The U.S. Court of Appeals for the Eleventh Circuit held on July 26, 2007, that a bankruptcy court properly calculated an investment bank's advisory fee under a reasonableness standard. In re Citation Corp., ___ F.3d ___ 2007 WL 2128165 (July 26, 2007). Rejecting the advisor's argument that a bankruptcy court may not "calculate … a lodestar fee as part of a reasonableness review … for the services of an investment bank, which has historically charged a fixed percentage fee," the court also ordered the bankruptcy court to determine whether the advisor failed to disclose potential conflicts, possibly requiring an appropriate penalty. Id., at 3, 6.

Terms of Pre-Bankruptcy Engagement

Three months prior to bankruptcy, the advisor had agreed to work for the debtor for a fixed monthly fee plus an additional $3.5 million restructuring fee. Despite the terms of the advisor's engagement, the bankruptcy court "specifically reserved the right to" review the overall fee request under the reasonableness standard in Bankruptcy Code § 330. Id., at 4. In doing so, the court rejected the advisor's argument that its engagement letter provided for retention "under the more deferential [Code] § 328," reasoning that "§ 328 would not allow [the court] 'the opportunity to fairly review [the advisor's] application and to pay them as they ought to be paid.'" Id. Despite the advisor's later protestations of unfairness, the bankruptcy court authorized the advisor's retention "only with the reservation of the right to review its fees under § 330." Id. "With the knowledge of this possibility, [the advisor] still entered into the agreement and continued to provide services." Id.

Final Fee Application Process

The advisor sought approval of all the monthly fees previously paid to it and sought the balance of its restructuring fee at the end of the reorganization case. Rejecting the debtor's argument that the advisor had a conflict of interest because it had failed to disclose its prior dealings with a private equity firm shareholder, the bankruptcy court still found that the advisor's originally anticipated services had not been actually required; that the advisor's time on the matter was "slightly excessive"; and that its hourly rate was also "excessive." Id., at 2. The court reduced the advisor's fees slightly so that it would be compensated at the rate of $750 per hour. Id.

The advisor appealed. The district court reversed, holding that the advisor was entitled to be paid at its contract rate because the bankruptcy court was "not free to transform a fixed rate contract, knowingly entered into by knowledgeable parties at arms length, into an hourly rate contract." Id. The debtor appealed again to the Court of Appeals, arguing that the district court erred in finding that the bankruptcy court had abused its discretion "by calculating a lodestar fee …." Id. at 3.


The Court of Appeals reversed again, explaining the difference between §§ 328 and 330 of the Code. In contrast to § 327, the court wrote, § 328 permits the retention of a professional "on any reasonable terms and conditions of employment, including … a fixed or percentage fee basis, or on a contingent fee basis." Id. at 3, quoting Code § 328(a). Absent retention under Code § 328, however, a professional's compensation must be "reasonable," based on the "nature, … extent, and the value of such services," considering the time spent on such services "and the cost of comparable services." Id. at 3, quoting Code § 330(a). As the court explained:

"For instance, under § 328, the bankruptcy court reviews the fee at the time of the agreement and departs from the agreed fee only if some unanticipated circumstance makes the terms of that agreement unfair. Under § 330, the court reviews the fees after the work has been completed and looks specifically at what was earned, not necessarily at what was bargained for at the time of the agreement. Bankruptcy professionals are aware that the amount of any professional's fees will be less certain if the bankruptcy court awards fees under § 330."

Id. at 3–4.

Application of Law to Facts

The Eleventh Circuit explained that the district court improperly relied on the engagement letter between the advisor and the debtor. As it reasoned, the court "should not place the same emphasis on the contract when the bankruptcy court reviews the fee pursuant to § 330." Id. at 4. Prior to bankruptcy, the advisor's engagement letter "was the product of free and equal bargaining," but once the debtor filed its Chapter 11 petition, the advisor agreed to a later bankruptcy court review of its fee under Code § 330. Id. In other words, the advisor "failed to bargain with the court and the estate to have its fee pre-approved under § 328 when it had the opportunity. Instead, it chose to perform services with the knowledge that its fee would be reviewed for reasonableness pursuant to § 330." Id.

Nor did the court accept the advisor's argument "that, as an investment bank who historically has charged a fixed fee, a lodestar method of analysis is always inappropriate." Id. Because the Code requires a bankruptcy court to examine the amount of time spent on an engagement, it was "appropriate, but not required, for a bankruptcy court to use a lodestar analysis to review an investment bank's fees for reasonableness." Id. at 5. Having approved the bankruptcy court's methodology, the court went on to hold that the bankruptcy court had not abused its discretion when it found that the amount of time and hourly rate of the advisor were excessive. Id., at 5.

Lack of Disclosure Asserted

The debtor gained a limited victory with respect to its assertion that the advisor had "failed to disclose its past dealings with certain members of [the debtor's] board of directors." Id., at 6. Although Bankruptcy Rule 2014 "requires a professional to disclose all of its relevant connections in its disclosure so that the bankruptcy court can determine if there are any conflicts or potential conflicts," it was unclear to the Eleventh Circuit whether the bankruptcy court had considered the asserted disclosure violation. Accordingly, it remanded the issue to the bankruptcy court "for further consideration of whether [the advisor had] violated Rule 2014, and, if so, whether, in the court's discretion, it should penalize" [the advisor]. Id.


1. Consistent Approach. The Citation ruling is consistent with those in other circuits. In re Circle K Corp., 279 F.3d 669, 671 (9th Cir. 2002) (held, "unless … a professional's retention application unambiguously specifies that it seeks approval under § 328, it is subject to review under § 330."); In re Commercial Fin. Servs. Inc., 427 F.3d 804 (10th Cir. 2005) (held, lodestar analysis a factor to be considered by bankruptcy court when reviewing investment bank's fees under Code § 330). See also Daniels v. Barron (In re Barron), 325 F.3d 690, 691-92 (5th Cir. 2003) (held, when court pre-approves terms of professional's retention under § 328(a), it may not later change those terms under § 330 unless it finds that agreed-upon terms were "improvident"); In re National Gypsum Co. 123 F.3d 861 (5th Cir. 1997) (same).

2. Preference for Reasonableness Review. Bankruptcy courts and U. S. Trustees generally prefer that all professional fee applications be subjected to a complete review for reasonableness under Code § 330. A professional, therefore, should deal with the issue at the outset of the engagement, to avoid any last-minute surprises. See, e.g., In re Federal Mogul, Inc., 348 F.3d 390 (3d Cir. 2003) (held, court may approve employment of professional on terms court finds reasonable, including cap on compensation).

3. Disclosure Always Material. Even when a professional succeeds in getting retained under Code § 328(a), a bankruptcy court is still not precluded from considering the adequacy of the professional's initial disclosure. The court's approval of retention, either under §§ 327 or 328, does not ordinarily shield the professional's retention from later attack. See, e.g., In re Federated Dep't Stores, Inc., 44 F.3d 1310, 1317 (6th Cir. 1995) (investment banker "knew [the United States] Trustee objected to its appointment and it elected to continue providing services to the estate knowing that the retention order would be reviewed … on appeal and would be subject to reversal. Thus, the Trustee's failure to seek or obtain a stay … does not moot this appeal.").