that

Peele would be compensated based on the contingent fee arrangement,

and the bankruptcy court agreed to it. However, the bankruptcy

court and Peele did not agree on the rate to be used after
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2 The majority concludes that the hourly rate is specified in

the Modified Employment Order as that “in effect at Hill & Held on

September 8, 1995.” (emphasis added) However, the Modified

Employment Order merely sets the hourly rate as that “in effect as

of September 8, 1995.” It is unclear to which specific rate the

Modified Employment Order refers. The majority assumes that the

rate to which the Modified Employment Order refers is that in

effect at Hill & Held, but it does not explain why. The Modified

Employment Order gives no indication that the rate in effect at

Hill & Held on September 8 had been mutually agreed upon or given

prior court approval.

September 8, 1995, and no such rate was included in the Order. The

Modified Employment Order does not provide a definitive hourly rate

or even a range of hourly rates.2 Under § 328, the bankruptcy

court may approve a professional’s employment based on any

“reasonable terms and conditions of employment.” 11 U.S.C. § 328.

Because the Modified Employment Order did not establish a postSeptember 8 hourly rate of compensation, the bankruptcy could not

possibly have made a prior determination of the reasonableness of

the “terms and conditions of employment” or given prior approval to

the compensation requested by Peele. Thus, the bankruptcy court

and Peele did not agree that § 328 would apply to the entire final

fee application.

The Modified Employment Order states that the employment

agreement was being modified “to (i) affirm the contingency fee

arrangement with regard to completed work; (ii) pay for work-inprogress on a contingency/hourly fee basis, plus expenses; and

(iii) pay for future work performed on behalf of the estate

utilizing the lodestar approach, plus expenses.” (emphasis added).
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The lodestar approach refers to a formula involving the

multiplication of the number of hours reasonably expended in a case

by the hourly compensation rate prevailing in the community for

similar work. The resulting figure is then subject to adjustment

to reflect factors such as the difficulty and quality of the

representation. In accordance with the lodestar approach, Peele’s

final fee application included an analysis of the factors to be

considered in adjusting the lodestar. If the bankruptcy court was

without authority to reduce Peele’s fees, except for developments

unforeseen when the fees were approved, there would be no need to

mention the lodestar approach in the modified order or to address

the factors in the fee application. 

The Modified Employment Order states that it did “not modify

in any respect, this Court’s authority to review this and all

employment orders in accordance with Section 328 of the Bankruptcy

Code.” Peele argues that this language establishes that the entire

agreement is governed by § 328. However, the bankruptcy court’s

reservation of its authority to review the terms and conditions of

employment orders pursuant to § 328 does not necessarily imply that

the entire Order is actually controlled by § 328. Reserving

authority is not the same as exercising it. The Modified

Employment Order did not set a specific post-September 8

compensation rate, rendering § 328 inapplicable to the review of

post-September 8 compensation. 
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The only part of the agreement that § 328 governs is the 40%

contingent fee agreement because the court expressly approved and

established that amount in both the Original and Modified

Employment Orders. This arrangement enabled the bankruptcy court

to grant its prior approval because the court could evaluate the

reasonableness of the specified amount in advance. In contrast,

the bankruptcy court was not able to grant its prior approval to

the post-September 8 compensation because no rate on which the

blended fees and hourly fees would be based had been determined or

disclosed, and thus an analysis of the reasonableness of such an

arrangement could not be made in advance. 

In accordance with congressional intent, the bankruptcy and

district courts correctly decided to apply the reasonableness

standard of § 330 to the present case. If a district court fails

to clearly determine the hourly rate of compensation, then § 328 is

inapplicable, and § 330 governs by default. As this Court

explained in Donaldson Lufkin & Jenrette Securities Corporation v.

National Gypsum Company, professionals may avoid § 330 and the

“uncertainties of what a judge thought the work was worth after it

had been done” by proceeding under § 328. Id. at 862-3. However,

§ 328 applies only where prior agreement on a rate of compensation

has eliminated uncertainty and courts need not engage in judicial

guesswork to determine the rate. As in the present case, where

ambiguity exists as to whether court approval has been given to a
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specific, mutually agreed-upon hourly rate of compensation,

Congress intended § 330 to govern. See National Gypsum, 123 F.3d

861 (5th Cir. 1997) (holding that bankruptcy courts must set

compensation awards for professional consultants either according

to § 330, which governs compensation of officers based on

reasonableness, or § 328, which permits professionals to obtain

prior court approval of certain compensation agreed to with the

trustee, debtor, or committee) (citing 11 U.S.C. §§ 328, 330). 

In conclusion, I part company with the majority because of a

combination of factors. First, the majority relies on ambiguous

language in the Modified Employment Order that fails to clearly

disclose the hourly rate of compensation. See supra footnote 1.

Second, the majority overlooks the discussions of the lodestar

approach in the Modified Employment Order and the final fee

application. Third, it is uncertain whether the parties agreed that

§ 328 would apply to the entire Modified Employment Order. Thus,

I find that the bankruptcy and district courts were correct in

deciding that § 330 must control the post-September 8, blended and

hourly rate employment compensation arrangements, while § 328

governs the pre-September 8, 40% contingency fee employment

compensation arrangement. Therefore, I respectfully dissent.
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