Fifth Circuit to Reconsider En Banc (and Likely Eliminate) the Pro-Snax Standard for Evaluating Attorney’s Fees Applications in Bankruptcy Cases
The Fifth Circuit today granted rehearing en banc in In re Woerner. The main issue in the case is the proper standard to be applied when evaluating attorney’s fees applications for attorneys assisting debtors-in-possession in Chapter 11 bankruptcy proceedings. Though the en banc decision is unlikely to change the outcome in In re Woerner --- the Fifth Circuit stated it would have affirmed regardless of the applicable standard --- the decision will likely have substantial consequences in the Fifth Circuit.
Pro-Snax --- decided in 1998 --- involved an involuntary Chapter 7 bankruptcy petition against a debtor that was converted to a Chapter 11 proceeding and then, upon denial of the proposed plan of reorganization, back to a Chapter 7 proceeding. The debtor had been represented by a law firm both before and after the case was converted to a Chapter 11 proceeding. One of the issues on appeal was the standard to be applied when evaluating the law firm’s attorney’s fees application. The law firm urged a “reasonableness test” --- “whether the services were objectively beneficial toward the completion of the case at the time they were performed.” But the creditors urged a “more stringent” hindsight approach --- whether the services “resulted in an identifiable, tangible, and material benefit to the bankruptcy estate.” Citing a 1995 case from the Eastern District of Missouri, the Fifth Circuit concluded that “the stricter test is the appropriate measure.”
Like Pro-Snax, In re Woerner involved a law firm’s attorney’s fees application for services rendered during a Chapter 11 proceeding. The firm sought $134,000 in fees but was awarded only approximately $20,000. On appeal, the firm argued that the bankruptcy court erred by applying Pro-Snax’s hindsight test. The Fifth Circuit disagreed, explaining that circuit precedent dictated application of the Pro-Snax standard.
Though the Fifth Circuit affirmed the bankruptcy court, Judge Prado --- joined by the other two judges on the panel --- specially concurred urging the full court to reconsider the Pro-Snax standard. The problem? The Pro-Snax standard is inconsistent with 11 U.S.C. § 330, the applicable attorney’s fees statute, and unnecessarily creates a circuit split. Though section 330 grants bankruptcy courts discretion to award “reasonable compensation for actual, necessary services,” it requires courts to consider “all relevant factors,” including “whether the services were necessary to the administration of, or beneficial at the time at which the service was rendered.” Moreover, section 330 also instructs courts to deny compensation for services that were not “reasonably likely to benefit the debtor’s estate.” Read together, these provisions explicitly contemplate analyzing whether the legal services were reasonable at the time they were performed. They are inconsistent with a hindsight approach --- an approach that determines reasonableness based on whether an identifiable, material benefit to the estate was actually achieved.
The Seventh Circuit said it best: “Litigation is a gamble, and a failed gamble can often produce a large net loss even if it was a good gamble when it was made.” In re Taxman Clothing Co., 49 F.3d 310, 313 (7th Cir. 1995). Section 330 compensates attorneys not only for victories, “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” to the bankruptcy estate. In re Woerner, 758 F.3d 693, 703 (5th Cir. 2014) (Prado, J., specially concurring). The Pro-Snax standard is in its last days.