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Retained Under Bankruptcy Code Section 328(a)? Good Luck With Your Fee Enhancement
In re FAH Liquidating Corp. (f/k/a Fisker Automotive Holdings, Inc.), No. 13-13087 (KG) (Bankr. D. Del. Jan. 21, 2015)
In this Opinion out of the successful, but not extraordinarily successful, Fisker Automotive Holdings, Inc. bankruptcy case, Judge Gross denied a request made by the professionals of the Official Committee of Unsecured Creditors (the “Professionals”) for a fee enhancement aggregating nearly $2.5 million, an amount more than 50% of their total fees previously approved and paid under section 328(a). The Court’s Opinion can be summed up in just three sentences: “The Court is disinclined to award fee enhancements in cases where professionals have been paid handsome market-rate hourly fees and creditors have received less than full recovery. Some of the attorneys in this case charged and were paid over $1,000 per hour. When attorneys are paid at that rate, the Court expects that work performed will be exceptional.” Op. at 18.
A description of the background and the key issue the Bankruptcy Court faced early on in the case — namely, whether to limit the credit bidding rights of Hybrid Tech Holdings, LLC (“Hybrid”) under Bankruptcy Code section 363(k) — can be found here. The issue, however, before the Court here was whether it should grant the Professionals requested fee enhancement due to their asserted substantial contributions made during the DIP financing and sales processes that resulted in a forty cents on the dollar recovery for unsecured creditors. According to the Professionals, “they undertook significant risk of nonpayment…and overcame considerable odds….” Op. at 12-13. The United States Trustee objected, arguing, among other things, that the results were not rare, that unsecured creditors will not be receiving a full recovery, and that the risk presented to professionals in the case was no different than the risk posed in cases where unsecured creditors may be out of the money. Hybrid, who is due to pay the Professionals’ fees per earlier agreement, also objected, stating that the Professionals did not attempt to satisfy the standards under section 328(a) and were not otherwise entitled to a fee enhancement as, among other things, the case’s success was the result of a collaborative effort.
As a threshold matter, the Court analyzed the differing standards, and accompanying case law, under sections 328 and 330. Under section 328, a contractually agreed upon and court-approved fee arrangement may only be altered if such terms and conditions prove improvident in light of developments not capable of being anticipated at the time of retention. As the Court noted, section 328 provides professionals with a certainty and predictability that comes at the expense of flexibility: “In disputes governed by § 328(a), the contractual agreement is supreme, and we shall enforce the contract as written.” In re ASARCO, L.L.C., 702 F.3d 250, 268 (5th Cir. 2012). On the other hand, section 330, akin to a fee-shifting statute, provides professionals with reasonable compensation determined after the fact and in light of various reasonableness factors set forth by the Bankruptcy Code and case law. See, e.g.,11 U.S.C. § 330(a)(3); Merola v. Atlantic Richfield Co., 515 F.2d 165, 168 (3d Cir. 1975). Pursuant to established case law, enhancements of reasonable fee awards under section 330 are rare and are only appropriate in exceptional cases.
Because the Professionals were retained under section 328(a), the Court applied the governing improvident standard and found no evidence that the amount of work required by the Professionals was unexpected. When the Professionals were retained, the expedited nature of the case was well-known and the Professionals turned down the opportunity to slow the proceedings down. Moreover, the Professionals found the competing bidder, Wanxiang America Corporation, with ease due to Wanxiang’s involvement in the A123 Systems Inc. bankruptcy case as the successful bidder and the Professionals’ own involvement in the same case representing the committee. Their contribution to the sale, “while laudatory, was [found] hardly the result of an arduous undertaking.” Op. at p. 15-16. Finally, while the results obtained through the Professionals’ efforts were better than expected, they were not, according to the Court, extraordinary. The vast majority of courts that have approved fee enhancements have presided over cases providing a full recovery to creditors. Here, the creditors received just forty cents on the dollar. While the Court applauded the Professionals’ efforts, Judge Gross indicated that the Professionals were simply doing their job, and that His Honor would not have granted a fee enhancement under section 330, let alone under section 328(a).