Page 6 - Corporate Restructuring & Bankruptcy

S6 | MONDAY, MARCH 3, 2014 | Corporate Restructuring & Bankruptcy
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employment, if such terms and conditions
prove to have been improvident in light of
developments not capable of being antici-
pated at the time of the ixing of such terms
and conditions.”4
Section 328(a) permits a bankruptcy court
to forgo a full post-hoc reasonableness inquiry
if it pre-approves the “employment of a pro-

fessional person under section 327 . on any
reasonable terms and conditions of employ-
ment, including on a retainer, on an hourly
basis, on a ixed or percentage fee basis, or
on a contingent fee basis.”5 Where the court
pre-approves the terms and conditions of the
retention under §328(a), its power to amend
those terms is severely constrained. The sig-
niicance of pre-approval under §328(a) is that
reasonableness of the fee and the basis of
the fee is determined in advance of services
being rendered. This is a strict standard in
its application, requiring extraordinary and
unforeseeable circumstances before a court

can depart from the pre-approved compensa-
tion after services have been rendered.
Section 328 and 330 inquiries are mutu-
ally exclusive, as a bankruptcy court may
not conduct a §330 inquiry into the reason-
ableness of the fees and their beneit to the
estate if the court already has approved the
professional’s employment under 11 U.S.C.
§328. Thus, there is a signiicant distinction
between compensation awarded under §330 K
to a professional who has been employed TOC
under §327, and compensation awarded to a IGS
professional according to an arrangement pre- B
viously approved under §328. Consequently,

Pre-Approved Retainers leading up to Smart World, courts were split
Utilizing about their ability under §328 to deviate from
the terms of a professional’s pre-approved
contingency fee agreement at the time of that
professional’s fee application.
Under Code Section 328
Circumstances Leading up to ‘Smart World’

Prior to Smart World, the case law inter-
preting §328 was greatly muddled for several
reasons. First, Congress’s implementation of
§328 was a departure from the general pow-
ers afforded to the court under §330. Courts niicantly curtailed. This article will discuss: compensation” based on an after-the-fact con-
struggled with the restrictions placed on their (i) a description of the retention of bankrupt- sideration of “the nature, the extent, and the
BY SETH H. LIEBERMAN
ability to control fees at the time of the profes- W cy professionals under the Bankruptcy Code, value of such services, taking into account
sionals’ fee applications.6 It was this subtle, ith names like Madoff and Lehman part (ii) the confusion among courts regarding all relevant factors.”2 Professionals employed
yet important, distinguishing characteristic of our everyday vernacular, bankrupt- §328 of the Bankruptcy Code leading up to in bankruptcy cases often accept the uncer-
of §328(a) from §330 that led to confusion cies are now commonplace in Ameri-
Smart World, (iii) an analysis of Smart World tainty of not knowing what the court will
because certain courts had addressed 328 can culture. While part of the mainstream, and its impact on the fee requests of bank- consider “reasonable compensation” under
fee applications under a §330 analysis in spite media coverage is often dedicated to the fees ruptcy professionals retained under §328 of §330 of the Bankruptcy Code because the
of Congress’s intent to distinguish the two that professionals earn in these bankruptcy the Bankruptcy Code, and (iv) in light of Smart fees are subject to potential reduction if not
sections.
cases. The headlines often tell of eye-popping World, practical tips to those professionals deemed reasonable by the court.
Second, other courts applied the correct dollars that are doled out to these profes- seeking retention and payment under §328 As a result of commonplace reduction of
§328 standard, but were befuddled when inter- sionals, yet little coverage is dedicated to the of the Bankruptcy Code.
professionals’ fees under §330 of the Bank-
preting the language of §328(a). In certain procedure underlying those payments, and ruptcy Code, Congress enacted §328 in 1978.
circumstances, courts struggled with apply- the different payment schemes contemplated Section 328 allows bankruptcy profession-
ing the term “improvident” as found in the by the Bankruptcy Code.
Retention of Bankruptcy Professionals
als to avoid the uncertainty of what is rea-
latter half of 11 U.S.C. §328(a).Even more Approximately ive years ago, the Second Section 327 of the Bankruptcy Code autho- sonable compensation by having their fee
7
concerning, in other circumstances, courts Circuit authored a decision entitled Riker, rizes a bankruptcy trustee, with the court’s arrangements approved in advance by the
struggled to deine the phrase “developments Danzig, Scherer, Hyland & Perretti v. Ofi- approval, to employ professionals to repre- court. Speciically, under §328, a debtor or
not capable of being anticipated” found in 11 cial Committee of Unsecured Creditors (In re sent the trustee. Sections 328 and 330 estab- bankruptcy trustee, with the court’s approval,
U.S.C. §328. Such “developments” had proven Smart World Technologies),1 wherein a bank- lish a two-tiered system for judicial review may employ a professional “on any reason-
troublesome for courts to identify.8 Impor- ruptcy court’s ability to reduce the fees of and approval of the terms of the bankruptcy able terms and conditions of employment,
tantly, however, those developments must bankruptcy professionals that were retained professional’s retention.
including on a retainer, on an hourly basis, or
not have been capable of being anticipated under §328 of the Bankruptcy Code was sig-
Retention of professionals in bankruptcy on a contingent fee basis.”3 Even if the court
at the time of the professional’s retention. cases are most commonly governed by §330 “pre-approves” the terms of a professional’s
Yet, merely because a circumstance was not of the Bankruptcy Code, where a professional compensation pursuant to §328, “the court
anticipated does not mean that it was not SETH H. LIEBERMAN is partner at Pryor Cashman, is paid on an hourly or lodestar basis. Sec- may allow compensation different from the
capable of being anticipated.9 Certain other where he works in the bankruptcy, reorganization tion 330 authorizes the bankruptcy court to compensation provided under such terms
courts reached results-oriented » and creditors’ rights group.
award the retained professional “reasonable
and conditions after the conclusion of such
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