Source: http://bankruptcycave.com/author/jkrystinik/
Timestamp: 2017-04-23 07:54:41
Document Index: 458910737

Matched Legal Cases: ['§ 362', '§ 330', '§ 329', '§ 330', '§ 330', '§330', '§ 330', '§ 330']

» Jay Krystinik Search
Jay Krystinik Categories
Chapter 7 BankruptcySecured Transactions Tenth Circuit Joins Missouri River to Divide Kansas City Over What Constitutes A Stay Violation
Authored by: Jay Krystinik On February 27, 2017, the United States Court of Appeals for the Tenth Circuit joined a minority approach followed by District of Columbia Circuit: failing to turn over property after demand is not a violation of the automatic stay imposed by 11 U.S.C. § 362. WD Equipment v. Cowen (In re Cowen), No. 15-1413, — F.3d —-, 2017 WL 745596 (10th Cir. Feb. 27, 2017), opinion here.
Supreme Court Roundup Supreme Court Weighs Granting Cert on Bankruptcy Issues Involving Surcharge and Voting Rights of Assignee of Insider Claim
Authored by: Jay Krystinik The Supreme Court is considering whether to grant review of two bankruptcy cases. On October 3, 2016, the Supreme Court invited the Solicitor General to file briefs expressing the views of the United States. Because the Supreme Court’s justices normally give significant weight to the federal government’s recommendations regarding interpretations of federal statutes (here, the Bankruptcy Code), the Solicitor General’s forthcoming briefs could influence whether the Supreme Court grants cert. on the two notable bankruptcy cases.
Mark DuedallJay Krystinik Categories
Compensation of Professionals ASARCO’s Revenge: Do Estate Professionals Now Have to Charge the Same Fees to an Estate or Committee that They Would Charge a Similar Client in an Out-of-Court Matter?
Authored by: Mark Duedall and Jay Krystinik Either from our prior posts here and here, or from the great posts from Stone and Baxter’s Plan Proponent blog or from Bracewell’s Basis Points blog, we all know the Supreme Court’s holding in ASARCO[1]/: a strict interpretation of Section 330(a) of the Bankruptcy Code[2]/ allows professionals to charge for the preparation of a fee application per Section 330(a)(6). But as there is no express statutory authority to charge the estate for defense of a fee application, the “American rule” prevails, requiring professionals to bear their own defense costs if a third party objects to the fees.[3]/
The cases following Asarco have all been sad days for bankruptcy professionals. As we have written, the Delaware Bankruptcy Court has rejected all arguments that Section 328 of the Bankruptcy Code, which allows the Court to approve reasonable contractual terms, could allow a contractual term (instead of Section 330(a)(6)) requiring the estate to bear the costs of defending a fee application.[4]/ Moreover, estate professionals cannot charge a fee of $X if there is no fee objection, and then an “upcharge” to $X plus $Y more if there is a fee objection.[5]/ The New Gulf Resources “upcharge” argument had the benefit of candor – it was precisely geared to prevent expensive fee disputes that punish innocent estate professionals who would not be paid for defending their fee applications. Judge Shannon acknowledged the “creative approach” but ruled there was no meaningful distinction between a “Fee Premium” upcharge and the attempted use of Section 328 that was rejected by Judge Walrath in In re Boomerang Tube, Inc.[6]/
But what about a more circuitous way around ASARCO? That is, a pre-petition fee structure of X, and a post-petition fee structure that charges more? The post-petition fee structure is not geared toward preventing fee disputes, but rather, simply compensates the professional more for all the problems of representing a company (or committee) in bankruptcy: delays in getting paid, holdbacks that seemingly last forever, risk of non-payment, and, of course, the risk of fee dispute. You readers, and we at the Bankruptcy Cave, know all too well that while representing an estate fiduciary is a wonderful experience, the months (years?) of nail-biting as to whether or how much you will be paid is a serious problem.
But do we instead have ASARCO’s revenge? That is, if New Gulf Resources rejects an upcharge in the event of a fee challenge, do ASARCO/New Gulf Resources extend to prevent an overall, generalized, non-specific increase in rates or a higher fee structure simply due to the fact of bankruptcy? We are about to see this play out in the In re SunEdison bankruptcy case.
In SunEdison, debtor’s counsel had a pre-petition engagement letter providing the client with substantial percentage discounts as fees crossed certain hurdles.[7]/ However, upon filing for bankruptcy, a new engagement letter was written, charging the same hourly rates but eliminating the discounts.[8]/ The Office of the U.S. Trustee has hinted that it will cry foul, although noting that its objections may wait for the fee application stage, instead of requiring resolution at the time of approval of the retention application.[9]/ At least for now, the court has approved the retention of debtor’s counsel at the stated rates.[10]/
The U.S. Trustee’s objection has some appeal, we must say. If New Gulf Resources rejects an upcharge solely for fee objections, then how can an upcharge for any reason (or for no reason) be permissible simply due to the debtor filing for bankruptcy? At the same time, the U.S. Trustee’s approach concerns us greatly.
There are ample reasons to charge an estate fiduciary more than you would charge in the pre-petition period, or in an out-of-court workout, due to the added risks to estate professionals in bankruptcy.[11]/ Some of those are described above – the lack of a bankruptcy filing means you get paid on a schedule you and your client work out, not a schedule dictated by Section 331 and your local practice. Holdbacks are not customary outside bankruptcy. Hearings are not required to be paid. Clients will sometimes do you a solid and pay before year end, while courts move at their own pace. In addition, rather than having to satisfy the complaints and queries of many creditors, interested parties, or the Court (as you must in bankruptcy), outside of bankruptcy you only have to satisfy the client (and perhaps a lender that must approve expenditures) of the value and good purpose behind your services. And finally, assisting the client in a workout could lead to future work from that client, meriting a discount or alternative fee arrangement.
Inside bankruptcy, however, the debtor or committee will rarely be a future customer – a modern, hell-bent for leather, 363 sale case almost always mean your client is gone for good once the case is over. This is not the stuff that warrants discounts, and so we fully understand the position of debtor’s counsel in In re SunEdison.
This is a serious issue, and a potentially slippery slope. The position of the U.S. Trustee in In re SunEdison is a few dangerous steps away from arguing that the debtor (or committee) is entitled to “most favored nation” pricing from your law firm or advisory firm. Section 330 of the Bankruptcy Code requires bankruptcy fees to be commensurate with non-bankruptcy fees. But “commensurate” does not mean “identical,” by any means.
We will be watching this unfold, real time, in In re SunEdison, and then get back to you. In the meantime, if you sign up a distressed client, and offer it a discount, alternative fee, or other financial accommodation, expect the Office of the U.S. Trustee to argue that such structure must carry through a bankruptcy case as well, despite the enhanced payment risks and ongoing payment delay that in-court engagements entail.
[1]/ Baker Botts v. ASARCO, 135 S. Ct. 2158 (2015).
[2]/ 11 U.S.C. § 330(a).
[3]/ ASARCO, 135 S. Ct. at 2164-65.
[4]/ See, e.g., In re Boomerang Tube, Inc., Case No. 15–11247, 2016 WL 385933 *4 (Bankr. D. Del. Jan. 29, 2016) (holding, committee professionals cannot include 328 terms in an engagement agreement that side-step ASARCO); In re Samson Resources Corp., Case No. 15-11934 (CSS), letter opinion dated Feb. 8, 2016, at Docket No. 641 (holding, debtor professionals can’t do this either).
[5]/ In re New Gulf Resources, LLC, Case No. 15-12566, letter opinion dated March 16, 2016, at Docket No. 395 (acknowledging “creative approach” but rejecting “Fee Premium” upcharge in retention agreement) (Bankr. D. Del. Mar. 16, 2016); id. at Order dated March 21, 2016, at Docket No. 408 (Bankr. D. Del. Mar. 21, 2016) (order denying same).
[6]/ In re New Gulf Resources, LLC, Case No. 15-12566, letter opinion dated March 16, 2016, at Docket No. 395.
[7]/ In re SunEdison, Inc., Case No. 16-10992, Reservation of Rights by United States Trustee, at Docket No. 196 (Bankr. S.D.N.Y. May 5, 2016).
[8]/ Id.
[9]/ Id.
[10]/ Id. at Order Authorizing Employment and Retention of Debtor’s Counsel, at Docket No. 260 (Bankr. S.D.N.Y. May 12, 2016)
[11]/ But see, e.g., Burgess v. Klenske (In re Manoa Fin. Co., Inc.), 853 F.2d 687, 690 (9th Cir. 1988) (“Congress did not intend to authorize higher compensation than attorneys would receive for comparable non-bankruptcy services”).
Jay KrystinikMark Duedall Categories
Compensation of Professionals Delaware Bankruptcy Court Holds, Twice: “ASARCO is Here to Stay” (But Your Authors Have Hatched Another Plan; Read Below!)
Authored by: Jay Krystinik and Mark Duedall You may recall the holding and analysis of ASARCO [1]/ from Jay’s previous post, here. At bottom, ASARCO followed a strict interpretation of Section 330(a) of the Bankruptcy Code,[2]/ holding that professionals are allowed to charge certain fees for the preparation of a fee application per Section 330(a)(6). But as there is no express statutory authority to charge the estate for defense of a fee application, the “American rule” prevails, requiring professionals to bear their own defense costs if a third party objects to the fees.[3]/
The efforts to get around ASARCO are well underway, primarily in the venue of the Delaware Bankruptcy Court. So far, the score is ASARCO (two wins), to frustrated estate professionals (zero). And, even as your authors were writing this post, there is another means underway, using the “upcharge” principal – the hourly rates will be $x if no one objects to the fees, but 10% more than $x if someone does object to the professional fees. This bevy of cases, and our own proposed solution, are discussed below.
The first effort to side-step ASARCO was In re Boomerang Tube.[4]/ In that case, certain creditors’ committee professionals argued that their engagement letters required, as a contractual matter, the payment of fee application defense costs. Because Section 328 of the Bankruptcy Code allows the approval of any “reasonable term[] and condition[] of employment,”[5]/ the Court could avoid ASARCO’s limited reading of Section 330(a), the professionals argued. The Boomerang Tube Court, via Judge Walrath, rejected that. First, the Court held that an engagement letter is a contract between a professional and its client (here, a creditors’ committee), yet the professional fee defense provision seeks to bind the estate – and under Section 330 of the Code, there is no authority for the estate to be forced to cover such costs.[6]/ Moreover, the Boomerang Tube Court held, any argument that similar market-based provisions are permitted in bankruptcy cases — such as exculpation and indemnity clauses for estate financial advisors and investment bankers[7]/ — must yield to the more specific ruling of ASARCO, which rejected a market-based approach to reasonableness.[8]/
A few weeks later came In re Samson Resources. In that case, the Delaware Bankruptcy Court, this time through Judge Sontchi, agreed that Boomerang Tube’s analysis would apply equally to debtor professionals, and not just committee professionals.[9]/
Not to be dissuaded, a third effort is underway in Delaware (and this time Judge Shannon gets to weigh in). In that case,[10]/ debtors’ counsel is not seeking to use Section 328 to assert that fee application defense costs can be allowed. Instead, debtors’ counsel argues that estate professionals should be allowed to charge one rate if there is no objection to the fees, but then also a 10% premium if there is an objection. In short, it is an upcharge, like substituting a yummy Caesar salad at your fav bistro for the wilted garden salad it usually serves you.[11]/ Your authors love the creativity, but have their doubts that this will work; stay tuned.[12]/
Anyway, now that we have seen what unique ideas don’t work, your authors have another! (Let it not be said that we just blog about goings-on in the esoteric world of restructuring – we are here to solve problems, not just describe them!) And the idea is this – if a professional thinks it may be subject to second-guessing later in the case from disgruntled creditors, then don’t wait until the end of the case to seek allowance. Instead, smoke out those objectors, while the case is ongoing. Thus, once a discrete portion of the case is done – such as first days, a 363 sale, a major piece of litigation, perhaps even the first round of exclusivity and stability of the case – seek final allowance of the fees and expenses incurred for that portion of the case. If an objection is raised, you still cover your own costs, but at least then you can learn it early, adjust your case strategy, and perhaps get a ruling from a judge directing such malcontents to stand down, lest their own positions in the case come under attack.
We know this is a weird option. But it is no weirder than trying to use Section 328’s generality to get around Section 330’s specificity, or seeking to impose an upcharge to recover fees which ASARCO says you cannot get. Let the arguments continue further!
[4]/ In re Boomerang Tube, Inc., Case No. 15–11247, 2016 WL 385933 (Bankr. D. Del. Jan. 29, 2016).
[5]/ 11 U.S.C. § 329(a).
[6]/ In re Boomerang Tube, Inc., 2016 WL 385933 at *4. The Court also noted that the result is the same if the professional incurs fees to defend its fees, or if the costs to defend a fee application are set forth as expenses (such as where the professional hires another professional to defend its fees). Id. at *8.
[7]/ See, e.g., In re United Artists Theatre Co., 315 F.3d 217. 234 (3d Cir. 2003) (permitting tailored financial advisor indemnity provisions in bankruptcy cases, based on market evidence that such provisions are customary outside of bankruptcy).
[8]/ In re Boomerang Tube, Inc., 2016 WL 385933 at *7. This is concerning to your authors – does this mean exculpation and indemnity clauses for FAs and IBS, long the norm in most courts under United Artists and many other cases, could be in doubt? Wow.
[9]/ In re Samson Resources Corp., Case No. 15-11934 (CSS), letter opinion dated Feb. 8, 2016, at Docket No. 641.
[10]/ In re New Gulf Resources, LLC, Case No. 15-12566 (BLS), Brief in Support of Retention Application, dated March 2, 2016, at Docket No. 344.
[11]/ The foregoing sentence was brought to you by Mark Duedall.
[12]/ And aside from loving the creativity, we also sympathize with Baker Botts, and other estate professionals (like our beloved Bryan Cave!), that face the risk of objections to fees from disgruntled creditors with an axe to grind. The facts of ASARCO (in which the estate professional was Baker Botts) are worth noting again here – an incredibly complicated case, in which the estate had to sue its parent company for very serious matters. The suit was successful to the tune of at least $7 billion, and creditors were paid in full – an amazing result. When Baker Botts filed its fee application and sought a fee enhancement, the parent company which Baker Botts sued was right there ready to object to virtually everything about the fees. ASARCO is an unfair result, and a poster child for the mischief that results when cranky creditors object to fees. That being said, ASARCO is now the law, and will remain so absent Congressional action (unlikely) or a creative lower court ruling (unlikely too). So deal with it we must.
Supreme Court Rules No Fees for Defending Fee Applications
Supreme Court Roundup Supreme Court Rules No Fees for Defending Fee Applications
Authored by: Jay Krystinik The Supreme Court of the United States recently addressed whether estate professionals could recover fees expended in defending fee applications. Baker Botts L.L.P. v. ASARCO LLC, 576 U.S. _____ (2015). A divided court ruled that the plain language of 11 U.S.C. § 330(a)(1) allowed compensation only for “actual, necessary services rendered[,]” and that to allow fees for defending fee applications would be contrary to the statute and the “American Rule” that each litigant pay her own attorneys’ fees unless a statute or contract provides otherwise.
In 2005, ASARCO, a copper mining, smelting, and refining company, filed for Chapter 11 bankruptcy protection. ASARCO obtained the Bankruptcy Court’s permission to hire two law firms, Baker Botts L.L.P. and Jordan, Hyden, Womble, Culbreth & Holzer, P.C. Among other services, the firms prosecuted fraudulent-transfer claims against ASARCO’s parent company and ultimately obtained a judgment against it worth between $7 and $10 billion. This judgment contributed to a successful reorganization in which all of ASARCO’s creditors were paid in full.
After ASARCO’s counsel filed fee applications under § 330(a)(1), ASARCO, controlled again by its parents company, objected to the compensation requested. After extensive discovery and a 6-day trial on fees, the Bankruptcy Court rejected ASARCO’s objections and awarded the firms approximately $120 million for their work in the bankruptcy proceeding plus a $4.1 million enhancement for exceptional performance. The court also awarded the firms over $5 million for time spent litigating in defense of their fee applications.
The Court of Appeals for the Fifth Circuit ultimately reversed the award of fees for defending the fee application, observing that §330(a)(1) provides “that professional services are compensable only if they are likely to benefit a debtor’s estate or are necessary to case administration.” In re ASARCO, L.L.C., 751 F.3d 291, 299 (5th Cir. 2014).
The Supreme Court’s affirmance of the Fifth Circuit was rooted in the “American Rule”: Each litigant pays his own attorney’s fees, win or lose, unless a statute or contract provides otherwise. Slip Op. at 3 (citing Hardt v. Reliance Standard Life Ins. Co., 560 U. S. 242, 252–253 (2010)). In a textual analysis, the Court reasoned that defending a fee application against a client was simply not a “service rendered” on behalf of the client. In so concluding, the Court rejected the law firms’ argument that the estate does benefit from lawyers defending fee applications.
The Court also rejected arguments by the United States as amicus curiae, which urged the Court to allow fees incurred defending fee applications on policy reasons and because such fees were part of the “reasonable compensation” awardable under § 330(a)(1). Justice Breyer’s dissent additionally argued that the “reasonable compensation” provision of § 330(a)(1) allows an award of fees incurred defending fee applications because in some cases, unless such fees are allowed, the fee award would be artificially low and, therefore, not “reasonable.” The Court rejected these arguments and stated in passing that Federal Rule of Bankruptcy Procedure 9011 could be used to militate against the risk of frivolous objections to fee applications.
An increase in objections to fee applications should be anticipated. Because defense fees will be unrecoverable, debtor’s counsel may be inclined to efficiently resolve objections rather than engage in protracted litigation.
We anticipate the most likely avenue bankruptcy professionals will employ will be to include a provision in engagement letters that fees incurred defending fee applications are expressly recoverable. This would address the American Rule by expressly providing, in a contract, that fees are recoverable. However, courts could refuse to uphold such provisions based on an argument that the Bankruptcy Code evidences Congress’s intent to preempt state law regarding compensation of bankruptcy professionals. Ultimately, congressional intervention and amendment of the Bankruptcy Code would be the most certain way to ensure fair compensation for bankruptcy professionals.
[1] Justice Thomas delivered the opinion of the Court, in which Justices Roberts, Scalia, Kennedy, and Alito joined, and in which Justice Sotomayor joined as to all but Part III-B-2. Justice Sotomayor filed an opinion concurring in part and concurring in the judgment. Justice Breyer filed a dissenting opinion, in which Justices Ginsberg and Kagan joined.
[2] The Government alleged that requiring bankruptcy professionals to pay the cost of defending their fee applications would dilute fees awarded and result in bankruptcy lawyers receiving less compensation than nonbankruptcy lawyers, thereby undermining the congressional aim of ensuring that talented attorneys will take on bankruptcy work.
Jay KrystinikKeith Aurzada Categories
Receivership Managing Property Managers — A Guide for Lenders
Authored by: Jay Krystinik and Keith Aurzada Lenders are frequently confronted with questionable lender-liability claims not only from borrowers (usually in connection with collection or foreclosure procedures) but also from property managers unable to recover from borrowers. Claims property managers assert directly against lenders include those for breach of oral or written contract, fraud, and unjust enrichment (particularly if the lender has foreclosed its interest in the borrower’s property). Lenders can hedge against the risk of claims by property managers through a variety of methods, both pre- and post-borrower default.
FacebookLinkedin@BryanCaveLLPContact Us
Bryan CaveBlog NetworkBankruptcy TeamBankruptcy Practice