Restructuring

Contributed by Rich Mullen
Previously, we explained the remarkable when we reported that the Bankruptcy Court for the District of Hawaii had sua sponte increased an attorney’s hourly rate.  Attorneys may now be adding Texas and the rest of the Fifth Circuit to their “favorites” list.  In a recent trio of opinions, both the Fifth Circuit and the United States District Court for the Southern District of Texas upheld fee enhancements in bankruptcy cases after concluding that Perdue v. Kenny A. ex rel. Winn, 130 S. Ct. 1662, 176 L. Ed. 2d 494 (2010) did not apply to a bankruptcy court’s determination of compensation for professionals. 
All three opinions arise out of “rare and exceptional” circumstances that led to the granting and affirmance of a fee enhancement.  In In re Pilgrim’s Pride Corp., the Fifth Circuit considered a fee enhancement for a financial advisor that had been retained as the debtor’s chief restructuring officer at a time when the debtor believed that the best outcome would be a debt for equity swap for unsecured creditors, but the financial advisor’s assistance resulted in a 100% recovery for all creditors and $450 million new equity interest for the debtor’s prepetition shareholders.  In In re ASARCO LLC, the district court considered fee enhancements for the debtor’s lead and local counsel, both of whom represented the debtor in perhaps the largest fraudulent transfer case in United States history.  The attorneys won the debtor a judgment in excess of $6 billion, which resulted in a 100% recovery (plus interest and attorneys’ fees) for creditors and left the debtor with approximately $1.4 billion cash on hand. 
In both cases, the U.S. Trustee opposed the fee enhancement arguing, among other things, that the bankruptcy court must apply the test enunciated by the Supreme Court in Perdue, which the U.S. Trustee asserted had narrowly circumscribed bankruptcy courts’ discretion to grant fee enhancements.  Perdue, a federal fee-shifting case, set forth guidelines to be considered for fee enhancements:  (1) a reasonable fee is that sufficient to induce a capable attorney to undertake the case; (2) the “lodestar” method yields a fee that is presumptively sufficient to reach this objective; (3) enhancements may be awarded in “rare” and “exceptional” circumstances; (4) a “lodestar” calculation includes most, if not all, of the relevant factors constituting reasonable attorney fees and an enhancement may not be based upon a factor already subsumed in the lodestar calculation; (5) the burden of proof is always on the proponent of the enhancement; and (6) one seeking an enhancement must produce specific evidence to support the award.  As explained by the Fifth Circuit in Pilgrim’s Pride, the “lodestar” amount “is equal to the number of hours reasonably expended multiplied by the prevailing hourly rate in the community for similar work.”
The Honorable Jennifer Walker Elrod wrote the Fifth Circuit’s opinion in Pilgrim’s Pride and concluded that Perdue did not “unequivocally, sub silientio overrule [the] existing bankruptcy framework” concerning fee enhancements.  In reaching this conclusion, Judge Elrod first reviewed the development of the now well-established precepts governing the compensation of professionals in bankruptcy cases.  Judge Elrod summarized the current framework as one in which bankruptcy courts have “broad discretion to adjust the ‘lodestar’ upwards or downwards when awarding reasonable compensation to professionals employed by the estate pursuant to section 330(a),” but that upward adjustments are only permissible in “rare and exceptional circumstances” where the “applicants had provided superior services that produced outstanding results[.]”
Judge Elrod went on to distinguish Perdue and explain its inapplicability in the bankruptcy context.  The court explained that the Supreme Court’s ruling in Perdue was primarily founded on justifications unique to the federal fee-shifting statutes, and the policy concerns of these statues are not implicated in the bankruptcy context.  She further explained that the Fifth Circuit abides by the “rule of orderliness,” which prohibits a panel of three circuit judges from unilaterally overruling or disregarding established precedent absent a change in law.  In this regard, the court stated that a Supreme Court opinion must be “more than merely illuminating with respect to the case before the court and must unequivocally overrule prior precedent.”  Judge Elrod distinguished Perdue because the Supreme Court determined that the “lodestar” method was to be favored over the “Johnson factors,” whereas the Fifth Circuit has always treated the “lodestar” method and the Johnson factors as complementary and not mutually exclusive.  The 12 oft-cited Johnson factors are:  (1) the time and labor required; (2) the novelty and difficulty of the questions; (3) the skill requisite to perform the legal service properly; (4) the preclusion of other employment by the attorney due to acceptance of the case; (5) the customary fee; (6) whether the fee is fixed or contingent; (7) time limitations imposed by the client or circumstances; (8) the amount involved and the results obtained; (9) the experience, reputation, and ability of the attorneys; (10) the “undesirability” of the case; (11) the nature and length of the professional relationship with the client; and (12) awards in similar cases.  Ultimately, Judge Elrod concluded that, because the Supreme Court failed to indicate that Perdue applied outside of the federal fee-shifting context, it did not overrule the existing bankruptcy framework and the Fifth Circuit affirmed the bankruptcy court’s fee enhancement. 
The district court’s opinions in ASARCO were written before Pilgrim’s Pride but still applied the same reasoning and reached the same conclusion.  Like the Fifth Circuit, the district court in ASARCO determined that Supreme Court used “very limiting language” and meant for Perdue to only apply to federal fee-shifting cases.  After stating that the question was better left for the Fifth Circuit, the district court decided that Perdue did not clearly apply.  The district court went on to determine the “lodestar” amount and consider the Johnson factors, and affirmed the fee enhancements granted by the bankruptcy court. 
In the Fifth Circuit, the status quo still stands, and Perdue, in and of itself, will not bar bankruptcy courts from awarding fee enhancements.  It will be interesting to see how the other circuits come out.  The Bankruptcy Appellate Panel of the Tenth Circuit has already determined that Perdue does not limit bankruptcy courts to exclusive use of the “lodestar” method.  Whether other courts will follow those of the Fifth and Tenth Circuits remains to be seen.

Weil, Gotshal & Manges LLP represented Pilgrim’s Pride in its chapter 11 case.