Sections 327 and 328 of the Bankruptcy Code² authorize debtors-in-possession, trustees and committees to employ attorneys and other professionals on reasonable terms and conditions of employment. Such employment terms may include, inter alia, the payment of a retainer and the payment of fees on either an hourly or contingent basis. Occasionally, such attorneys and professionals will seek a premium or an "enhancement" to their base fees on grounds of superior service, superlative results and other reasons.

Whether one is employed on behalf of a debtor, trustee or a committee, lawyers and other professionals must know the legal basis of, and the issues and objections that may be raised in opposition to, requests for fee enhancements. Although fee enhancements are routinely characterized as "rare," a substantial number of reported decisions reflect the willingness of bankruptcy courts to award such premiums in appropriate cases. This article identifies and sets forth the relevant standards for determining what constitutes "an appropriate case" and what circumstances will justify an award of a fee enhancement.

Bankruptcy Code §330(a): The Governing Statute

Bankruptcy Code §330(a) governs the payment of fees to estate professionals and is the starting point for determining the propriety of all professional fee requests. That Code section provides:

(1) After notice to the parties in interest and the U.S. Trustee and a hearing...the court may award to a...professional person employed under §327 or 1103—

(A) Reasonable compensation for actual, necessary services rendered by...the professional person...; and
(B) reimbursement for actual, necessary expenses.

(2) The court may...award compensation that is less than the amount of compensation that is requested.
(3) In determining the amount of reasonable compensation to be awarded, the court shall consider the nature, the extent and the value of such services, taking into account all relevant factors, including—

(A) the time spent on such services;
(B) the rates charged for such services;
(C) whether the services were necessary to the administration of, or beneficial at the time at which the service was rendered toward the completion of, a case under this title;
(D) whether the services were performed within a reasonable amount of time commensurate with the complexity, importance and nature of the problem, issue or task addressed; and
(E) whether the compensation is reasonable based on the customary compensation charged by comparably skilled practitioners in cases other than cases under this title...³

The enactment of Bankruptcy Code §330(a)(1) substantially changed the prior Bankruptcy Act's "spirit of economy" principle under which estate professionals were entitled to only minimum compensation. The new provision is intended to allow estate professionals to receive compensation that is commensurate with the fees received by professionals providing comparable services in non-bankruptcy cases. Section 330's twofold goal is therefore to ensure that compensation is "reasonable" and that future lawyers will not be deterred from taking bankruptcy cases due to a failure to pay adequate compensation.⁴

In effectuating the two-pronged purpose of §330, bankruptcy courts have grappled with whether to analyze fee requests under precedents involving "common fund" or "fee-shifting statutes."⁵ The Seventh Circuit has commented, "[a]lthough bankruptcy situations certainly share many attributes of common fund cases—most fundamentally, the existence of a fund in the court's control—courts have viewed fee-shifting statutes as providing a more suitable analogy."⁶ Because there is substantial similarity of purpose between §330 and the typical fee-shifting statute, Supreme Court and other precedents involving fee-shifting statutes have been widely applied to fee enhancement determinations in bankruptcy, even though the analogy is imperfect and the principles may require some accommodation to the peculiarities of bankruptcy matters.⁷ Because the non-bankruptcy Supreme Court and other authorities pertaining to fee enhancements are essential for such determinations in bankruptcy, such authorities are summarized below.

Early Standards Under Fee-shifting Statutes

Under the "American Rule," a prevailing litigant is not ordinarily entitled to collect a reasonable attorney's fee from the loser.⁸ Even so, there are more than 100 statutes under which Congress has authorized courts to require one party to award fees to the other.⁹ The benchmark for an award under nearly all of these fee-shifting statutes, including Bankruptcy Code §330, is that the attorney's fee must be "reasonable."¹⁰ One of the earliest and most widely cited measures of "reasonableness" was developed by the Fifth Circuit in Johnson v. Georgia Highway Express.¹¹ Under the Johnson test, courts consider 12 factors in determining the reasonableness of a fee:

1. the time and labor required
2. the novelty and difficulty of the question
3. the skill required to perform the legal service
4. the preclusion of other employment by the attorney
5. the customary fee
6. the fixed or contingent nature of the fee
7. the time limitations imposed by the client or the circumstances
8. the amount involved and the results obtained
9. the experience, reputation and ability of the attorney
10. the undesirability of the case
11. the nature and length of the professional relationship, and
12. awards in similar cases.

Although the Johnson factors have been widely adopted, the Supreme Court has nonetheless criticized the subjective nature of the test, which places "unlimited discretion in the trial court and produce[s] disparate results."¹²

The Third Circuit's alternative test for determining the "reasonableness" of fee awards under fee-shifting statutes was first articulated in Lindy I.¹³ Pursuant to this approach, the number of hours expended on a case is multiplied by a reasonable hourly rate of compensation, and then using this "lodestar" amount as a starting point, the court may then adjust the fees based on (1) the contingent nature of the case, specifically, the investment of hours and expenses without any assurance of compensation; and (2) the quality of the work performed, as evidenced by the complexity of the issues and the recovery obtained.¹⁴ Although the Supreme Court has applauded the lodestar approach for providing lower courts with somewhat more guidance than the Johnson factors, it has also criticized the "risk" and "quality" adjustments for continuing to produce arbitrary fee awards.¹⁵

Supreme Court Standards Under Fee-shifting Statutes

In response to the perceived arbitrariness of the Johnson and lodestar adjustments, the Supreme Court issued a series of decisions that adopted, but substantially refined, the standards developed by the Third and Fifth Circuits. In the first of those decisions, Hensley v. Eckerhart,¹⁶ the Supreme Court held that

[t]he most useful starting point for determining the amount of a reasonable fee is the number of hours reasonably expended on the litigation multiplied by a reasonable hourly rate...[however] the product of reasonable hours times a reasonable rate does not end the inquiry. There remain other considerations that may lead the district court to adjust the fee upward or downward, including the important factor of 'results obtained.' The district court may also consider other factors identified in Johnson v. Georgia Highway (citation omitted), though it should note that many of these factors usually are subsumed within the initial calculation of hours reasonably expended at a reasonable hourly rate.¹⁷

Although the Hensley decision did not discuss which Johnson factors are properly subsumed within the lodestar, the Supreme Court did opine that the "results obtained" factor is a "crucial" consideration in determining the propriety of an upward fee adjustment because the overriding purpose of a fee-shifting statute is to limit fee awards to prevailing parties and to deny fee awards to non-prevailing parties.¹⁸

In its second decision, Blum v. Stenson,¹⁹ the Supreme Court reaffirmed that the proper starting point in determining a reasonable attorney's fee is to calculate the lodestar.²⁰ In Blum, however, the Supreme Court furthered this holding by requiring that when an applicant "has carried his burden of showing that the claimed rate and number of hours are reasonable, the resulting product is presumed to be the reasonable fee."²¹ In order to overcome the presumption that the lodestar is the proper fee award, an applicant must produce specific evidence that an upward enhancement is otherwise necessary to provide fair and reasonable compensation.²² Blum also answered, as Hensley had not, what Johnson factors are properly subsumed within the lodestar and should therefore not be considered as a basis for an upward fee adjustment. In particular, Blum held that "complexity [and] novelty of the issues," "the special skill and experience of counsel," the "quality of representation," and the "results obtained" from the litigation are presumptively reflected in the lodestar amount and thus cannot serve as independent bases for increasing the basic fee award.²³

Although the conclusion that "results obtained" are presumptively subsumed within the lodestar departs from the prior Hensley decision, the Blum court massaged this discrepancy by relying on its earlier statement in Hensley that, "[w]here a plaintiff has obtained excellent results, his attorney should recover a fully compensatory fee [and] [n]ormally this will encompass all hours reasonably expended on the litigation, [although] indeed in some cases of exceptional success, an enhanced award may be justified."²⁴ The Blum court seized this "exceptional success" language, emphasizing that although results-based fee enhancements are not per se impermissible, they are reserved for "rare" and "exceptional" cases supported by "specific evidence" on the record and detailed findings that the quality of the service rendered was superior to what one would reasonably expect in light of the rates charged.²⁵

In the third decision of the sequence, Delaware I, the Supreme Court transformed the Blum "presumption" in favor of the lodestar to a "strong presumption"²⁶ and further limited results-based enhancements by explaining the rationale underlying the usual fee-shifting statute as follows:

[t]hese statutes were not designed as a form of economic relief to improve the financial lot of attorneys...Instead, the aim of such statutes is to enable private parties to obtain legal help in seeking redress for injuries resulting from the actual or threatened violation of specific federal laws. Hence, if plaintiffs...find it possible to engage a lawyer based on the statutory assurance that he will be paid a "reasonable fee," the purpose behind the fee-shifting statute has been satisfied...In short, the lodestar figure includes most, if not all, of the relevant factors constituting a "reasonable" attorney's fee, and it is unnecessary to enhance the fee for superior performance in order to serve the statutory purpose of enabling plaintiffs to secure legal assistance.²⁷

In yet a further retreat from Hensley's "results obtained" focus, the Delaware I court emphasized that "when an attorney first accepts a case and agrees to represent the client, he obligates himself to perform to the best of his ability and to produce the best possible results commensurate with his skill...and [the lodestar] therefore adequately compensates the attorney and leaves very little room for enhancing the award based on his post-engagement performance..."²⁸ Although Delaware I reinforced the conclusion that superior performance should not generally warrant a fee enhancement, it did not resolve whether an attorney's risk of loss should justify such an enhancement.

Risk enhancement was, however, addressed by the Supreme Court in Delaware II,²⁹ wherein the majority concluded that although the risk of loss enhancements are not per se impermissible,³⁰ under Blum, such enhancements should only be awarded in "exceptional" cases where there are specific findings and evidence regarding the existence of such risk of loss. Such specific findings must be based on evidence that demonstrates that absent an opportunity for risk-related fee enhancements, the plaintiff would have faced substantial difficulties in finding counsel in the relevant professional market.³¹

In a subsequent decision,³² however, a majority of the Supreme Court definitively held that under a fee-shifting statute, an attorney's lodestar fees may not be risk-enhanced.³³ The court grounded this holding on several rationales. First, the court reasoned that risk enhancements duplicate factors already subsumed in the lodestar because the greater the risk of loss due to deficiencies in the merits of the underlying claim, the greater the number of hours the attorney must expend in order to overcome those deficiencies.³⁴ Second, awarding risk enhancements encourages attorneys to pursue unmeritous litigation because the lower the attorney's probability of success in litigation, the greater the enhancement to which he is entitled.³⁵ Third, although risk enhancements may be appropriate in contingency-fee arrangements, engrafting such premiums onto lodestar determinations under fee-shifting statutes creates a hybrid scheme that inconsistently borrows from the contingency model only to increase, but not to decrease, fee awards.³⁶ Fourth, the allowance of risk enhancements under fee-shifting statutes makes fee determinations more complex, arbitrary and unpredictable, and thereby results in more fee-related litigation.³⁷ Although the Supreme Court has now squarely concluded that risk enhancements under fee-shifting statutes, without more, are per se impermissible, only two bankruptcy decisions appear to have thus far considered this holding in the context of bankruptcy-related fee determinations.³⁸

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Footnotes

¹ The author is an attorney with Vinson & Elkins L.L.P. in Houston. She received her B.B.A. from the University of Houston in 1990, her M.B.A. from the University of Illinois in 1992 and her J.D. from the University of Houston Law Center in 1996. The views expressed herein are not necessarily those of Vinson & Elkins L.L.P. Return to article

² All references to the "Bankruptcy Code" are to 11 U.S.C. §101, et seq. Return to article

³ Bankruptcy Code §330(a) (emphasis added). Return to article

⁴ In re UNR Indus. Inc., 986 F.2d 207, 209-10 (7th Cir. 1993). Return to article

⁵ Unlike a fee-shifting statute, where the intent is "to encourage private enforcement of substantive statutory rights" by allowing a prevailing party to recover from a defendant, a common fund provision allows for the award of an attorney's fee from a fund established for the benefit of plaintiffs on the theory that "those who have benefitted from litigation should share its costs." Skelton v. General Motors Corp., 860 F.2d 250, 252-53 (7th Cir. 1988), cert. denied, 493 U.S. 810 (1989). Return to article

⁶ UNR, 986 F.2d at 209. Return to article

⁷ Id. at 210, citing In re Apex Oil Co., 960 F.2d 728, 731-32 (8th Cir. 1992); see, also, In re Manoa Finance Co., 853 F.2d 687, 690-91 (9th Cir. 1988). Return to article

⁸ Alyeska Pipeline Service Co. v. Wilderness Soc'y., 421 U.S. 240 (1975). Return to article

⁹ Pennsylvania v. Delaware Valley Citizens' Council for Clean Air, 478 U.S. 546, 562 (1986) (Delaware I). Return to article

¹⁰ Id. Return to article

¹¹ Johnson v. Georgia Highway Express Inc., 488 F.2d 714 (5th Cir. 1974). Return to article

¹² Delaware I, 478 U.S. at 562. Return to article

¹³ Lindy Bros. Builders Inc. v. American Radiator & Standard Sanitary Corp., 487 F.2d 161, 167 (3d Cir. 1973) (Lindy I). Return to article

¹⁴ Merola v. Atlantic Richfield Co., 515 F.2d 165, 168 (3d Cir. 1975). Return to article

¹⁵ Delaware I, 478 U.S. at 563. Return to article

¹⁶ Hensley v. Eckerhart, 461 U.S. 424 (1983). Return to article

¹⁷ Id. at 433-34 and n.9 (emphasis added, citations omitted). Return to article

¹⁸ Note that because Bankruptcy Code §330(a) does not differentiate between "prevailing" and "non-prevailing" parties, this "prevailing party" consideration is largely irrelevant to an analysis of fee awards in bankruptcy. Return to article

¹⁹ Blum v. Stenson, 465 U.S. 886 (1984). Return to article

²⁰ Id. at 888. Return to article

²¹ Id. at 897 (emphasis added). Return to article

²² Id. at 898. Return to article

²³ Id. at 898-900. Return to article

²⁴ Hensley, 461 U.S. at 435 (emphasis added). Return to article

²⁵ Id. at 899. Return to article

²⁶ Delaware I, 478 U.S. at 565. Return to article

²⁷ Id. at 565-66. Return to article

²⁸ Id. Return to article

²⁹ Pennsylvania v. Delaware Valley Citizens' Council for Clean Air, 483 U.S. 711 (1987) (Delaware II). Return to article

³⁰ A four-justice plurality concluded to the contrary. Return to article

³¹ Id. at 731, 733. Return to article

³² City of Burlington v. Dague, 505 U.S. 557 (1992). Return to article

³³ Id. at 565, 567. The City of Burlington decision was rendered in the context of the fee-shifting provisions of the Clean Water Act. Return to article

³⁴ Id. at 562. In the bankruptcy context, the parallel rationale would be that the greater the risk of non-payment due to the administrative insolvency of an estate, the greater the number of hours that an attorney must expend in order to transform the insolvent estate into a solvent one and/or the higher the hourly rate that must be paid to an attorney who is experienced and capable enough to transform the insolvent estate into a solvent one. Return to article

³⁵ Id. at 563. Return to article

³⁶ Id. at 566. Return to article

³⁷ Id. Return to article

³⁸ See In re Cedic Dev. Co. Inc., 219 F.3d 1115, 1117 (9th Cir. 2000) (holding that City of Burlington was not controlling because the risk of non-payment in the underlying case was not created by any contingency in the merits of the litigation but by the debtor's conduct,, which suggested that it did not like to pay its lawyers); In re Vista Foods USA Inc., 234 B.R. 121, 128 n.29 (Bankr. W.D. Okla. 1999) (recognizing that the Supreme Court has rejected fee enhancements based on the single Johnson factor of contingency, but applying the holding only to counsel who are employed on a contingency- rather than an hourly-fee basis. Return to article