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- On a Mission: Supreme Court Clarifies Effect of Rejection of Executory Contract
Achieved Recoveries Are Not the Benchmark of Fee Reasonableness Says Bankruptcy Court
In re Hospital Partners of America, Inc., et al., No. 08-12180 (BLS) (Bankr. D. Del. Mar. 7, 2019)
In this Opinion, Judge Shannon denied a request by the United States Trustee (the “UST”) to reduce the fees incurred by a chapter 7 trustee’s professionals (the “Professionals”) related to avoidance actions because the fees exceeded the recoveries realized on account of such actions. In doing so, the Court concluded that the Professionals’ fee requests were reasonable and that the Professionals exercised reasonable judgment at the time the challenged services were rendered.
Hospital Partners of America and its affiliates filed for chapter 11 bankruptcy protection in September of 2008. Shortly thereafter, the Court converted the cases to ones under chapter 7 of the Bankruptcy Code. A chapter 7 trustee was appointed who subsequently retained the Professionals. The Professionals pursued various preference and fraudulent conveyance actions that resulted in a cash recovery of approximately $273,625. The Professionals then sought $445,477 in fees for their related work. Op. at 2. The UST objected to the Professionals’ final fee applications (the “Fee Applications”) arguing that the fees were “substantially disproportionate to the cash recovery” and that the Professionals failed to properly “analyze . . . , and  abandon” the avoidance actions when they “appeared likely to be a net drain on the estate.” Id. at 2-3. The Professionals defended their Fee Applications, arguing that the fees were reasonable considering the “objective recovery” in the cases and that they exercised reasonable judgment at the time they analyzed the avoidance actions and decided which avoidance actions to pursue. Id. at 3.
As a threshold matter, the Court revisited the statutory framework for the approval of professional fees under Bankruptcy Code section 330. Citing to, among other cases, the Third Circuit decision in In re Top Grade Sausage, Inc., 227 F.3d 123 (3d Cir. 2000), the Court explained that “services to be compensable under § 330(a)(4)(A),  must only have been ‘reasonably likely to benefit the debtor’s estate’ at the time they were rendered, not in ‘hindsight.’” Id. at 5. The Court emphasized that section 330(a)(3) of the Bankruptcy Code requires a court to take into account “all relevant factors” in determining whether a requested fee is reasonable and that this language contemplates that a court has broad discretion in deciding which factors are relevant in a particular case. Id. at 4. With respect to avoidance actions, the Court specifically acknowledged the difficulties professionals face in assessing whether or not to pursue a particular avoidance action, especially, as is often the case, with limited information at hand. Id. at 5. In addition, the Court emphasized that “bankruptcy professionals are not guarantors of the success of a particular theory, proceeding, or strategy.” Id.
With these principles in mind, the Court approved the Fee Applications. While acknowledging the UST’s concerns – namely “the heedless pursuit of avoidance actions by a trustee . . . incurring substantial professional expense for little or no return to the estate” – the Court disagreed with the UST’s assessment that the proceedings before it fit such a description. Id. at 10. To the contrary, the Court recognized the Professionals’ reasonable and “systematic approach” in evaluating, pursuing, resolving, and abandoning the avoidance actions. Id. at 8. For example, as was revealed during the evidentiary hearing, the Professionals maintained a detailed chart for each adversary proceeding setting forth applicable defenses and the status of settlement discussions. Id. The Court found that the testimony and information in support of the Fee Applications “strongly indicate[d] objective reasonableness [that], standing alone, warrant[ed] approval of the Fee Applications.” Id. at 9. Moreover, the Court stated that the UST’s focus on the achieved recoveries versus the fees incurred “does not end the inquiry . . . .” Id. Rather, other factors that confer “significant economic benefits” upon an estate can be considered, such as in these proceedings a settlement that achieved an approximate $24 million unsecured claim waiver. Id. As a result of the circumstances presented, the Court found that the Professionals’ services were not only “reasonably likely to benefit the debtor’s estate,” but that they actually materially benefited the estate and that the requested fees were “far outweighed by the benefit to the estate accruing from the services.” Id. at 8-9.