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/: a strict interpretation of Section 330(a) of the Bankruptcy Code/ 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./
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./ 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./
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./
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./ However, upon filing for bankruptcy, a new engagement letter was written, charging the same hourly rates but eliminating the discounts./ 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./ At least for now, the court has approved the retention of debtor’s counsel at the stated rates./
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./ 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.