In a bankruptcy case, the bankruptcy estate (through the Debtor or Trustee) is permitted to employ counsel and other professionals (e.g. accountants, real estate brokers, auctioneers, etc.) to assist with the reorganization or liquidation process.1 These estate professionals, however, must be approved by the bankruptcy court.2 And, the bankruptcy court must approve a professional’s fees and expenses before those items can be paid by the estate.3 Typically, creditors might think they are better off when an estate has less professional assistance and, hence, less administrative cost. Sometimes this is true, but in many cases, creditors would be benefitted if the estate simply had better professional help. (As “Speedy” pointed out in the movie Coal Miner’s Daughter, Doolittle: “… I can’t afford no more pickers! And as bad as them two are, what do you want more for?” Speedy: “I mean more better, pardner.”) After being an obstacle to estates having access to better professional guidance for almost two decades, one of the errant standards set by the Pro-Snax opinion, below, has finally been corrected.
Under the Bankruptcy Code, the bankruptcy court may award “reasonable compensation for actual, necessary services rendered” and the court is permitted to “award compensation that is less than the amount of compensation that is requested.”4 When determining the reasonableness of the requested compensation, the bankruptcy court is required to consider “the nature, the extent, and the value of such services, taking into account all relevant factors.”5 The Bankruptcy Code prohibits compensation to professionals for “services that were not reasonably likely to benefit the debtor’s estate or necessary to the administration of the case.”6
Under the Fifth Circuit Court of Appeals’ ruling in Andrews & Kurth, L.L.P. v. Family Snacks, Inc. (In re Pro-Snax Distributors, Inc.), 157 F.3d 414 (5th Cir. 1998), professionals representing debtors in Texas, Louisiana, and Mississippi were required to demonstrate that their services “resulted in an identifiable, tangible, and material benefit to the bankruptcy estate” before fees could be awarded.7 This translated into a hindsight standard, which led to harsh results for professionals in cases where the estate, despite the professionals' best judgment and efforts, was not ultimately successful.8 In some instances, this was even applied to various subtasks within an otherwise successful reorganization or liquidation.
Recently, the Fifth Circuit overturned its ruling in Pro-Snax and adopted a newly restated standard, requiring only that counsel demonstrate that his or her services were “reasonably likely to benefit” the bankruptcy estate at the time those services were performed.9 The restatement of this standard removed at least one barrier estates had faced in obtaining better professionals (i.e., “more better” pickers).
Ironically, in Woerner, the new standard did not reverse the underlying result, where the bankruptcy court had allowed less than 85% of the requested fees, Woerner, 2015 U.S. App. LEXIS 5747 at *8, due to a lack of success in the case. On appeal to the full Fifth Circuit (after a three-judge panel had applied the old standard but called for en banc review, Barron & Newburger, P.C. v. Texas Skyline, Ltd (In re Woerner), 758 F.3d 693, 702, 706 (5th Cir. 2014)), the Fifth Circuit overturned the Pro-Snax hindsight rule and recognized “that the retrospective, ‘material benefit’ standard enunciated in Pro- Snax conflicts with the language and legislative history of §330, diverges from the decisions of other circuits, and has sown confusion in our circuit.”10 In its analysis, the en banc Fifth Circuit explained that “Section 330 . . . explicitly contemplates compensation for attorneys whose services were reasonable when rendered but which ultimately may fail to produce an actual, material benefit.”11
The new test under Section 330 is whether the attorney’s services were “reasonably likely to benefit the estate.”12 “Under this framework, if a fee applicant establishes that its services were ‘necessary to the administration’ of a bankruptcy case or ‘reasonably likely to benefit’ the bankruptcy estate ‘at the time at which [they were] rendered’ . . . then the services are compensable.’”13 The Fifth Circuit made clear that section 330 “permits a court to compensate an attorney not only for activities that were ‘necessary,’ but also for 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.”14 Fifth Circuit Judge E. Grady Jolly, concurring with the majority, was careful to note, however, that, “[o]ur opinion today does not require a bankruptcy court to award fees for any service that can be characterized as reasonable as of the time it was performed, as the bankruptcy courts remain restricted by the terms of § 330, which require compensable services to be both ‘actual’ and ‘necessary.’. .. An identifiable benefit distinguishes an actual benefit from a speculative one, and a material benefit distinguishes a necessary benefit from an irrelevant one.”15
Bankruptcy Courts should now consider the following factors when reviewing fee requests: (1) probability of success when the services were rendered; (2) reasonable costs of pursuing the action; (3) the services a reasonable lawyer or firm would have performed under the same circumstances; (4) whether the Trustee or his staff could have provided the services; and (5) if there were any potential benefits to the bankruptcy estate (rather than to the individual debtor).16 “Whether the services were ultimately successful is relevant to, but not dispositive of, attorney compensation.”17
This decision brings the Fifth Circuit in line with other circuits on this issue, and allows professionals seeking compensation to be judged on the totality of their services, taking into account their professional judgment, and not solely on whether their “good gamble” was ultimately successful.