Fifth Circuit Reverses Pro-Snax

In a unanimous decision, the en banc Fifth Circuit Court of Appeals walked back a prior precedent which mandated an identifiable, tangible and material benefit before professionals employed in bankruptcy cases could be compensated.   No. 13-50075, Barron & Newburger, P.C. v. Texas Skyline, et al (5th Cir. 4/9/15).    You can read the opinion here.

What Happened

The case stemmed from the chapter 11 bankruptcy of a businessman whose case was ultimately converted to chapter 7.   When the Debtor's counsel filed its fee application, both a creditor and the U.S. Trustee objected.   Relying upon In re Pro-Snax Distributors, Inc.,  157 F.3d 414 (5th Cir. 1998), the Bankruptcy Court denied 85% of the requested fees on the basis that they did not produce tangible results (although a portion of the fees was denied for other reasons).    The District Court affirmed.  2013 U.S. Dist. LEXIS 188262 (W.D. Tex. 2013).  A panel of the Fifth Circuit affirmed the case based on the prior precedent but recommended that Pro-Snax be reconsidered by the en banc court.  758 F.3d 693 (5th Cir. 2014).   The Court agreed to grant en banc review.   771 F.3d 820 (5th Cir. 2014).   In the en banc briefing, the U.S. Trustee changed its position and agreed with the Debtor that Pro-Snax applied an improper standard.   However, it still contended that the fees should be denied under any standard.

The En Banc Ruling

The Fifth Circuit unanimously voted to abrogate the Pro-Snax decision. (See explanatory note below).   In summarizing the Court's ruling, Judge Prado stated:

We now recognize that the retrospective, “material benefit” standard enunciated in Pro–Snax conflicts with the language and legislative history of § 330, diverges from the decisions of other circuits, and has sown confusion in our circuit. Correspondingly, we overturn Pro–Snax’s attorney’s-fee rule and adopt the prospective, “reasonably likely to benefit the estate” standard endorsed by our sister circuits.

Opinion, p. 2.     The Court also stated:

B & N and the U.S. Trustee contend that the “hindsight” or “material benefit” standard we enunciated in Pro–Snax conflicts with the text and legislative history of § 330 and unnecessarily places us at odds with our sister circuits. We agree.

 Opinion, p. 8.   

The Court found that section 330 adopts a standard which includes allowing fees for services which were necessary "at the time at which the service was rendered" and denying them if the services "were not reasonably likely to benefit the debtor's estate or necessary to the administration of the estate."    The Court found that this language precluded a results-only approach.

Section 330, then, explicitly contemplates compensation for attorneys whose services were reasonable when rendered but which ultimately may fail to produce an actual, material benefit. “Litigation is a gamble, and a failed gamble can often produce a large net loss even if it was a good gamble when it was made.” (citation omitted).    The statute permits a court to compensate an attorney not only for activities that were “necessary,” but also for good gambles—that is, services that were objectively reasonable at the time they were made—even when those gambles do not produce an “identifiable, tangible, and material benefit.” What matters is that, prospectively, the choice to pursue a course of action was reasonable.

 Opinion, pp. 12-13.

The statutory language relied upon by the Court was added to section 330 in 1994.   However, the only case relied upon by the Pro-Snax court to support the material benefit standard was based on the language of the statute prior to 1994.   

In conclusion, Judge Prado stated:

We conclude that § 330 embraces the “reasonable at the time” standard for attorney compensation endorsed by our colleagues in the Second, Third,and Ninth Circuits. As explained above, the text and legislative history of § 330 contemplate a prospective standard for the award of attorney’s fees relating to bankruptcy proceedings—one that looks to the necessity or reasonableness of legal services at the time they were rendered. Under this framework, if a fee applicant establishes that its services were “necessary to the administration” of a bankruptcy case or “reasonably likely to benefit” the bankruptcy estate “at the time at which [they were] rendered,” see 11 U.S.C. § 330(a)(3)(C), (4)(A), then the services are compensable.

In assessing the likelihood that legal services would benefit the estate, courts adhering to a prospective standard ordinarily consider, among other factors, the probability of success at the time the services were rendered, the reasonable costs of pursuing the action, what services a reasonable lawyer or legal firm would have performed in the same circumstances, whether the attorney’s services could have been rendered by the Trustee and his or her staff, and any potential benefits to the estate (rather than to the individual debtor). (citations omitted). Whether the services were ultimately successful is relevant to, but not dispositive of, attorney compensation. See 11 U.S.C. § 330(a)(3) (“[T]he court shall consider the nature, the extent and the value of such services, taking into account all relevant factors . . . .”  (citations omitted).

Insofar as Pro–Snax precludes resort to this prospective analysis, we overrule those portions of the opinion. . . .  (W)e observe that our ruling today is not intended to limit courts’ broad discretion to award or curtail attorney’s fees under § 330, “taking into account all relevant factors,” 11 U.S.C. § 330(a)(3).

Opinion, pp. 15-17.

Having concluded that the Pro-Snax standard should be abrogated, the Court turned to the issue of whether the case should be remanded for a new hearing on fees.   The Court found that a remand was necessary in order to allow the bankruptcy court to make findings under the revised standard.  

Because our opinion today announces a new legal rule, and out of an abundance of caution given the complex facts of the case before us, we remand this matter for the bankruptcy court to evaluate whether B & N is entitled to fees under the prospective, “reasonable at the time” standard.

Opinion, p. 19.   Thus, the bottom line is that Barron & Newburger will receive the opportunity to have its fees considered under the reasonable at the time standard.   This may result in more fees being awarded or perhaps it won't.    That remains to be seen.

Placing the Opinion in Context

This opinion restores the discretion given to the Bankruptcy Court in awarding compensation.   For many years, In re First Colonial Corp. of America, 544 F.2d 1291 (5th Cir. 1977), a decision under the Bankruptcy Act, was the leading decision on attorney compensation.   It adopted the 12 factor Johnson test for compensation which had been used in fee-shifting cases.   While the result was one factor under the test, it was not the overriding factor.    Some thirty-five years later, the Court stated that the statutory text together with the lodestar approach and the Johnson factors “coalesce . . . to form the framework that regulates the compensation of professionals employed by the bankruptcy estate.” In re Pilgrim’s Pride Corp., 690 F.3d 650, 656 (5th Cir. 2012).    These formulas, which contain multiple factors, gave the Bankruptcy Court considerable latitude in deciding how much weight to give to specific factors.   Pro-Snax was an outlier because it severely limited what could be considered.   Now that Pro-Snax has been repudiated, courts can consider and weight as many factors as they deem appropriate.    While this may result in less predictable outcomes, it treats judges as professionals capable of exercising discretion rather than mechanical calculators.

The opinion also gives greater recognition to the professional judgment of attorneys.   Under Pro-Snax a losing gamble could equal uncompensated work depending upon whether any party objected to the fee application.  Because fee applications in unsuccessful cases often passed through without objection, the rule was often more honored in the breach.   When it was invoked, its application was often inconsistent, a fact noted by the Fifth Circuit. However, for the attorney unlucky enough to draw the black bead and face a strict application of the test, the results were harsh.   Under the new standard (which is actually a return to the old standard), the Court is permitted to examine the attorney's exercise of judgment in pursuing an action.  Courts often comment that the decision in a case was a close one or that both sides presented solid evidence and arguments.   In these circumstances, the Court is freed to look at the totality of the circumstances rather than simply looking at whether the applicant prevailed.   By rewarding even failed efforts, the Court both encourages and rewards professionalism. 

Note

Pro-Snax had two holdings.   Its primary holding was that Debtor's counsel could not receive compensation from the estate after appointment of a Chapter 11 Trustee.   That holding was affirmed by the Supreme Court in another case.   The secondary holding of Pro-Snax, which was more in the nature of dicta, concerned the material benefit standard.   It is only the material benefit standard that was modified.    

Disclosure

My firm was the Appellant in this case and I personally worked upon it.   While I hope that I have been fully accurate in describing the case, I make no claim of impartiality.