iStock_000036932336_MediumIn the mid-1990’s I represented several trade creditors in a contentious Chapter 11 bankruptcy called Pro-Snax. At the creditors’ request, the bankruptcy court directed the appointment of a Chapter 11 trustee one month into the case. Nonetheless the dispossessed debtor pursued a Chapter 11 liquidation plan. The creditors, which held a clear “blocking position” in terms of class voting, opposed the plan. The plan was denied confirmation six months into the case.

Debtor’s counsel then filed a fee application for fees. Approximately 80% of counsel’s fees were incurred during the five month period after the Chapter 11 trustee was appointed, and most of those fees related to the failed plan. We made the following arguments on behalf of the creditors against the fee application.

First, we argued that Section 330 of the Bankruptcy Code did not permit compensation to debtor’s counsel as a matter of law after the appointment of a Chapter 11 trustee. This argument was based upon the deletion of the term “debtor counsel” from Section 330 of the Bankruptcy Code in the 1994 amendments. The significance of this deletion became absolutely clear a decade later when the Supreme Court decided Lamie v. U.S. Trustee, 124 S.Ct. 1023 (2004), holding as a matter of law that a debtor’s counsel is not entitled to fees after the appointment of a Chapter 11 trustee.

Second, because it was uncertain before Lamie whether the deletion of “debtors counsel” eliminated all judicial discretion to award the fees, we made an alternative argument. We argued that a debtor’s counsel fees incurred after the appointment of a Chapter 11 trustee should be subjected to strict scrutiny. Support for that position was found in an opinion, In re Melp, Ltd., 179 B.R. 636 (E.D. Mo. 1995), which held that allowance of fees to a debtor’s counsel after the appointment of a Chapter 11 trustee should be governed by an “identifiable, tangible, and material benefit” standard.

Remarkably, in In re Pro‑Snax Distributors, Inc., 157 F.3d 414 (5th Cir. 1998), the Fifth Circuit applied both of our alternative arguments. First, the Court held that no fees may be allowed for debtor’s counsel after a Chapter 11 trustee is appointed, thereby eliminating 80% of the fee request. Second, the Court applied the “identifiable, tangible and material benefit” standard to the remaining 20% of fees that had been incurred before the Chapter 11 trustee’s appointment. It is often said “making law is a lot like making sausage” and the Pro-Snax opinion demonstrates what can happen when courts apply arguments more broadly than actually presented.

The Woemer Opinion allows fees for a “good gamble”

Seventeen years later, in a decision that explicitly overrules the Pro-Snax “material benefit” standard, the Fifth Circuit sitting en banc held that attorneys may be compensated for services that were “reasonably likely to benefit” the estate at the time those services were rendered, even though the case ultimately fails. See Barron & Newburger, P.C. v. Tex. Skyline, Ltd. (In re Werner), 2015 BL 101048 (5th Cir. Apr. 9, 2015) (the “Werner Opinion”). According to the Werner Opinion:

“[Section 330] permits a court to compensate an attorney not only for activities that were ‘necessary,’ but also for good gambles—that is, services that were objectively reasonable at the time they were made—even when those gambles do not produce an ‘identifiable, tangible, and material benefit.’ What matters is that, prospectively, the choice to pursue a course of action was reasonable.” [emphasis added] Werner Opinion at 12.

“Results achieved” is still a relevant factor

Counsel celebrating the abolition of the Pro-Snax “material benefit” standard must nonetheless remain cognizant that their failed efforts on behalf of a Chapter 11 debtor are still subject to a “results achieved” standard. In other words, the results of counsel’s actions are a factor the court can consider in awarding compensation. This factor goes back to In re First Colonial Corp. of America, 544 F.2d 1291 (5th Cir. 1977), which has long been the leading Fifth Circuit opinion on attorney compensation. In that case, the Fifth Circuit adopted a 12 factor “Johnson test” for compensation, and the “results achieved” was one factor under the Johnson test. In endorsing this factor, the Werner Opinion states:

“Whether the services were ultimately successful is relevant to, but not dispositive of, attorney compensation. See 11 U.S.C. § 330(a)(3) (“[T]he court shall consider the nature, the extent and the value of such services, taking into account all relevant factors . . . .”); see also In re Pilgrim’s Pride Corp., 690 F.3d 650, 656 (5th Cir. 2012) (affirming the continued relevance of the Johnson factors).” Werner Opinion at 17.

Counsel should also be aware that the “results achieved” standard is embedded in most state ethical laws governing lawyers. For example, Rule 1.04 of the Texas Disciplinary Rules of Professional Conduct provides that “the amount involved and the results obtained” must be taken into account in the setting a reasonable fee.

In sum, bankruptcy judges properly exercise their discretion when applying a Janus-like review of fee applications in failed cases. Janus is the Roman god depicted as having two faces, since he looks to the future and to the past. In the Fifth Circuit, bankruptcy judges are to take into account both the forward looking “good gamble” test, and the backward looking “results achieved” test.