By: David Bloom
St. John’s Law Student
American Bankruptcy Institute Law Review Staff
Although a “hedging” arrangement between attorneys retained by a Chapter 7 Trustee and a lender did not appear to offend policy considerations underlying 11 U.S.C. §504, such an agreement could not be approved as a means to obtain downside protection against risks associated with an appeal. In the case of In re Winstar Communications, Inc.,
the Trustee’s special litigation counsel and a consultant sought permission to assign part of their anticipated contingency fees to their lender.
Under the proposed agreement, the lender agreed to pay an undisclosed fixed price to Trustee’s counsel and consultant.
In exchange, the lender would receive the actual amount of contingency fees awarded, up to $10,000,000.00.
If the contingency fees were to exceed $10,000,000.00, the counsel and consultant would share the fees in excess of that amount.
Moreover, the lender agreed to waive any right to object to the Trustee’s settlement or other disposition of the adversary proceeding.
The Court concluded that this arrangement constituted impermissible “sharing” of fees within the meaning of §504, and denied the motion to approve the transaction.