June 03, 2015

Delaware Bankruptcy Court Denies Request for Fee Enhancement

Robert C. Maddox – June 3, 2015

The propriety of a fee enhancement for an estate professional was considered by the Delaware Bankruptcy Court in In re FAH Liquidating Corp., Case No. 13-13087 (Bankr. D. Del. Jan. 21, 2015). There, legal and financial advisors to the unsecured creditors’ committee moved for the approval of fee enhancements that could have earned the professionals an additional 50 percent of their approved fees and expenses. In denying their motion, the bankruptcy court noted (among other things) that it is not inclined to award fee enhancements in cases where professionals have been paid market-rate hourly fees and creditors have received less than full recovery.

Fisker Automotive (with its debtor affiliates) produced electric hybrid automobiles, and prior to its petition date it had entered into a $169.3 million loan facility with the U.S. government. Hybrid Tech Holdings, LLC, purchased the U.S. government’s position at an auction for $25 million and later entered into an asset purchase agreement to acquire substantially all of the debtors’ assets that included a $25 million credit bid as part of the consideration. The debtors filed for bankruptcy protection and moved the bankruptcy court to approve the sale to Hybrid on an expedited basis.

The bankruptcy court approved the committee’s retention of its professionals under section 328(a) of the Bankruptcy Code and the committee and its professionals were active in the case. Among other things, the committee investigated the debtors’ financing and moved for a competitive auction process and a cap on Hybrid’s credit bid. The committee also courted alternative buyers, including Wanxiang America Corporation, an entity that the committee’s professionals had dealt with in a different bankruptcy proceeding. The committee also negotiated a settlement agreement with Hybrid relating to, among other things, the committee’s investigation of Hybrid’s liens. Under the terms of the settlement, Hybrid committed to pay certain professional fees and administrative claims. Ultimately, an auction resulted in the purchase of the debtors’ assets by Wanxiang, not Hybrid, for more consideration to the estate and for a greater potential distribution to unsecured creditors than that provided under the Hybrid asset purchase agreement.

The committee’s professionals moved under section 330(a) for a fee enhancement. Generally, the professionals argued that they were entitled to a fee enhancement because they undertook significant risk of nonpayment for services and overcame considerable odds to achieve a better sale result than otherwise would have been obtained. The United States Trustee (the UST) and Hybrid (which would be obligated to pay the committee’s additional fees under the settlement agreement) objected. The UST argued that no enhancement was warranted because unsecured creditors were not receiving a full recovery and the risk undertaken by the committee’s professionals was not greater than that taken by professionals in any other case in which unsecured creditors may not be paid in full. The UST further argued that the professionals were compensated at full market rates and simply performed the job that they were hired to do. Hybrid additionally argued that the professionals were retained under section 328 but were improperly seeking a fee enhancement under section 330 and that the professionals did not meet the standards under section 328(a) of the Bankruptcy Code for a fee enhancement.

The bankruptcy court agreed that the relevant provision for the professionals’ requests was section 328(a) and held that the professionals did not merit a fee enhancement under that section.  The bankruptcy court further held that the professionals did not merit a fee increase under section 330, to the extent that section was relevant.

First, the court noted that under section 328(a) a fee arrangement can be altered only if the terms and conditions prove improvident in light of developments that could not have been anticipated at the time of the retention. Here, the court found nothing in the record that would support a fee enhancement under this standard, including because (a) the amount of work was expected; (b) the professionals were involved in the case prior to their appointment; (c) the expedited timing of the auction was known from the outset of the case (and the committee never sought to extend the timing); and (d) the professionals did not need to undertake an extensive marketing process to identify Wanxiang as a potential bidder for the debtors’ assets. Accordingly, the court concluded that a fee enhancement was not justified under section 328(a).

Second, the court held that even if section 330 applied to the professionals’ fee applications, they still would not be entitled to a fee enhancement. The bankruptcy court noted that under section 330 a fee enhancement may be justified considering, among other things, the following:

  • The time spent on such services

  • The rates charged for such services

  • Whether the services were necessary to the administration of, or beneficial at the time at which the service was rendered toward the completion of the bankruptcy case

  • Whether the services were performed within a reasonable amount of time commensurate with the complexity, importance, and nature of the problem, issue, or task addressed

  • With respect to a professional person, whether the person is board certified or otherwise has demonstrated skill and experience in the bankruptcy field

  • Whether the compensation is reasonable based on the customary compensation charged by comparably skilled practitioners in cases other than cases under this title.

The bankruptcy court found that enhancement of the professionals’ fees was not warranted under any of these criteria because

  • the time expended was normal,

  • the rates were not discounted,

  • the services were necessary and not extraordinary,

  • nothing was unusual about the time or complexity of the services provided,

  • compensation was reasonable based on comparable bankruptcy professionals and engagements, and

  • the compensation was commensurate with that of similarly skilled practitioners in non-bankruptcy settings.

Importantly, the bankruptcy court noted that it 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. Where attorneys charge and are paid over $1,000 per hour, the court noted, it expects that work performed will be exceptional.

Robert C. Maddox – June 3, 2015