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Corporate Restructuring & Bankruptcy | MONDAY, MARCH 3, 2014 | S11

Retainers
On appeal from the bankruptcy court, the of being anticipated at the time of the auc- be proposed because the estate has little or
U.S. District Court for the Southern District tioneer’s retention that would have rendered no assets, and the proposed professional is
of New York reversed the bankruptcy court’s the terms of that retention improvident.13 taking a risk that he or she will not be paid.
« Continued from page S6
decision and, on a question of irst impres- In short, the effect of Smart World is that In other cases, compensation for the profes-
decisions by inding that certain anticipat- sion, the Second Circuit, afirmed the district under §328 of the Bankruptcy Code, a party sional might be dependent on whether the
able developments met the legal standard of court’s reversal of the bankruptcy court. will be entitled to receive exactly what is professional is successful in recovering assets
“developments not capable of being antici- Agreeing with the district court, the Second provided for in its retainer agreement unless for the estate. Or the proposed professional
pated” and, in drawing such a conclusion, Circuit found the bankruptcy judge’s justiica- the movant seeking to alter payment different might be called upon to perform services that

enabled the court the lexibility to reduce tion for the fee reduction lacking, asserting from those terms can show facts that were are so specialized that hourly compensation
the professional’s compensation in a results that the events described as “incapable of not anticipatable at the time of the reten- would not be reasonable.
driven decision. It was those decisions that being anticipated” at the time of Riker Dan- tion that rendered those retention terms Smart World teaches estate professionals
so muddied the legal standard created ambi- zig’s retention probably were anticipated improvident.
that seek to be retained under §328(a) two
guities for future courts adjudicating similar and certainly anticipatable. “The prospect valuable lessons. First, when in doubt, reten-
disputes, as was the case giving rise to Smart of prolonged litigation always exists, and was Practical Tips
tion applications must be abundantly clear
World.
clearly anticipated by the parties,” the Sec- that the applicant is seeking retention under
ond Circuit said, noting that Riker Danzig’s Most bankruptcy attorney fee agreements §328(a) of the Bankruptcy Code. Any ambi-
Impact
fee agreement included contingencies based are made under section 330 of the Bankruptcy guity in the language of the fee application
on the length of the litigation.10 “Simply put, Code, in which attorneys are retained on an will be construed against the fee applicant,
In Smart World, the ight over attorneys’ none of these developments were incapable hourly basis. The court gets inal approval of most likely resulting a in a inding that the
fees originated from an adversary proceed- of being anticipated at the time the bank- hours and fees claimed on a review utilizing bankruptcy court retained the estate profes-
ing in the Smart World bankruptcy case ruptcy court preapproved the terms of Riker a reasonableness standard. Although contin- sional under §330 of the Bankruptcy Code
between Smart World and Juno Online Ser- Danzig’s retention,” the Second Circuit con- gency and other section 328 fee agreements and subjecting that professional’s fees to a

vices. Riker Danzig Scherer Hyland & Per- cluded, establishing a more rigorous standard are not the norm for bankruptcy lawyers, reasonableness review. Second, §328(a) of
retti was retained to represent Smart World for altering fee agreements that receive court Smart World is important for both companies the Bankruptcy Code provides certainty to
in an adversary proceeding commenced in approval pursuant to §328 of the Bankruptcy entering bankruptcy and for attorneys and estate professionals who have been retained
the Smart World bankruptcy case, which dis- Code.11
other professionals handling their cases. The under this section. Since Smart World, it is
pute surrounded the valuation of a subscriber Several decisions both within and beyond professionals who enter into these types of more dificult for a court to award fees that
list that Smart World had sold to Juno. The the Second Circuit have followed Smart arrangements need conidence that they are deviate from what was previously approved
parties ultimately agreed that Juno would World. For example, in 2012, the Fifth Circuit going to be honored.
in a section 328(a) retention order. Impor-
pay $6.5 million to settle that adversary relied on Smart World in preventing a inan- Because the standard for compensation of tantly, this, too, could have its drawbacks
proceeding.
cial advisor from seeking an enhancement professionals under section 328(a) is differ- where an estate professional seeks a “fee
Given that settlement, Riker Danzig sought to its fees where the bankruptcy court had ent than the standard under section 330(a), enhancement” and believes that a reason-
fees of $2.2 million based on the terms of its previously approved the terms of its reten- professionals should unambiguously state the ableness review under §330 of the Bank-
contingency agreement that the bankruptcy tion pursuant to §328(a) of the Bankruptcy basis for employment in their employment ruptcy Code would result in granting fees
court had previously approved. Despite the Code. Speciically, the Fifth Circuit found that application before the bankruptcy court. If that were in excess of that provided for in
agreement, the unsecured creditors commit- the inancial advisor could not demonstrate a professional desires to be compensated the retainer agreement. In short, if the estate

tee and Smart World’s principals objected that developments during the course of the pursuant to section 328, the application to professional wants fee certainty, §328(a)
to Riker Danzig’s fee request, and a judge in bankruptcy case were incapable of being employ the professional should cite to sec- should be abundantly clear in that profes-
the U.S. Bankruptcy Court for the Southern anticipated at the time the advisor’s retention tion 328(a) of the Bankruptcy Code, explain sional’s retention application, and it must
District of New York awarded Riker Danzig which otherwise rendered improvident the the proposed fee arrangement, explain the be comfortable with compensation based
only $1.2 million. That judge had claimed terms of the advisor’s retention.12 Similarly, scope of the proposed employment, and pro- on those terms under any circumstance
that the reduction was justiied by events in 2010, the Eastern District of New York fol- vide the reason or reasons that the movant that might arise during the course of the
incapable of being anticipated at the time lowed Smart World’s strict interpretation of believes justify such an arrangement. In addi- bankruptcy case.
that Riker Danzig was retained, such as dis- §328(a) when reviewing an auctioneer’s fee tion, the movant should submit a proposed •
agreements between the debtor and creditors application and concluding that the default of order that provides such information and ••••••••••••••••••••••••••••
and an unusually prolonged procedural path the winning bidder at the bankruptcy auction approves the employment under section 1. 552 F.3d 228 (2d Cir. 2009) (Smart World).
of the adversary proceeding.
was not a development that was incapable
328(a). For instance, a contingency fee might
2. 11 U.S.C. §330(a).
3. 11 U.S.C. §328(a).
4. 11 U.S.C. §328(a).
5. 11 U.S.C. §328(a).
6. In re Humbert, 39 B.R. 643, 645 (N.D. Ohio 1984)
(concluding that the 36 hours expended by special coun-
statute authorizes a bankruptcy court to it started with Stern, it will implicate, not 18. Id.
19. Id.
sel to achieve favorable results did not warrant a con-
“hear and determine” such claims.
only bankruptcy judges, but magistrate 20. Id. at 2609 (internal quotations and citation omit-
tingent fee and the bankruptcy court had discretion to grant a fee different from the agreed upon §328(a) terms
Furthermore, the statute authorizes the judges, federal district court judges and ted).
and conditions); In re Churchield Mgmt. & Inv., 98 B.R.
bankruptcy court to issue proposed ind- the attorneys litigating before them. Some 21. No. 12-1200.
893, 899-900 (Bankr. N.D. Ill. 1989) (because there is no
ings of fact and conclusions of law. In its practitioners may favor this scheme, as it 22. In re Bellingham Ins. Agency (Executive Beneits
Ins. Agency v. Arkison), 702 F.3d 553, 557 (2012) (Arki- evidence to show that special counsel had any signii-
reasoning, the Ninth Circuit stated that the limits bankruptcy court jurisdiction and son).
cant risk of failure and nonpayment in its pursued litiga- tion, the court should use its discretion under §328(a)
power to “hear and determine” a “core” promotes litigation before the district 23. Id.
to reduce the allowance below the original contingent
proceeding “surely encompasses . the courts. Perhaps the court’s decision will 24. Id.
percentage because the contingent fee otherwise would
more modest power to submit indings of provide some guidance on how the post- 25. Id.
26. Id. at 572-73. “constitute not an award to counsel based on risk, but rather a bonanza not earned under §330 of the Bank-
fact and conclusions of law to the district Stern system will work. Or, perhaps, the 27. Id. at 561. ruptcy Code”).
courts.”43 Again, the Supreme Court is now court will further complicate these issues.
28. Id.
7. See In re Ashby, No. 05-05779, 2006 Bankr. LEXIS
faced with the daunting task of illing the 29. 131 S. Ct. 2594.
954, at *12 (Bankr. N.D. Iowa May 31, 2006) (refusing to
void it created in Stern.
•••30. 492 U.S. 33.
31. 458 U.S. 50.
ind that the one-third contingency fee agreement was improvident under §328(a), but still reducing counsel’s
Arkison is the Supreme Court’s first ••••••••••••••••••••••••••
32. 131 S. Ct. at 2595.
fees because counsel sought payment for carrying out
1. 131 S.Ct. 2594 (2011). 33. 478 U.S. 833, 849 (1980). duties that were the responsibility of the trustee).
opportunity to address its controversial 2. No. 12-1200 (Arkison). 3. 30 Stat. 544.
34. Id. at 850.
8. In re Gilbertson, 340 B.R. 618, 622 (Bankr. E.D. Wis.
decision in Stern. Should the Supreme 4. 92 Stat. 2657.
35. 538 U.S. 580, 586 (2003).
36. 478 U.S. at 848.
2006) (erroneously inding “that the contingency fee arrangement . has proven improvident in light of the
Court rule in favor of the petitioner, the 5. 458 U.S. 50 (1982).
37. Id. at 851.
unexpectedly early and easy resolution of this matter”).
bankruptcy court’s ability to adjudicate 6. Id. at 71 (internal citations omitted). 38. Id. at 850-51 (emphasis added).
9. In re Gilbertson, Case No. 06-C-610, 2007 U.S. Dist.
“core” claims will be very limited. The 7. Id. at 70-71.
8. Id. at 50.
39. See BP RE, L.P. v. RML Waxahachie Dodge (In re
BP RE), 2013 WL 597030 (5th Cir. Nov. 11, 2013); Frazin LEXIS 11734 (E.D. Wis. Feb. 4, 2007) vacated the bank- ruptcy court’s order, noting that the fact that the bank-
Supreme Court noted in Stern that it 9. Id. at 87 n.40.
v. Haynes & Boones (In re Frazin), 732 F.3d 313, 320 n.3 ruptcy professional “settled the claim quickly and easily
did not purport to change the division 10. See 28 U.S.C. §157.
(5th Cir. 2013); Wellness Int’l Network Ltd. v. Sharif, 727 was not a development ‘not capable of being anticipat-
of labor between the bankruptcy courts 11. Id.
F.3d 721, 767-73 (7th Cir. 2013); Peterson v. Somers, 729 ed’ at the time his application was approved.” Id. at *15.
and district courts, however, some think 12. Id.
13. Id.
F.3d 741 (7th Cir. 2013); Waldman v. Stone, F.3d 910, 917- 18 (6th Cir. 2012), cert. denied.
10. 552 F.3d at 235.
11. Id.
that the practical effect of that decision 14. 492 U.S. 33 (1989).
40. 28 U.S.C. §157(b)(1).
12. Asarco v. Barclays Cap. (In re Asarco), 702 F.3d 250
has undermined this statement. If the 15. Id. at 63-64.
41. Id.
(5th Cir. 2012).
Supreme Court continues down the path
16. Id. at 35.
42. Id.
13. Liani v. Baker, Nos. 09-CV-2651 (ILG), 09-CV-2652
17. 1361 S. Ct. 2608-10.
43. In re Bellingham, 702 F.3d at 566.
(ILG), 2010 U.S. Dist. LEXIS 64785 (E.D.N.Y. June 28, 2010).