Friday, February 14, 2014

Will the Fifth Circuit Clarify Pro-Snax?

For chapter 11 debtor's lawyers, Matter of Pro-Snax Distributors, Inc., 157 F.3d 414 (5th Cir. 1998) is like the sword of Damocles--constantly hanging over counsel's head and threatening to deny compensation when a case goes south.   While 11 U.S.C. Sec. 330(a)(3) makes results one of several factors to consider in awarding compensation, Pro-Snax makes "identifiable, tangible and material" results a pre-requisite to getting paid.    

While several Bankruptcy Judges have pushed back against Pro-Snax, there has not been a publi-shed decision from the circuit construing Pro-Snax since it came down.   However, that may change soon.

My firm was on the receiving end of a Pro-Snax ruling (please don't tell anyone), which finally made it to the Fifth Circuit last week.    In oral argument, the Court indicated that this was not the only Pro-Snax case they were considering.   Here are some excerpts from the oral argument in No. 13-50075, Barron & Newburger, P.C. v. Texas Skyline Interests, Ltd., et al:
Mr. Sather:   Since 1998 when a panel of this court decided the Pro-Snax case the lower courts have struggled with the meaning of Pro-Snax . . .
Judge Owen:   So have we.
Mr. Sather:  . . . a case that they have described as "difficult to apply" and "having clouded the issue."  Today the court has the opportunity to clarify whether the Pro-Snax court intended to modify Title 11 and in effect reverse Congress and intended to modify this Court's prior precedents on attorney's fees in bankruptcy or whether Pro-Snax can be harmonized with the statutory text and this court's prior precedents.   In case it's not obvious, we're taking the latter position.   We believe Pro-Snax can be harmonized with the other rulings from the Fifth Circuit as well as the statutory text.
Judge Prado:  Our opinion could be the opinion that clarifies it for everyone? 
Mr. Sather:  There is another case pending before the court on the same issue that was argued in November.  Ironically, with Pro-Snax having been out for fifteen years, the two cases pending before the Court right now are, to what I can see, the first ones to say please tell us what the heck you were thinking when you decided that.    
Judge Owen:  I've seen it four times this year at least, so why is it all of a sudden Pro-Snax is bubbling up in so many cases?
Mr. Sather:  I think that when you get a bad ruling (against your own firm), there is a reluctance to appeal.   In this case, our firm was stubborn enough to bring it up.   But the strange thing is, Judge Gargotta, who heard the case said that in his five or six years on the bench, it was the first time the issue had come up.   So I think what happens is that the case is honored more in the breach than in the day to day operation of chapter 11 because most chapter 11 cases fail and you would expect therefore that most chapter 11 lawyers would have their fees denied.
The take-away here is that the Fifth Circuit seems to definitely be thinking about Pro-Snax, which is a good thing.   The other thing is that it's really weird hearing your own voice on a recording. The argument can be accessed on the Fifth Circuit's oral argument page.

Note:   After re-reading this post, I realize that quoting my own oral argument sounds like shameless self-promotion.   I typically do not write about my own cases, much less what I have to say in them.   However, in this case, it was the comments from the court that I felt were noteworthy as opposed to anything I had to say.

1 comment:

Patrick Hughes said...

Thanks for the post Steve, and for highlighting an issue that clouds a debtor oriented practice in this Circuit. The gauntlet that debtor's counsel face without this precedent is high enough, and the hindsight review Pro Snax takes in evaluating compensation is certainly a contributor to decisions made on where to file, which exacerbates the venue problem. Counsel need not underwrite the end result, and with the new guidelines, the role of secured creditors, and unsecured creditors, there is enough oversight already on whether fees and expenses were properly charged based on what was understood at the time. We hope there is some further harmonization with the practice of law in the opinion to come.