Fee Enhancements How Do You Get One Part II
In accordance with UNR, most bankruptcy courts have adhered to the Hensley-Blum-Delaware I and II limitations in evaluating the propriety of fee enhancements in bankruptcy.40 For instance, courts from multiple jurisdictions have reiterated the position that many of the Johnson factors are subsumed within the lodestar and may therefore not serve as an independent basis for a fee enhancement.41 As one court observed, "excellent results" will not justify a fee enhancement where a law firm's representation has otherwise enhanced the firm's reputation in the bankruptcy community, where such representation "will mean additional business and referrals...in the future" and where the applicant has held itself out as "a firm where excellent services and results are the norm, not the exception."42 Despite this and many similar holdings, bankruptcy courts have nonetheless been willing to award fee enhancements to estate professionals under various circumstances. For example, enhancements have been awarded:
(i) To Debtor's Counsel:
1. where a non-payment contingency was created by evidence suggesting that the debtor "did not like to pay its lawyers," and where the rates charged by counsel were below-market, "bargain rates," a 33 percent or $10,000 fee enhancement would be awarded in order to fairly compensate counsel;43
2. where a non-payment contingency is combined with extreme hardship to counsel, who was required to borrow money in order to continue representing the debtor, a fee enhancement may be permissible if in fact a 100 percent distribution to unsecured creditors is ultimately realized;44
3. where a "great" non-payment contingency is combined with the transformation of 200 debtors with no unencumbered assets into solvent companies that confirmed a plan providing a 60 percent dividend to creditors, where $33 billion in claims were successfully litigated in 132 proceedings, and where the debtors' former management approved of the enhancement, counsel would be awarded a fee enhancement of $1.3 million;45
4. where a non-payment contingency is combined with confirmation of a plan that, contrary to initial expectations, reduced claims from $50 to $20 million, fully satisfied all secured and priority claims, and provided a dividend to unsecured creditors and shareholders, a 30 percent fee enhancement would be awarded to enhance the lodestar fees of partners, but not those of associates or paralegals;46
5. where liquidation appeared likely at the outset of the case, but where counsel instead negotiated a plan providing for a 100 percent dividend to creditors, plus interest, or roughly $40 million in excess of the sums that would have been received in a liquidation, and where counsel's base hourly rates were modest in light of his experience and national reputation, counsel would be awarded a 10 percent fee enhancement;47
6. where initial recovery projections for general unsecured creditors were 5 percent or less due to the debtor's $5,674,404.70 insolvency, and where ultimately all secured and unsecured claims were paid in full and the debtor emerged from chapter 11 with a net worth of approximately $3.5 million, 200 percent fee enhancements would be awarded;48
7. where a partial non-payment contingency is combined with what appeared to be at the outset of the case no realistic prospect of reorganization due to the debtor's substantial operating losses, its incurrence of monthly interest payments at the rate of 22 percent, and the loss of its key employees, but where, due to the innovative and skillful efforts of counsel in resolving untested provisions of the then-new Bankruptcy Code, a 100 percent dividend and substantial returns to stockholders were ultimately realized, a fee enhancement would be rewarded;49
8. where counsel achieved a "relatively quick and successful completion of the case," a $10,000 fee enhancement would be awarded once counsel's lodestar fees were otherwise reduced by approximately the same amount in order to conform counsel's rates with those charged by local professionals;50
9. where a non-payment contingency is combined with delays in counsel's receipt of fees and "exceptional results," a $10,000 fee enhancement would be awarded once counsel's lodestar fees were otherwise reduced by approximately 40% in order to account for hours expended by counsel pursuing unsuccessful avoidance litigation;51
(ii) To Counsel for a Trustee:
10. where a non-payment contingency is combined with delay in payments to counsel, the absence of any objections to the requested enhancement, a protracted 16-year case, the establishment of landmark authority, and counsel's personal safety being placed at risk due to the engagement, a $117,500 fee would be awarded to enhance counsel's $1.35 million lodestar;52
11. where counsel successfully disposed of a radio station in the face of harassment, character assassination, affronts to professional competence, repeated groundless suits, unfavorable and demeaning publicity, and where a lis pendens tied up property of counsel's law firm, a 15 percent fee enhancement would be awarded;53
12. where a non-payment contingency is combined with an excellent result and the requested $35,000 fee adjustment results in hourly rates that are not unreasonably high ($175 for the lead partner and $130 for associates), an upward enhancement is permissible;54
13. where a non-payment contingency is combined with an excellent result in an 11-year case resulting in full payment to creditors, and the total fee award of $1.4 million is reasonable, a fee multiplier of 1.7 times (that is, a 70 percent enhancement of) the lodestar is permissible;55
14. where class-action litigators are employed on behalf of an estate under a contingency-fee arrangement, they are entitled, under "common fund" standards, to a fee enhancement of 1.5 times the amount of their lodestar;56
15. where counsel for a chapter 7 trustee successfully reduced the estate's claims from $9 million to $1 million and recovered funds sufficient to allow for a 40 percent dividend to creditors, a $17,500 fee enhancement would be awarded;57
16. where counsel for a chapter 11 trustee was able to increase the tenancy rate in the debtor's commercial office building from 45 to 84 percent, negotiate and compromise claims of all creditors, sell the debtor's real property for $34 million cash without incurring a broker's fee, fully pay all administrative and priority claims and provide dividends to equity security holders, all within 11 months, a $33,618.50 fee enhancement would be awarded;58
17. where a non-payment contingency is combined with the trustee's resuscitation of a case that had languished for six months prior to his appointment, and where his successful efforts to sell the debtor's sole encumbered asset resulted in the satisfaction of claims junior to those of the first-priority lienholder, a fee enhancement of 13 percent would be awarded;59
18. where a non-payment contingency results from an estate's administrative insolvency and the existence of only speculative assets, where counsel demonstrated appropriate billing judgment by not charging for travel time over the six-year course of the case, where a 100 percent dividend, plus interest to unsecured creditors, would not have been realized from the formerly insolvent estate but for the unique blend of skill, diplomacy, preparation, negotiating prowess and sheer investment of counsel's time, and where counsel singularly fostered the transformation of a bitter and contentious case into one of cooperation and professionalism, an 8.6 percent enhancement fee would be awarded;60
19. where a non-payment contingency is combined with a case requiring special expertise due to the involuntary nature of the proceeding, where there are threats against counsel and an intransient debtor, where all creditors would not have been paid in full with interest but for counsel's initiative, perseverance and skill and where no party with a pecuniary interest in the case objected to the fee request, counsel would be awarded $20,000 over its $15,000 lodestar; however, such award should not be characterized as an "enhancement" or a "bonus," but rather final compensation under an analysis of reasonableness;61
(iii) To Counsel for a Committee:
20. where a non-payment contingency is supported by evidence that the committee was unable to find counsel willing to represent it for approximately 90 days after the commencement of the case, committee counsel would be entitled to a 50 percent upward adjustment of the lodestar;62
21. where an insolvent pork processor with $2.2 billion in annual revenues confirmed a plan within one year that provided unsecured creditors with a 100 percent payout, plus interest, committee counsel would be awarded a 15 percent fee enhancement in the amount of $37,500;63
22. where a very substantial non-payment contingency is combined with payment delays, a 10 percent fee enhancement would be awarded once counsel's lodestar fees were otherwise reduced in order to reflect counsel's complete lack of billing judgment;64
(iv) To Multiple Estate Professionals:
23. where counsel for the chapter 11 trustee and the creditors' committee performed their jobs "well" and in a "professional and proficient manner," they would be entitled to a "20 percent success fee;"65
24. where counsel successfully resolved multibillion-dollar claims of asbestos personal-injury claimants by confirming a plan involving 31 debtor affiliates in five months and where counsel's efforts were "herculean" and "nothing short of a truly remarkable tour de force," enhancements of between 5-10 percent of the lodestar are permissible;66
25. where resolution of among the largest and most complex bankruptcy proceedings filed to that point in time under the Bankruptcy Code was consummated before the second anniversary of the petition date, where enormous liabilities were successfully resolved, creditors were to receive a 100 percent payout and the reorganized entity was to re-enter the business community with assets of approximately $100 million, modest fee enhancements would be awarded;67
26. where a non-payment contingency is combined with exceptional results that are not reflected in the lodestar and where the case had the potential to become one of the more complicated, lengthy, expensive and controversial proceedings in the court's experience, but where instead the case was resolved in five months with a minimum of court involvement, the court would award a $75,000 fee enhancement to be unequally divided among five of the estate's professionals;68
27. where an estate has $199 on the petition date and three and one-half years later, a plan is confirmed with total assets of $20.9 million providing for a 100 percent distribution to unsecured creditors, a premium may be awarded in order to reward these "spectacular results;"69
28. where the debtor, in one of the largest chapter 11 cases ever filed, confirmed a plan providing for 70-100 percent distributions to the estate's 45,000 creditors within three years, 12 percent fee enhancements may properly be awarded to some of the estate's professionals;70
29. where a non-payment contingency is combined with counsels' "incredible effort," without which a majority of the 48 debtors would not have been able to confirm plans within approximately two years, and where complex issues, unparalleled in the court's experience, were successfully resolved due to counsels' efforts, counsel for the debtors would be awarded 50 percent fee enhancements, and counsel for the trustees and receivers would be awarded 26 percent fee enhancements;71
30. where a prolonged reorganization resulted in the debtor's special counsel and the creditor and equity committees' counsel bearing the economic burden of substantial payment delays, the court would award requested fee enhancements in the amounts of $33,362, $98,161 and $87,418, respectively, in order to compensate counsel for the time-value of money;72
31. where the value of the debtor's estate was increased from $1 billion to $2.3 billion within approximately two years, (i) the equity committee's financial advisor's $2 million lodestar would be enhanced by $1 million based on its unprecedented fulfillment of duties normally undertaken by the debtor and its implementation of novel devices that enhanced equity-holders' value without cost to higher-priority claimants; and (ii) the court-appointed examiner's $268,875 lodestar would be enhanced by $200,000 based on his assumption of a proactive and instrumental role in forcing disclosures that supported substantially higher enterprise values, and that substantially benefited the estate at the risk of his professional reputation;73
32. where a non-payment contingency was even more substantial than in the typical contingent-fee arrangement, and yet counsel willingly and knowingly made a substantial three-year investment of time with very little prospect of recompense, fee enhancements of 15 percent would be awarded to counsel for the debtor and the unsecured creditors' committee;74
33. where a non-payment contingency existed by virtue of there being no "free assets" in the estate to assure that administrative expenses would ever be paid, where it appeared at the outset of the case that there was no prospect whatsoever for a sizeable dividend but, due to counsel's ingenious efforts, all unsecured creditors were paid in full, and no party other than the U.S. Trustee objected to the requested premiums, fee enhancements of 50 and 70 percent would be awarded to counsel for the unsecured creditors' committee and the chapter 11 trustee;75
(v) Other:
34. where a secured creditor's counsel directed the course of the case to a much more favorable result for all parties-in-interest, counsel's $4,582.50 lodestar would be enhanced for a total award of $8,957.50.76
Although decisions other than those synopsized above have awarded fee enhancements in both reported and unreported decisions, these cases demonstrate the fact-sensitive nature of the fee-enhancement inquiry. Despite the somewhat unpredictable outcomes of fee enhancement requests, at least two standards pertaining to such requests are, in fact, constant. First, the burden of proof is always on the applicant seeking the premium,77 and the "evidentiary showing necessary to justify [the] fee enhancement must be proportional to the amount at issue."78 Second, the abuse-of-discretion standard uniformly governs appellate review of a bankruptcy court's award or denial of a requested premium,79 and appellate courts often recite the highly discretionary nature of the fee-enhancement inquiry.80
Other than the burden of proof and the standard of appellate review, few constants can be gleaned from a review of existing fee enhancement precedents. Despite this absence of uniformity, certain fee-enhancement guidelines can nonetheless be discerned from the existing case law. First, many of the most generous fee enhancement awards pre-date the Supreme Court's more restrictive Hensley-Blum-Delaware I and II guidelines, and accordingly, the precedential value of those cases is presumably less forceful than those decided after the Supreme Court pronouncements. Second, it is now clear, based on Supreme Court precedents and applicable bankruptcy court interpretations thereof, that bankruptcy courts have, and may exercise, their discretion to award fee enhancements for (1) superior performance if (a) the applicant has produced specific evidence that the services rendered are superior to what one would expect in light of the hourly rates charged; (b) the lodestar does not fairly compensate the applicant for the work done; and/or (c) the lodestar falls short of the compensation earned by comparably skilled attorneys providing non-bankruptcy services;81 and (2) risk of non-payment if the applicant is not employed on a contingency-fee basis and the application can show that without such risk enhancement, the estate would have faced substantial difficulties in finding counsel in the relevant market.82
While the foregoing discussion summarizes the few principles that can be derived from existing fee-enhancement opinions, it is evident from a survey of the case law that these guidelines have by no means resulted in uniform bankruptcy court determinations concerning the propriety or impropriety of requested fee enhancements. Predictably, this lack of uniformity results in uncertainty for the bankruptcy practitioner who either seeks or opposes such fee enhancements. Until further clarity is provided by either Congress or the Supreme Court, fee-enhancement determinations will likely continue to be ad hoc, discretionary inquiries in which the court and practitioner are forced to cite and rely on widely divergent, fact-sensitive case precedents.
Footnotes
39 UNR, 986 F.2d at 208, 210-11. Return to article
40 For exceptions to this general adherence to Supreme Court precedents, see In re Baldwin-United Corp., 79 B.R. 321, 346 (Bankr. S.D. Ohio 1987) (Delaware II is not binding when analyzing fee enhancements under Bankruptcy Code §330(a)); In re Chary, 201 B.R. 783, 785-86 (Bankr. W.D. Tenn. 1996) (stating that no authority had been cited that would require the court to apply non-bankruptcy Supreme Court cases). Return to article
41 See In re El Paso Refining L.P., 2000 WL 33152050 *7 (Bankr. W.D. Texas Dec. 4, 2000) (Johnson factors are subsumed within the lodestar amount); In re Powerine Oil Co., 71 B.R. 767, 772-73 (B.A.P. 9th Cir. 1986) ("results obtained" are generally subsumed within other factors used to calculate the lodestar and should therefore not be used as an independent basis for increasing the fee award); In re Big Rivers Elec. Corp., 252 B.R. 676, 686 (W.D. Ky. 2000) (the lodestar subsumes most, if not all, of the Johnson factors, including the novelty and complexity of the issues, the special skill and experience of counsel, the quality of representation and the results obtained); In re Southern Merchandise Distribs. Inc., 117 B.R. 725, 723 (Bankr. S.D. Fla. 1990) (although the "results obtained" factor alone will not normally provide a basis for increasing the lodestar, the presence of this factor, combined with the "contingent fee" factor, may provide such a basis); In re Energy Coop. Inc., 95 B.R. 961, 965 (Bankr. N.D. Ill. 1989) (novelty and complexity of the issues, the special skill and experience of counsel, the quality of representation and the results obtained are presumably fully reflected in the lodestar and thus cannot serve as a basis for increasing the fee award; however, risk of non-payment may justify an increase where counsel can show that without an adjustment for risk, the estate would have faced substantial difficulties in finding competent counsel in the relevant market); In re East Peoria Hotel Corp., 145 B.R. 956, 962-63 (Bankr. C.D. Ill. 1991) (the lodestar figure subsumes a number of the Johnson factors, including the customary fee and the experience, reputation, ability and skill of counsel; moreover, an enhancement based on "results obtained" is questionable given that there are not too many miracles to be performed in the bankruptcy court); In re Price, 143 B.R. 190, 197-98 (Bankr. N.D. Ill. 1992) (complexity and novelty of the issues, the large number of persons benefitted, the superior quality of service and the exceptional results obtained are not sufficient bases upon which to award a fee enhancement); In re Fender, 12 F.3d 480, 488 (5th Cir. 1994) (to award an enhancement for complexity, skill, results and experience would double-count the Johnson factors). Return to article
42 In re Interco Sys. Inc., 206 B.R. 61, 63-64 (Bankr. W.D.N.Y. 1997). Return to article
43 In re Cedic Dev. Co., 219 F.3d 1115, 1116-17 (9th Cir. 2000). Return to article
44 In re D.W.G.K. Restaurants, 106 B.R. 194, 196-97 (Bankr. S.D. Cal. 1989). Although the D.W.G.K. court ultimately refused to award a fee enhancement due to the debtor's failure to make scheduled payments to unsecured creditors, it advised counsel that if such payments were in fact made, the court would deem it a "rare" and "exceptional" case that warranted the requested fee enhancement. Return to article
45 Baldwin-United, 79 B.R. at 344, 347. Successor counsel for the creditors' committee was also awarded a $150,000 fee enhancement for its role in changing the "tenor of the committee" "from combative to cooperative." Return to article
46 In re Idak Corp., 26 B.R. 793, 796-97, 800 (Bankr. D. Mass. 1982). Return to article
47 In re Moramerica Fin. Corp., 100 B.R. 451, 453-55, 457-58 (Bankr. N.D. Iowa 1989). Return to article
48 In re Farah, 141 B.R. 920, 922, 925 (Bankr. W.D. Tex. 1992). The Farah court opined that despite widespread reliance on precedents involving fee-shifting statutes, in reality bankruptcy cases are much more akin to class-action, common-fund cases, and accordingly, precedents involving such common-fund cases are the more reliable authorities. Id. at 926 n.7. Return to article
49 In re Warrior Drilling & Eng'g., 9 B.R. 841, 842-44, 848-50 (Bankr. N.D. Ala. 1981). Return to article
50 In re Wendy's of Montana Inc., 111 B.R. 314, 315, 317 (Bankr. D. Mont. 1988). Return to article
51 In re Port Royal Land & Timber Co., 105 B.R. 72, 73, 78 (Bankr. S.D. Ala. 1989). Return to article
52 In re Blue Coal Corp., 206 B.R. 721, 722, 725, 727 (Bankr. M.D. Pa. 1997). Return to article
53 In re Whet Inc., 61 B.R. 709, 711-13 (Bankr. D. Mass. 1986). Return to article
54 Southern Merchandise, 117 B.R. at 727-28. Return to article
55 In re Lawler, 807 F.2d 1207, 1213 (5th Cir. 1987). Return to article
56 In re Churchfield Management & Inv. Corp., 98 B.R. 838, 856 (Bankr. N.D. Ill. 1989). Return to article
57 In re Chary, 201 B.R. 783, 785-86 (Bankr. W.D. Tenn. 1996). As noted above, the Chary court rejected the applicability of non-bankruptcy Supreme Court fee-enhancement precedent. Return to article
58 In re One City Centre Assoc., 111 B.R. 872, 878-79 (Bankr. E.D. Cal. 1990). Return to article
59 In re Stable Mews Assocs., 49 B.R. 395, 399, 403-05 (Bankr. S.D.N.Y. 1985). Return to article
60 El Paso, 257 B.R. at 816, 838-40. Return to article
61 Vista Foods, 234 B.R. at 123-24, 132-34. Return to article
62 Powerine, 71 B.R. at 773-74. (Note that Powerine was decided prior to the Supreme Court's 1987 Delaware II decision, which instructs that if a risk enhancement is proper, it should not exceed 1/3 of the lodestar.) Return to article
63 In re Wilson Foods Corp., 40 B.R. 118, 121-22 (Bankr. W.D. Okla. 1984). Return to article
64 In re The Leonard Jed Co., 118 B.R. 339, 343, 347 (Bankr. D. Md. 1990). Return to article
65 In re Garland Corp., 8 B.R. 826, 834 (Bankr. D. Mass 1981). This case precedes the Hensley-Blum-Delaware I and II line of cases and does not apply any sort of objective standard for analyzing the propriety of fee enhancements. Return to article
66 In re Hillsborough Holdings Corp., 191 B.R. 937, 939-40 (Bankr. M.D. Fla. 1995); see, also, In re Hillsborough Holdings Corp., 127 F.3d 1398, 1400 (11th Cir. 1997). Return to article
67 In re Penn-Dixie Indus. Inc., 18 B.R. 834, 835-36 (Bankr. S.D.N.Y. 1982). Return to article
68 In re Summit Communities of Florida, 84 B.R. 863, 66-67, 873 (Bankr. S.D. Fla. 1988). Return to article
69 In re Aminex Corp., 15 B.R. 356, 358, 361-62 (Bankr. S.D.N.Y. 1981). Return to article
70 In re White Motor Credit Corp., 50 B.R. 885, 886-88, 894-95 (Bankr. N.D. Ohio 1985). Return to article
71 In re Bolton Hall Nursing Home, 40 B.R. 657, 659, 662-64, 667 (Bankr. D. Mass. 1984). Return to article
72 In re Public Serv. Co., 138 B.R. 660, 663 (Bankr. D. N.H. 1992). Return to article
73 In re Public Serv. Co., 160 B.R. 404, 438, 441-42, 444-45, 449-50 (Bankr. D. N.H. 1993). Return to article
74 In re Yankton College, 101 B.R. 151, 168 (Bankr. D. S.D. 1989). Return to article
75 In re Elmendorf Board Corp., 57 B.R. 580, 582-83, 586-87 (Bankr. D. N.H. 1986). Return to article
76 In re Breeden, 180 B.R. 802, 811 (Bankr. N.D. W.Va. 1995); see, also, In re Fall, 93 B.R. 1003, 1011 (Bankr. D. Dre. 1988) (awarding $354.10 premium on lodestar fees of $26,154.77). Return to article
77 Blum, 465 U.S. at 896; Fall, 93 B.R. at 1011. Return to article
78 In re Atlas, 202 B.R. 1019, 1021 (Bankr. S.D. Fla. 1996). Return to article
79 Fender, 12 F.3d at 487; Cedic, 219 B.R. at 116; Big Rivers, 252 B.R. at 681. Return to article
80 Leffler v. Meer, 936 F.2d 981, 984-85 (7th Cir. 1991). Return to article
81 In re Manoa, 853 F.2d at 688; UNR, 986 F.2d at 211. Return to article
82 Delaware II, 483 U.S. at 731, 733. Return to article