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Two Courts Agree: Purdue Analysis Should Not Be Extended to Professional Fee Awards under § 330

by Cassandra Porter Lowenstein Sandler PC; Roseland, N.J. Compensation of professional persons employed under §§ 327 or 1103 of chapter 11 of the Bankruptcy Code[1] or who represent a chapter 12 or 13 debtor is governed by § 330. Pursuant to this section, after notice and a hearing, a court may award “reasonable compensation” for services and “reimbursement” for expenses.[2] The appropriate method to calculate reasonable compensation under § 330 is the “lodestar” approach, which is determined by multiplying the number of hours reasonably expended in connection with a particular service by a reasonable hourly rate.[3] In 2010, the U.S. Supreme Court ruled in Purdue v. Kenny A. ex rel Winn[4] that an attorney’s fee under the federal fee- shifting statutes may be increased as a result of superior performance and results. However, such an increase may only be permitted in “extraordinary circumstances” and upon a showing by the applicant that such an enhancement is warranted due to circumstances not accounted for in the lodestar approach.[5] In Purdue, a class-action lawsuit filed against the state of Georgia asserted deficiencies in the state’s foster-care system. The matter was settled, except for the attorney’s fees to be paid to plaintiffs’ counsel pursuant to 42 U.S.C. § 1988.[6] Plaintiffs’ counsel submitted an application for $14 million. The district court reduced the fee award to $6 million, citing vague time entries and travel time.[7] However, the district court enhanced the award by 75 percent, concluding that the lodestar method did not take into account certain factors, such as: (1) counsel was forced to outlay $1.7 million in expenses, (2) counsel was not paid on an ongoing basis for work performed and (3) counsel had no guarantee of payment for services provided.[8] The district court’s opinion was affirmed by the Eleventh Circuit of Appeals,[9] and the Supreme Court granted certiorari. In a lengthy analysis, the Supreme Court noted that there is a strong presumption that the lodestar methodology for determining fee awards is sufficient and factors subsumed in the lodestar calculation cannot be used as grounds for increasing an award.[10] The Court identified six factors that are used in determining a lodestar fee award. In particular, the Court noted that a party seeking fees has the burden of identifying a factor that the lodestar does not adequately take into account and proving, with specificity, that an enhanced fee is justified.[11] The Court reversed the Eleventh Circuit’s decision because the factors were not applied and remanded the matter for further proceedings consistent with their

• pinion.[12]

Two recent opinions hold that the standard articulated in Purdue to support a fee enhancement is not binding upon a bankruptcy court.[13] In Market Center, the Tenth Circuit Bankruptcy Appellate Panel (BAP) held that § 330(a)(3) expressly permits a bankruptcy court to consider all relevant factors when considering a fee award.[14] The Tenth Circuit BAP held that Purdue did not limit bankruptcy courts to an exclusive use of the lodestar approach under § 330.[15] The facts of Market Center are relatively simple. Danny Lahave was the president and sole shareholder of Market Center East Retail Property Inc. (MCERP),[16] which owned a retail shopping center in New Mexico.[17] In 2007, MCERP entered into negotiations with Lowe’s Home Center Inc. to purchase the shopping center. As a result, Lowe’s signed a contract to purchase the shopping center for $13.5 million (the “Purchase Agreement”).[18] A few months before the scheduled closing, Lowe’s informed MCERP that it would not complete the sale.[19] In response, Lahave met with Barak Lurie, a litigation attorney, to discuss MCERP’s options.[20] Although Lurie’s typical fee was $395 per hour, he agreed to compensation at a lesser hourly rate with the right to a contingency fee.[21] In February 2009, Lurie filed suit on behalf of MCERP against Lowe’s for, among other things, breach of the Purchase Agreement.[22] In response, Lowe’s offered to purchase the shopping center for $7.5 million.[23] Without notifying Lurie, MCERP filed a petition for chapter 11 relief in April 2009.[24] After the petition date, a settlement was negotiated whereby Lowe’s agreed to purchase the shopping center for $9.75 million.[25]An order approving the sale

• f the shopping center to Lowe’s was obtained on Nov. 6, 2009.[26]

In This Issue

Two Courts Agree: Purdue Analysis Should Not Be Extended to Professional Fee Awards under § 330 Who's Watching the Watchmen? - Ethical Considerations in the Solicitation and Selection of Chapter 7 Trustees Not A "Checklist": In re Sullivan and Incorporating Reasonableness Factors in § 330 Fee Analyses Two Ethics Opinions Clarify Rules in Legal Internet Advertising Space is Limited - Reserve your Spot at the Mid-Level Professional Development Program Now! Register Today for the Young and New Members Committee Webinar - “Examiners and Select Plan Confirmation Issues" Comment on Proposed Rule Amendments Online

Volume 9, Number 6 / September 2012

ABI Committee News

Reprinted with permission of the American Bankruptcy Institute.

On June 10, 2009, MCERP filed an application (the “Retention Application”) to employ Lurie to “continue his prosecution of the case against Lowe’s…on the terms previously agreed to before the bankruptcy filing, including the contingent-fee agreement between the parties.”[27] MCERP never submitted a proposed order approving the Retention Application to the bankruptcy court.[28] Instead, three days after the sale order was entered, MCERP sought to withdraw the Retention Application.[29] The court found that MCERP’s withdrawal of the Retention Application was done in bad faith.[30] In January 2010, MCERP and Lurie filed a “stipulated employment order” that was approved by the bankruptcy court.[31] The stipulation provided that Lurie was entitled to an administrative claim for professional services rendered on and after June 10, 2009, but certain issues were reserved, including Lurie’s entitlement to compensation in connection with the sale.[32] Thereafter, Laurie filed an application for compensation. Because the shopping center was ultimately sold to Lowe’s for $9.75 million, not the $7.5 million originally offered prior to the filing, the bankruptcy court determined that Lurie should be awarded a contingency fee based on the $2.25 million sale price increase.[33] MCERP appealed. The Tenth Circuit BAP held that § 330 expressly allows a bankruptcy court to consider more than hours spent and hourly rates when making a determination as to the reasonableness of a fee award.[34] The Tenth Circuit BAP further stated that “[s]ection 330(a)(3) expressly allows a bankruptcy court to look at ‘all relevant factors’ as it makes a fee award. The list contained in § 330(a)(3) is not meant to be exhaustive; had Congress wished to limit a bankruptcy court’s consideration to the factors listed in § 330(a)(3), it knew how to do so.”[35] The Tenth Circuit BAP rejected the debtor’s argument that Purdue mandates use of the lodestar approach and prohibits consideration of other factors.[36] The court noted that there are significant differences between fee awards in civil-rights actions and bankruptcy cases. Namely, § 1988 actions (unlike grants under § 330) award reasonable attorneys’ fees to the prevailing party, not directly to the attorney.[37] Further, § 1988 is a fee-shifting statute where attorneys’ fees are assessed against the losing party and awarded as a part of the costs and such an award is dependent upon prevailing in the suit.[38] In contrast, awards under § 330 are not dependent on a successful litigation and are paid directly from the debtor’s estate.[39] Moreover, the Tenth Circuit BAP noted the Supreme Court in Purdue distinguished as “far different” a situation where an attorney agrees to a lesser hourly rate in return for the opportunity to seek a performance bonus versus a situation where an attorney, who is compensated at his or her regular hourly rate, also seeks a fee enhancement at the conclusion of the litigation.[40] Here, Lurie fell into the former category.[41] Therefore, the Purdue standard for awarding a fee enhancement did not apply.[42] The Fifth Circuit, following the Tenth Circuit BAP, made a similar finding that an enhanced fee award under § 330 need not first meet the Purdue Factors. In Pilgrim’s Pride, the debtors filed for chapter 11 protection with very low prospects for a successful reorganization.[43] The year before, the debtors “had lost approximately $1 billion” and operated “at a negative annual cash flow of [more than] $300 million.”[44] The debtors retained CRG Partners Group LLC.[45] With the help of CRG, the debtors confirmed a reorganization plan that provided for a 100 percent return to secured and unsecured creditors and $450 million in new equity interests for pre-petition shareholders.[46] CRG filed a fee application seeking $5.98 million dollars in fees and a fee enhancement of $1 million dollars.[47] The U.S. Trustee’s Office objected to CRG’s fee application.[48] Despite finding that CRG contributed significantly to the debtors’ success, the bankruptcy court denied CRG’s request for a fee enhancement.[49] CRG appealed, and the district court reversed.[50] On appeal to the Fifth Circuit, the U.S. Trustee argued that the district court erred in reversing the bankruptcy’s decision because Purdue narrowly circumscribes the bankruptcy court’s discretion to grant fee enhancements.[51] After a discussion

• f the circuit’s relevant guidelines for analyzing compensation applications under the Bankruptcy Code, the Fifth Circuit

considered whether the principles set forth in Purdue altered them.[52] The Fifth Circuit explained that a professional’s compensation is determined by a combination of tools: the lodestar method, the 12-factor Johnson test and § 330(a).[53] The Fifth Circuit noted that its prior rulings have consistently held that bankruptcy courts have broad discretion to adjust the lodestar upwards or downwards when awarding reasonable compensation pursuant to § 330(a). When considering the fee award in Purdue, the Fifth Circuit noted that the Supreme Court did not “unequivocally, sub silentio overrule our legion

• f precedent in the field of bankruptcy.”[54]

The Fifth Circuit further noted that Purdue is a federal fee-shifting case that neither explicitly touched on bankruptcy law nor indicated that the Supreme Court intended it to extend to non-fee-shifting cases.[55] The Fifth Circuit, similar to the Tenth Circuit BAP, noted that the debtors’ estate would be responsible for paying fee enhancements and not the general public.[56] Moreover, in Pilgrim’s Pride, where creditors were receiving a 100 percent return, only the debtors’ bottom line was impacted. Finally, the court distinguished Purdue based on the fact that the debtors’ board of directors recommended paying the fee enhancement: “[W]e can hardly compare the [d]ebtors’ situation to that of the non-consenting taxpayers. ”[57] As a result of the opinions in Market Center and Pilgrim’s Pride, professionals seeking fee enhancements under § 330 should be comforted that their extraordinary results may be recognized and rewarded.

• 1. 11 U.S.C. § 101, et seq.
• 2. 11 U.S.C. § 330(a)(1)(A).
• 3. See In re Apex Oil Co., 960 F.2d 728, 730-731 (8th Cir. 1992).

Reprinted with permission of the American Bankruptcy Institute.

• 4. 130 S.Ct. 1662, 1669 (2010).
• 5. See Purdue, 130 S.Ct. at 1673 (“[T]here is a ‘strong presumption’ that lodestar figure is reasonable, but that

presumption may be overcome in those rare circumstances in which the lodestar does not adequately take into account a factor that may properly be considered in determining a reasonable fee.”).

• 6. Id. at 1669-70.
• 7. Id. at 1670.
• 8. Id.
• 9. Id.
• 10. Id. at 1674.
• 11. Id.
• 12. Id. at 1677.
• 13. See Market Center East Retail Property Inc. v. Lurie (In re Market Center East), 469 B.R. 44 (10th Cir. B.A.P. 2012),

and CRG Partners Group LLC v. Neary (In re Pilgrim’s Pride Corp.), 2012 WL 3239955 (5th Cir. Aug. 10, 2012).

• 14. In re Market Center East, 469 B.R. at 52.
• 15. Id. at 54.
• 16. Id. at 46.
• 17. Id.
• 18. Id.
• 19. Id.
• 20. Id.
• 21. Id.
• 22. Id.
• 23. Id. at 47.
• 24. Id.
• 25. Id.
• 26. Id.
• 27. Id.
• 28. Id.
• 29. Id.
• 30. Id. at 47-48.
• 31. Id. at 47.
• 32. Id. at 48.
• 33. Id. at 49.
• 34. Id. at 52.
• 35. Id.
• 36. Id. at 53.
• 37. Id.
• 38. Id.
• 39. Id. (“As such, § 330 awards are effectively ‘paid’ by the debtor’s unsecured creditors as a whole, rather than by the

loser of a litigation. Comparing fee awards under the civil right statutes and the Code is akin to comparing apples and

• ranges.”).
• 40. Id.
• 41. Id. at 53-54, 55.

Reprinted with permission of the American Bankruptcy Institute.

• 42. Id. at 53-54.
• 43. In re Pilgrim’s Pride Corp., 2012 WL 3239955 at *1.
• 44. Id.
• 45. Id.
• 46. Id.
• 47. Id. (citation omitted).
• 48. Id. (citation omitted).
• 49. Id. at *2 (citation omitted).
• 50. Id. (citation omitted).
• 51. Id.
• 52. Id. at 12.
• 53. Id.
• 54. Id.
• 55. Id. at 13.
• 56. Id.
• 57. Id.

Reprinted with permission of the American Bankruptcy Institute.