Source: https://www.lexisnexis.com/legalnewsroom/bankruptcy/b/bankruptcy-law-blog/archive/2014/07/21/fifth-circuit-panel-urges-re-examination-of-pro-snax.aspx?Redirected=true
Timestamp: 2017-04-24 02:56:22
Document Index: 421843673

Matched Legal Cases: ['§ 330', '§ 330', '§ 330', '§ 330', '§ 330', '§ 330', '§ 330', '§ 330', '§ 224', '§ 330', '§ 330', '§ 330', '§ 330', '§ 330', '§ 330', '§ 330', '§ 330', '§ 330']

03:52 PM Author: Stephen Sather
The Fifth Circuit ruled on July 15 that a bankruptcy court following Matter of Pro-Snax Distributors, Inc., 157 F.3d 414 (5th Cir. 1997) did not abuse its discretion in substantially reducing fees requested by counsel in a failed chapter 11 case. The Debtor's counsel argued that Pro-Snax was subject to multiple interpretations such that a pure results test was not mandated. The Court did not accept this argument. Nevertheless, the interesting part of the opinion was the special concurrence written by Judge Prado and joined in by the other members of the panel, which stated, "I write separately to note that the Pro-Snax standard may be misguided." Barron & Newburger, P.C. v. Texas Skyline Limited, No. 13-50075 (5th Cir. 7/15/14), p. 15. The opinion can be found here [an enhanced version of this opinion is available to lexis.com subscribers].
The statute reinforces this point in an accompanying section: a court must disallow any compensation when “the services were not reasonably likely to benefit the debtor’s estate or necessary to the administration of the case.” § 330(a)(4)(A)(ii)(I); see In re ASARCO, L.L.C., 751 F.3d 291 (5th Cir. 2014) (“Section 330 states twice, in both positive and negative terms[,] that professional services are compensable only if they are likely to benefit a debtor’s estate or are necessary to case administration.” (citation omitted)) [enhanced version]; In re Ames Dep’t Stores, Inc., 76 F.3d 66, 71 (2d Cir. 1996) (referring to “reasonably likely to benefit the debtor’s estate” as an “inverse construction” of § 330(a)(3)(C)) [enhanced version], abrogated on other grounds by Lamie v. U.S. Trustee, 540 U.S. 526 (2004). Read together, a court may compensate an attorney for services that are “reasonably likely to benefit” the estate and adjudge that reasonableness “at the time at which the service was rendered.” Section 330, then, explicitly contemplates compensation for attorneys whose services were reasonable when rendered but which ultimately may fail to produce an actual benefit. “Litigation is a gamble, and a failed gamble can often produce a large net loss even if it was a good gamble when it was made.” In re Taxman Clothing Co., 49 F.3d 310, 313 (7th Cir. 1995) [enhanced version]. The statute permits a court to compensate an attorney for any activities that were “necessary,” but also for any good gambles—that is, services that were objectively reasonable at the time they were made—even when those gambles do not produce an “identifiable, tangible, and material benefit. What matters is that, prospectively, the choice to pursue a course of action was reasonable.
The legislative history of § 330 provides additional support for this reading. When Congress enacted § 330 in 1978, it relaxed the previously stringent standard bankruptcy courts applied in reviewing professional fee awards. 3 Collier on Bankruptcy ¶ 330.LH[4] (16th ed. 2014). Under the old regime, our court enforced a “strong policy . . . that estates be administered as efficiently as possible.” In re First Colonial Corp. of Am., 544 F.2d 1291, 1299 (5th Cir. 1977) (citations omitted) [enhanced version], superseded by statute, 11 U.S.C. § 330. This policy originated in the idea that “[s]ince attorneys assisting the trustee in the administration of a bankruptcy estate are acting not as private persons but as officers of the court, they should not expect to be compensated as generously for their services as they might be were they privately employed.” Id. (citation omitted);see also Mass. Mut. Life Ins. Co. v. Brock, 405 F.2d 429, 432–33 (5th Cir. 1968) (holding that the interest of the public—especially the debtor and creditors—could limit compensation to a debtor’s counsel) [enhanced version], superseded by statute, 11 U.S.C. § 330.
But “[i]n enacting section 330, Congress intended to move away from doctrines that strictly limited fee awards” and instead provide compensation “commensurate with the fees awarded for comparable services in non-bankruptcy cases.” In re UNR Indus., Inc., 986 F.2d 207, 208–09 (7th Cir. 1993) (citing, inter alia, H.R. Rep. No. 95–595, at 329–30 (1978), reprinted in 1978 U.S.C.C.A.N. 5963, 6286) [enhanced version]; see also 3 Collier on Bankruptcy ¶ 330.03[a][3]. To that end, § 330 instructed courts to award “reasonable compensation” for “actual, necessary services” “based on the nature, the extent, and the value of such services, the time spent on such services, and the cost of comparable services other than in a case under [the Code].” 11 U.S.C. § 330(a). Congress took a further step in 1994 when it “codif[ied] many of the factors previously considered by courts in awarding compensation and reimbursing expenses.” 3 Collier on Bankruptcy ¶ 330.LH[5]; see Pub. L. No. 103-394, § 224, 108 Stat. 4106 (1994).3 In particular, Congress added the language at issue here: 11 U.S.C. §§ 330(a)(3)(C) & 330(a)(4)(A).
Besides contravening the plain effect of § 330’s language, the actual benefit test of Pro–Snax has put our circuit in unnecessary conflict with our sister circuits. In light of the plain language of § 330(a)(4)(A), the Second, Third, and Ninth Circuits have rejected the actual benefit test required by Pro–Snax. In In re Ames Department Stores, Inc., the Second Circuit specifically rejected an approach that would make fee award “contingent upon a showing of actual benefit to the estate,” opting instead to give effect to the statute’s “reasonably likely to benefit the estate” standard. 76 F.3d at 71. The Third Circuit rejected the very approach our court adopted in Pro–Snax, concluding that it departed from the statute by imposing a “heightened standard” and requiring evaluation “by hindsight.” In re Top Grade Sausage, Inc., 227 F.3d 123, 132 (3d Cir. 2000) [enhanced version] abrogated on other grounds by Lamie, 540 U.S. 526. Finally, the Ninth Circuit held that § 330(a)(4)(A) superseded its past precedent, which had “requir[ed] that the services actually provide an ‘identifiable, tangible and material benefit to the [debtor’s] estate.’” In re Smith, 317 F.3d 918, 926 (9th Cir. 2002) (quoting In re Xebec, 147 B.R. 518, 523 (B.A.P. 9th Cir. 1992)) [enhanced version]. In addition, the Seventh Circuit has applied a similar rule, without specifically relying on the post-1994 guidelines. See In re Taxman Clothing Co., 49 F.3d at 314–16 (holding that the bankruptcy court abused its discretion in granting a fee award to an attorney whose preference action did not have a reasonable likelihood of benefiting the estate).
While Pro–Snax purported to consider the post-1994 guidelines of § 330(a), its lone citation for its actual benefit test, In re Melp, interpreted the pre-1994 version of § 330. See 179 B.R. at 639 (quoting pre-1994 language). Indeed, the only other circuit precedents to apply an actual benefit requirement came to that conclusion prior to 1994 or based entirely on pre-1994 precedent for determining “reasonable compensation.” See In re Kohl, 95 F.3d 713, 714 (8th Cir. 1996) (“[A]n attorney fee application in bankruptcy will be denied to the extent the services rendered were for the benefit of the debtor and did not benefit the estate.” (quoting In re Reed, 890 F.2d 104, 106 (8th Cir. 1989)) [enhanced version]; In re Lederman Enters., Inc., 997 F.2d 1321, 1323 (10th Cir. 1993) (“An element of whether the services were ‘necessary’ is whether they benefited the bankruptcy estate.”); Grant v. George Schumann Tire & Battery Co., 908 F.2d 874, 883 (11th Cir. 1990) (interpreting pre-1994 § 330 as requiring that attorney’s appeal bring a benefit to the estate). As discussed above, though, whereas the pre-1994 language did not provide guidance on whether to consider the reasonable likelihood a service would benefit the estate, the post-1994 language clearly foreclosed an actual benefit test by requiring that the court evaluate the likelihood of benefit to the estate at the time the service was rendered.
In re Broughton Ltd. P’ship, 474 B.R. 206, 209–10 n.5 (Bankr. N.D. Tex. 2012) (collecting cases) [enhanced version]. So, for example, one district court interpreted the Pro–Snax requirement as a threshold issue of entitlement to compensability under § 330(a)(1)(A), not a gloss on the guidelines for reasonable compensation under § 330(a)(3) and (a)(4). Kaye v. Hughes & Luce, LLP (In re Gadzooks, Inc.), No. 3:06-CV-0186-3 B, 2007 U.S. Dist. LEXIS 50929 (N.D. Tex. July 13, 2007) [enhanced version]. Yet Pro–Snax did not purport to alter the threshold compensability of services by interpreting “necessary” services to include only those that result in an actual benefit to the estate. By contrast, in In re Broughton characterized Pro–Snax as a practical “problem” and contorted Pro–Snax to conclude that it permits a fee award to “a professional [who] was justifiably pursuing a legitimate, realizable goal of the fiduciary client.” 474 B.R. at 213, 218. The splintered approaches to applying Pro–Snax underscore the difficulty of squaring that decision with the statute, and the practical importance of doing so.