The U.S. Bankruptcy Court for the Southern District of Texas issued a stern warning to professional services providers regarding “tail fees,” establishing a presumption of unreasonableness against contract terms requiring fees not attached to tangible, identifiable and material benefits to the debtor’s estate.

The case arose from the proposed retention by the debtor of an investment banking firm to act as financial advisor. As part of the heavily negotiated payment terms, the financial advisor contracted for a tail fee which could result in payment to the investment firm in the case of a transaction consummated within a period of 12 months, after the firm’s contract was terminated, even if the investment bank had no involvement in procuring the transaction. The court stated that such a fee arrangement was presumptively unreasonable when sought in addition to other forms of compensation such as, for example, fixed monthly fees. However, in this case, the debtor overcame the presumption based on the extensive negotiations, the experience of the debtor’s negotiator and the otherwise favorable payment arrangements with the investment banking firm. (In re Bigler L.P., 2010 WL 447034 (Bankr. S.D.Tex. Feb. 9, 2010))