In re Village Apothecary, Inc. (6th Cir.)

The following is a case update written by Uzzi O. Raanan, a partner at Danning, Gill, Israel & Krasnoff, LLP, analyzing a recent decision of interest:

SUMMARY

The Sixth Circuit Court of Appeals held that in determining the reasonableness of professional fees under section 330(a)(3) of the bankruptcy code, the lodestar factors specifically codified by Congress do not preclude consideration of other relevant factors, including the “results obtained” by the professionals. See In re Village Apothecary, Inc., 2022 WL 3365131 (6th Cir. 2022).

To read the full opinion, click here.

FACTS

In 2015, Village Apothecary, Inc. (“Debtor”), a Michigan pharmacy, filed for bankruptcy under Chapter 7. The estate’s trustee retained the law firm of Silverman & Morris, P.L.L.C. (the “Firm”) as his special counsel to investigate and pursue potential legal claims worth at least $1,655,962. After a year-long investigation, the firm identified possible claims against Debtor’s former president. It drafted a complaint but was ultimately convinced that the claims would be unsuccessful. The trustee agreed to settle the claims for $38,000. This brought the estate’s total assets to $40,710.87. The Firm filed a fee application under 11 U.S.C. section 330, asking for a little over $37,000, which represented 90.6% of the estate’s total assets.

Though no one objected to the Firm’s fee application, the bankruptcy court decided to hold a hearing to decide whether the requested fees should be reduced “given the amount of the benefit” the Firm’s work provided to the estate. The court ultimately approved half of the requested fees, finding that the total fees requested by the trustee, his general counsel, and the Firm would have subsumed all the funds collected in the case, leaving nothing for the non-professional creditors.

The Firm appealed to the district court, which twice reversed the bankruptcy court’s fee award. The third time it considered the application, the bankruptcy court again reduced the Firm’s fees by half. The court relied on lodestar factors, balancing the “amount in controversy” with the “results obtained” by counsel, and it concluded that the level of success was minimal because it resulted in no distribution to the non-administrative creditors.

On the third appeal, the district court affirmed the lower court’s ruling. It held that “results obtained” was still a relevant lodestar factor under Section 330(a)(3), and that the bankruptcy court did not abuse its discretion when it reduced the Firm’s fees by 50%.

The Firm appealed to the Court of Appeals.

REASONING

The Court of Appeals affirmed the lower courts, rejecting the Firm’s argument that Section 330(a)(3) bars courts from considering the “results obtained” by a professional as one of the lodestar factors for determining whether fees are reasonable. It further concluded that the bankruptcy court did not abuse its discretion by reducing the Firm’s fees by half.

The Court initially explained how professional fees are handled by the Bankruptcy Code. Under Section 330(a), courts “may” award to professionals “reasonable compensation” for actual and necessary services. The question raised in this appeal was how courts decide what is “reasonable compensation.”

Prior to 1994, Section 330 required courts to consider the time, nature, extent, and value of the services as well as the costs of “comparable services.” Seeking further guidance, courts adopted ways to define “reasonable compensation.” One approach adopted by the Fifth Circuit utilized 12 factors, known as the “Johnson Factors,” that relied on Title VII to analyze reasonableness. Another approach, adopted by the Sixth Circuit, required bankruptcy courts to first calculate a “lodestar amount” by multiplying a professional’s reasonable hourly rate by the number of hours reasonably worked. Once this amount was derived, courts could exercise their discretion by also applying the Johnson Factors. One of the factors was the “amount involved and the results obtained.”

In 1994, Congress amended Section 330, codifying some but not all the Johnson Factors. Section 330(a)(3) now instructs courts to consider, “the nature, the extent, and the value of such services, taking into account all relevant factors, including” many Johnson Factors. (Emphasis added.) The list does not include “results obtained.” The Court noted that it has never considered whether the 1994 amendment precludes courts from considering Johnson Factors, like the “results obtained,” that were not codified into the statute.

Using statutory interpretation canons, the Court concluded that by including the modifier, “all relevant factors, including,” Congress did not intend to limit courts to the specific factors it codified under Section 330(a)(3). Rather, courts may also consider factors not included in the statute.

The Court was also influenced by the fact that professional fees under Section 330(a)(1) are discretionary, stating that courts “may” but are not required to award such fees. This discretion suggests that Congress intended the list of factors in Section 330(a)(3) to be illustrative but not exclusive.

The Court rejected the Firm’s argument that multiple cases have held that “results obtained” cannot be used as a factor under Section 330(a)(3). It noted that the only cases cited by the Firm discussed this factor in the context of Section 330(a)(4), which contains circumstances under which bankruptcy professionals may not receive compensation.

The Court concluded that, based on the broad discretion afforded to it, the bankruptcy court did not abuse its discretion by reducing the Firm’s fees by half. It cited cases from a few jurisdictions where fees were reduced on a comparable scale.

AUTHOR’S COMMENTS

Based on the language in Section 330(a)(3) that courts may determine “reasonable compensation” using “all relevant factors, including” specifically identified factors, the rulings by the appellate Court and two lower courts appear reasonable. While one could argue that Congress was aware of all 12 Johnson Factors, so its decision to codify only some of them suggests an intent to exclude the others, it is hard to ignore the fact that Congress made the specifically listed factors non-inclusive.

The Court rejected the argument that allowing consideration of “results obtained” conflicted with the factor codified under Section 330(a)(3)(C), “whether the services were necessary to the administration of, or beneficial at the time at which the service was rendered toward the completion of, a case under this title.” While the two factors do not necessarily conflict, query whether Congress intended to condition compensation to professionals on their success, as opposed to basing it on the necessity or beneficial nature of the services at the time they were rendered. Adding a “results obtained” calculation, one might argue, brings professional fees under Section 330(a)(3) closer to the contingency fee model. It may also force professionals to become de facto insurers of the success of their work. 

These materials were written by Uzzi O. Raanan, a partner at Danning, Gill, Israel & Krasnoff, LLP, located in Los Angeles, California, who is a member of the ad hoc group and the representative from the Business Law Section (BLS) to the CLA’s Board of Representatives. Editorial contributions were made by the Honorable Meredith Jury (United States Bankruptcy Judge, C.D. Cal, Ret.), also a member of the ad hoc group. Thomson Reuters holds the copyright to these materials and has permitted the Insolvency Law Committee to reprint them. This material may not be further transmitted without the consent of Thomson Reuters.