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 (5^th 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 (5^th 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 (5^th Cir. 1977), quoting Johnson v. Georgia Highway Express, Inc., 488 F.2d 714 (5^th 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 (5^th 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 Johnsonfactors.

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 Johnsonfactors, 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 (5^th 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 Prideevidences the development of bankruptcy law as its own discipline.    As of 1977, both bankruptcy law and civil rights law followed the twelve Johnsonfactors.   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.

Civil Rights Opinion May Affect Attorney's Fees in Bankruptcy

A decision reviewing attorney's fees in a complex Title VII class action may have repercussions for attorney's fees in bankruptcy cases as well. McClain v. Lufkin Industries, Inc., No. 10-40036 (5th Cir. 8/8/11). You can find the opinion here.



What Happened



The Lufkin Industries case appears to be a David v. Goliath case where David decided he needed reinforcements. Timothy Garrigan, an attorney with a three attorney firm in Nacogdoches, Texas filed a class action suit against Lufkin Industries, Inc. under Title VII, alleging disparate treatment and disparate impact theories. While Mr. Garrigan was found to be well-qualified to handle the class-action, he determined that "it was imperative to associate with co-counsel in order to successfully try this case." The Court wryly noted that, "The case's ultimate trajectory, which spanned a decade and involved thousands of attorney hours, confirmed his initial impression."



When Mr. Garrigan went searching for co-counsel, he had to cast a wide net. After being turned down by multiple Texas firms, he ultimately associated Goldstein, Demchak, a firm from Oakland, California. The plaintiffs' team was successful. Although their initial judgment was reversed and paired down, the plaintiff class still recovered $3.3 million in back pay for discriminatorily lost promotions dating back to 1994.



The plaintiff's attorneys sought $7.7 million in fees. The Court allowed $4.7 million in fees. In doing so, they calculated the lodestar for both the Texas and the California lawyers at $400.00 per hour. This displeased the California lawyers who had sought an award based on $650.00 per hour. Specifically, the District Court ruled that fees should be awarded based on the prevailing market rate in the relevant legal market.



The Ruling



On appeal, the Fifth Circuit considered how to calculate the lodestar, that is, the proper hourly rate to be multiplied by the proper number of hours. The Court stated:

The precedents and purposes governing fee-shifting awards in civil rights cases are well established. The awards facilitate plaintiffs’ access to the courts to vindicate their rights by providing compensation sufficient to attract competent counsel. Fee awards must, however, be reasonable. (citation omitted). The linchpin of the reasonable fee is the lodestar calculation, a product of the hours reasonably expended by the law firms and the reasonable hourly rate for their services. (citation omitted). Charges for excessive, duplicative, or inadequately documented work must be excluded. (citation omitted).



Seminal to this case is the principle that “reasonable” hourly rates “are to be calculated according to the prevailing market rates in the relevant community.” (citation omitted). Further, Blum noted, “the burden is on the applicant to produce satisfactory evidence . . . that the requested rates are in line with those prevailing in the community for similar services by lawyers of reasonably comparable skill, experience and reputation.” (citation omitted). In an unbroken and consistent line of precedent, this court has interpreted rates “prevailing in the community” to mean what it says. Thus, as early as 1974, this court required district courts to consider the customary fee for similar work “in the community.” (citations omitted). Most telling, perhaps, is this court’s decision in a landmark affirmative action case reducing the fee of plaintiffs’ counsel, a former U.S. Assistant Attorney General and subsequent U.S. Solicitor General, from the rates he charged in Washington, D.C., to the prevailing rate in the forum, Austin, Texas. (citation omitted).

Opinion, pp. 8-9.



In the particular case, the Court found that

(W)here, as here, abundant and uncontradicted evidence proved the necessity of Garrigan's turning to out-of-district counsel, the co-counsel's '"home'' rates should be considered as a starting point for calculating the lodestar amount.

Opinion, p. 11.



What It Means



This conclusion is significant for the opposite of what it says. Out of district rates were allowed as the starting point for the lodestar because there was extensive evidence that no Texas lawyer was willing to touch the case. The converse is that an out-of-district lawyer cannot charge out-of-district rates if there was a qualified, local lawyer who could have taken the case.



The application to bankruptcy cases (which follow the same lodestar approach) is that a New York lawyer cannot charge New York rates in Houston without showing that a similarly qualified Houston lawyer was not available, or that a Houston lawyer could not charge Houston rates in Austin without showing that a similarly qualified Austin lawyer was not available, or that an Austin lawyer could not charge Austin rates in Waco without showing that a similarly qualified Waco lawyer was not available.



If this decision is applied to bankruptcy cases, it could prove to be a boon to local lawyers who are perfectly qualified to handle difficult cases but are willing to charge local rates. After all, if Ted Olson was limited to Austin rates in Hopwood v. State of Texas, why would a bankruptcy court in Austin allow a Washington, D.C. firm to charge D.C. rates in a bankruptcy case in Austin, Texas?



The Concurrences



Almost as interesting as the majority opinion are the concurrences. Chief Judge Jones and Circuit Judge Dennis each wrote separately to discuss aspects of the case. Since Chief Judge Jones authored the majority opinion, her concurrence to her own opinion is interesting to say the least.



Chief Judge Jones wrote to express her concern that the California lawyers were, let's be frank here, being greedy. She stated:

It cannot escape the reader’s attention that the Goldstein Demchak firm has been authorized to receive several million dollars in fees, and a million dollars in expenses, for prevailing in this protracted case. But to them, that’s not enough, and they seek an hourly increase that will add $3 million more to their award. If that happens, the attorneys will have received nearly double the dollar award of the plaintiffs. What has fee shifting come to? This is not an appeal about incentivizing modestly compensated attorneys for pursuing noble goals: the $400 hourly rate awarded to Mr. Garrigan is hardly a day laborer’s fee. This appeal is designed simply to enrich, not to enhance or encourage. The Supreme Court holds that fee-shifting cannot bring a windfall to attorneys. (citation omitted). On remand, the district court should exercise its discretion within the parameters we have set out to prevent a windfall recovery.

Opinion, at pp. 20-21. Do you think that Judge Jones made her feelings about the fees in this case clear enough? While Chief Judge Jones' majority opinion allowed the possibility of higher rates for out of district counsel, her concurrence suggests that she strongly objects to allowing that possibility in practice. Query whether she would show the same scorn for a bank's lawyers who sought to obtain a "windfall recovery"?

Judge Dennis wrote separately to suggest that the "hourly rates charged by the defendant's attorney's provide a helpful guide in determining whether similarly high rates and hours requested by the plaintiffs were reasonable." In the bankruptcy context, if the creditor's lawyers are charging obscene fees, then the debtor's lawyers may charge merely scandalous fees.



I think that this opinion, while affirming national rates in the specific case, is a victory for local rates in general. Of course, it bears mentioning that determining the appropriate market rates to use in the lodestar is only the starting point. Courts are still free to adjust upward or downward based upon the facts of the specific case.

Supreme Court Allows Recovery of Post-Petition Attorney's Fees Based On Pre-Petition Contract

In a unanimous opinion, the Supreme Court ruled that nothing in the Bankruptcy Code prohibits a creditor from asserting an unsecured claim for attorney's fees incurred post-petition where such fees would have been recoverable outside of bankruptcy. Travelers Casualty & Surety Co. of America v. Pacific Gas & Electric Co., No. 05-1429 (U.S. 3/20/07).

Travelers had issued a surety bond to Pacific Gas & Electric. In connection with the bond, the parties executed a series of indemnity agreements which allowed recovery of attorney's fees incurred in protecting Travelers rights. Travelers filed a claim to protect itself in the event that the debtor defaulted in the future. The debtor's plan preserved Travelers right to subrogation and indemnity in the event of a default, but Travelers disputed whether the language was sufficient. As part of a settlement, PG & E agreed that Travelers could assert an unsecured claim for its attorney's fees. However, when Travelers amended its claim to add the attorney's fees, the debtor objected. The Bankruptcy Court sustained the objection based upon a Ninth Circuit decision which held that attorney's fees were not recoverable for litigating issues unique to bankruptcy. In re Fobian, 951 F.2d 1149 (9th Cir. 1991). Not surprisingly, the District Court and the Ninth Circuit affirmed.

The Supreme Court reversed, finding that Sec. 502(b)(1) generally allows claims to the same extent that they would be allowable outside of bankruptcy. The only subsection of Sec. 502(b) which addresses recovery of attorney's fees is Sec. 502(b)(4), which limits claims by an attorney for the debtor to the reasonable value of such services. Thus, where the Code contained a specific limitation on attorney's fees, the Court would not imply a broader one.

The Supreme Court found that Fobian did not have any support in the language of the Bankruptcy Code. Travelers did not attempt to defend the Fobian rule. Instead, it argued that because Sec. 506(b) only allows attorney's fees to oversecured creditors, that unsecured creditors should not be entitled to recover them at all. The Supreme Court declined to address this argument on the basis that it had not been raised in the lower courts.

This ruling is important for what is decides and for what it does not decide. The first important point is that this case was determined with regard to unsecured claims under Sec. 502(b). Even though the litigation in this case took place post-petition, the creditor did not attempt to assert a post-petition administrative claim. The Supreme Court's broad reading of claims allowable under Sec. 502 would not apply to administrative claims under Sec. 503, which have a much narrower scope. Although it was not discussed in the Supreme Court's opinion, it appears that the parties recognized that litigation under a pre-petition contract created a pre-petition claim even though the litigation occurred during the bankruptcy. The Travelers opinion will create more opportunities for parties who could have recovered attorney's fees pre-petition to amend their unsecured claims to include post-petition attorney's fees. For example, if the debtor unsuccessfully objects to a proof of claim which had a contractual attorney's fees provision, the creditor could add the fees for defending the claim to its unsecured claim. In most cases, adding additional amounts to the unsecured pot will not have a major effect on the case. However, the potential for amending claims after the bar date could create administrative headaches in cases.

The opinion also creates potential tension between Sec. 502(b) and Sec. 506(b). Sec. 502(b)(2) disallows claims for unmatured interest, while Sec. 506(b) allows interest to oversecured claimants. Thus, these two sections are consistent. On the other hand, Sec. 502(b) is silent as to allowance of attorney's fees while Sec. 506(b) allows such fees only to oversecured creditors. Thus, there is a potential for claims for post-petition attorney's fees to be allowed under Sec. 502(b) and disallowed under Sec. 506(b). Because the Sec. 506(b) issue on attorney's fees was not addressed by the Supreme Court, lower courts will have to guess at how it would resolve this issue. However, it may be a safe bet to assume that with all nine justices silent, it might be reasonable to assume that the Supreme Court would find a way to reconcile the two statutes as opposed to overruling a recent precedent.