Wednesday, September 26, 2012

Pilgrim's Pride Opinion Allows Enhancements in Bankruptcy, Offers Comprehensive Overview of Bankruptcy Fees

The Fifth Circuit has affirmed a $1 million fee enhancement to a chief restructuring officer who achieved results described as “rare and exceptional.”  Matter of Pilgrim’s Pride Corp., No. 11-10774 (5th Cir. 8/10/12).   The opinion can be found here.   The Court rejected the argument that a recent Supreme Court opinion on fee shifting precluded enhancements and, in the process, set forth a comprehensive framework for allowance of professional fees in bankruptcy.   Curiously, the opinion did not mention the Court’s opinion in Matter of Pro-Snax Distributors, Inc., 157 F.3d 414 (5th Cir. 1998).

What Happened

When Pilgrim’s Pride Company filed for chapter 11 relief in December 2008, its prospects did not look good.   It had lost about $1 billion the previous fiscal year and was incurring negative cash flow of $300 million a year.   The Debtors anticipated that unsecured creditors would receive, at best, a debt for equity swap, and that equity would be cancelled. 
CRG Partners, LLC was engaged as chief restructuring officer.    Just over a year later, the company confirmed a plan which paid all secured and unsecured creditors in full and distributed equity interests valued at $450 million to the pre-petition shareholders.   

After the plan was confirmed, CRG requested that it be allowed compensation of $5.98 million plus an enhancement of $1 million.    The Debtor’s Board of Directors supported the enhancement.   The U.S. Trustee objected to the enhancement on the basis that CRG had already been adequately compensated through its lodestar-calculated fee.   The Bankruptcy Court denied the request for enhancement based on Perdue v. Kenny A. ex rel. Winn, 130 S.Ct. 1662 (2010).   The District Court reversed, finding that Perdue was not binding in the bankruptcy context.

On remand, the Bankruptcy Court approved the enhancement and the U.S. Trustee appealed.    The UST argued that Perdue precluded the enhancement.   The Fifth Circuit rejected the Trustee’s position and affirmed the Bankruptcy Court order approving the additional award.

An Overview of Professional Fees

In reaching its conclusion that enhancements remained viable, the Court of Appeals provided an extensive discussion of the history of awards of professional fees in the Fifth Circuit.   Under the Bankruptcy Act, courts in the Fifth Circuit applied the twelve Johnson factors, which included such requirements as the time and labor required, the novelty and difficulty of the questions, skill required, undesirability of the case and reputation of the attorneys.    In re First Colonial Corp. of America, 544 F.2d 1291, 1298-99 (5th Cir. 1977), quoting Johnson v. Georgia Highway Express, Inc., 488 F.2d 714 (5th Cir. 1974).   (Attorneys of a certain level of experience will remember preparing fee applications reciting the twelve Johnson/First Colonial factors even though many of them were usually irrelevant to the specific case).   While Johnson was a civil rights case, the First Colonial court found the factors to be “equally useful whenever the award of reasonable attorneys’ fees is authorized by statute.”     Id. at 1299.   While the same factors might be applicable, bankruptcy courts were advised to make awards at the lower end of the spectrum in light of the “strong policy of the Bankruptcy Act that estates be administered as efficiently as possible.”    Id.

The lodestar method was recommended by another Act case, In re Lawler, 807 F.2d 1207 (5th Cir. 1987).    Under the lodestar method, the Court determines a reasonable number of hours multiplied by a reasonable rate and then adjusts the resulting fee up or down based upon the other Johnson factors.

When section 330(a) was adopted as part of the Bankruptcy Code, it retained the overall framework of compensation under the Act, but rejected the “economy of the estate” limitation.   This meant that bankruptcy lawyers could be compensated at the same rate as other skilled professionals.   

Section 330(a) was amended in 1994 to include a list of six non-exclusive factors to be considered in awarding compensation and two instances in which the court should deny compensation.    Notwithstanding the statutory definition, the Fifth Circuit found that the prior case law and the statutory provisions provided a complimentary framework.

Following the Bankruptcy Code’s enactment, we made clear that the lodestar, Johnson factors, and §330 coalesced to form the framework that regulates the compensation of professionals employed by the bankruptcy estate.   (citation omitted).   Under this framework, bankruptcy courts must first calculate the amount of the lodestar.   (citation omitted).    After doing so, the courts “then may adjust the lodestar up or down based on the factors contained in §330 and [their] consideration of the factors listed in Johnson.”   (citation omitted).    We have also emphasized that bankruptcy courts have “considerable discretion” when determining whether an upward or downward adjustment of the lodestar is warranted.

Opinion, at p. 8.   

The Court also conducted an historical analysis of fee enhancements in bankruptcy, finding that, although they were extraordinary, they had been allowed under both the Bankruptcy Act and the Code.    The Court noted that 

(I)f enhancements were possible when fees were awarded “at the lower end of the spectrum of reasonableness,” then they surely remained possible after that ceiling was removed and the statutory text was otherwise unchanged.

Opinion, at p. 13.    The Court’s point is that because the Bankruptcy Act allowed enhancements despite the focus on economy of administration that it would be reasonable for enhancements to be allowed under the more liberal provisions of the Bankruptcy Code.

In conclusion, the Court ruled that enhancements were a part of the process of upward or downward adjustment of the lodestar and remained available in extraordinary situations.

In sum, we have consistently held that bankruptcy courts have broad discretion to adjust the lodestar upwards or downwards when awarding reasonable compensation to professionals employed by the estate pursuant to § 330(a). However, this discretion is far from limitless. Upward adjustments, for instance, are still only permissible in rare and exceptional circumstances--such as in Rose Pass Mines and Lawler, where the applicants had provided superior services that produced outstanding results--that are supported by detailed findings from the bankruptcy court and specific evidence in the record.

Opinion, at 15.

Sub Silentio and the Rule of Orderliness 

Having concluded that enhancements remained viable, the Court turned its attention to whether the Supreme Court had “unequivocally, sub silentio overruled our circuit’s bankruptcy precedent.”   Opinion, p. 15.  
In Perdue, the Supreme Court rejected a request for an enhancement in a civil rights case.   In interpreting the term “reasonable fees” under 42 U.S.C. §1988, the Supreme Court noted that the courts had initially applied the twelve Johnson factors, but had transitioned to a lodestar approach in order to “cabin() the discretion of trial judges.”    The Supreme Court concluded that enhancements could be allowed under section 1988, but only where the hourly rate used in the lodestar calculation did not adequately measure the attorney’s true market value, where the litigation involved an “extraordinary” outlay of expenses and where there was an “exceptional delay” in payment, especially where that delay was due to the defense.    The Court also noted that in civil rights cases, the presumption should be against an enhancement because defendants would be less likely to settle if faced with an open-ended fee request and because civil rights judgments were often paid by the public rather than the defendant. 
The Fifth Circuit found that Perdue did not apply in the bankruptcy context.   Relying on the rule of orderliness, as recently articulated in Technical Automation Services Corp. v. Liberty Surplus Insurance Corp., 673 F.3d 399 (5th Cir. 2012)(which held that Stern v. Marshall did not implicate the authority of Magistrate Judges), the Fifth Circuit found that Perdue was not directly on point and therefore did not compel the Court to abandon its prior precedent.   Among other things, the Court found that bankruptcy fee requests did not entail the same settlement considerations as civil rights cases and that the bankruptcy estate rather than the taxpayer would be paying the fees. 
The Court also noted that while the term “reasonable fees” in section 1988 offered little guidance to courts, that section 330(a) of the Bankruptcy Code contained detailed criteria for awarding fees.   

As a result, the Court concluded that until rescinded by a higher authority, fee enhancements were still possible in bankruptcy.   As a result, the Court affirmed the bankruptcy court’s enhanced fee award to CRG Partners.

What It Means

In the particular case, Pilgrim’s Pride means that a particular professional was recognized for doing an extraordinary job.    In the larger context, Pilgrim’s Pride is significant for what its historical analysis said for what it left unsaid.    

From an historical perspective, Pilgrim’s Pride evidences the development of bankruptcy law as its own discipline.    As of 1977, both bankruptcy law and civil rights law followed the twelve Johnson factors.   In the intervening 35 years, bankruptcy has developed its own body of fee jurisprudence.    While both bankruptcy law and civil rights law moved from the Johnson factors to a primarily lodestar based approach, Congress saw fit to define bankruptcy standards in more detail.     The Pilgrim’s Pride decision recognizes that bankruptcy fees fulfill a different role than fees in civil rights cases.    While the Court did not fully articulate it, I believe the difference is this.   Bankruptcy is inherently a collective process in which scarce resources are marshaled for the benefit of the creditor body and (in some cases) equity.    Allowing enhanced fees in rare cases provides incentives for professionals to take on difficult cases and be recognized when they deliver superior results.   Civil rights cases, on the other hand, are focused on compensating a harm and are a zero sum proposition.   Every dollar paid to the plaintiffs and their attorneys is a dollar taken away from the defendants and, by extension, the taxpayers.    While civil rights actions should incentivize government actors to obey the law in future cases, this function is secondary to compensating the wronged individual.    In a bankruptcy case, the professional may not only allocate scarce resources according to an ordered scheme of priorities, but may actually increase the pool of resources.   In a civil rights case, it seems that counsel is focused on obtaining an equitable transfer of resources from one party to another.    

Pilgrim’s Pride also curious because it does not mention the requirement that a professional demonstrate an “identifiable, tangible and material benefit to the bankruptcy estate” as required by In re Pro-Snax Distributors, Inc. in order to be compensated.   There is a tension between Pro-Snax and section 330(a)(4)(A)(i)(I) which mandates denial of fees for services not “reasonably likely to benefit the debtor’s estate.”   There is a significant difference in requiring that services be “reasonably likely” to benefit the estate as opposed to actually yielding an “identifiable, tangible and material benefit.”    In the one instance, compensation is based on whether the services appeared to be reasonable at the time, while the other makes compensation contingent on results.    Pilgrim’s Pride discusses the Johnson factors, the lodestar test and the statutory provisions of section 330(a), but does not discuss Pro-Snax.  Judge Carl Stewart, who authored Pro-Snax, was on the panel that decided Pilgrim’s Pride.

It is certainly possible that the panel did not see the need to discuss Pro-Snax for the reason that Pilgrim’s Pride was a case involving not just an “identifiable, tangible and material benefit,” but an extraordinary one at that.    However, given the Court’s comprehensive discussion of the framework for fees in bankruptcy and its contrast with fees in civil rights cases, the actual results requirement would seem to be a reasonable thing to mention.   

My personal opinion (which is partially motivated by self-interest) is that the Pro-Snax panel never intended to impose an actual results requirement.    The Pilgrim’s Pride opinion discusses how “the lodestar, Johnson factors, and §330 coalesced to form the framework that regulates the compensation of professionals employed by the bankruptcy estate.”    Under Johnson, results were one of twelve factors to be considered.   Under section 330(a), the court is instructed to examine whether the services were “beneficial at the time” and whether they were “reasonably likely to benefit the debtor’s estate.”   The lodestar may be adjusted upwards or downwards based upon the results.    Given that results are a factor to be considered under each of these approaches, it is much more reasonable to conclude that the Pro-Snax panel meant to emphasize the importance of results but not to make them an absolute requirement.   At the very least, it will make for an interesting argument when the Court is asked directly to reconcile Pilgrim’s Pride, Pro-Snax and the language of section 330(a).

Disclosure:   I have a case pending on appeal that raises the application of Pro-Snax.