Barron & Newburger, P.C. v. Texas Skyline, Ltd. (In Re Woerner)

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IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
United States Court of Appeals
Fifth Circuit
FILED
No. 13-50075 April 9, 2015
Lyle W. Cayce
In the Matter of: CLIFFORD J. WOERNER; GAIL S. WOERNER, Clerk
Debtors
BARRON & NEWBURGER, P.C.,
Appellant
v.
TEXAS SKYLINE, LIMITED; PECOS & 15TH, LIMITED; UNITED STATES
TRUSTEE; SKYLINE INTERESTS, L.L.C.,
Appellees
Appeals from the United States District Court
for the Western District of Texas
Before STEWART, Chief Judge, REAVLEY, JOLLY, DAVIS, JONES,
SMITH, DENNIS, CLEMENT, PRADO, OWEN, ELROD, SOUTHWICK,
HAYNES, GRAVES, HIGGINSON and COSTA, Circuit Judges.
EDWARD C. PRADO, Circuit Judge:
This case concerns a bankruptcy court’s order reducing the fees a
debtor’s counsel received under 11 U.S.C. § 330. On May 13, 2010, on the eve
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of a major state-court judgment against him, Debtor Clifford Woerner 1 filed a
voluntary petition under Chapter 11 of the Bankruptcy Code. Appellant
Barron & Newburger (“B & N”), a law firm, represented Woerner in his
Chapter 11 bankruptcy. On April 20, 2011, the bankruptcy court converted
the case to Chapter 7.
Its services terminated, B & N filed an application for fees in excess of
$130,000. The bankruptcy court allowed approximately $20,000 and disallowed
the remainder, finding that the additional fees were unreasonable. The district
court affirmed. B & N appealed, contending that the bankruptcy court
misapplied Fifth Circuit precedent and 11 U.S.C. § 330 in reducing the fees
awarded to it. In an opinion issued on July 15, 2014, a panel of this Court
affirmed the district court’s judgment. In re Woerner, 758 F.3d 693, 702 (5th
Cir. 2014). However, all three members of the panel specially concurred to call
for en banc reconsideration of In re Pro–Snax Distributors, Inc., 157 F.3d 414(5th Cir. 1998), the opinion interpreting § 330 that controlled the appeal. In re
Woerner, 758 F.3d at 702–06 (Prado, J., specially concurring).
We granted rehearing en banc to reexamine our decision in Pro–Snax.
In re Woerner, 771 F.3d 820 (5th Cir. 2014) (per curiam). We now recognize
that the retrospective, “material benefit” standard enunciated in Pro–Snax
conflicts with the language and legislative history of § 330, diverges from the
decisions of other circuits, and has sown confusion in our circuit.
Correspondingly, we overturn Pro–Snax’s attorney’s-fee rule 2 and adopt the
prospective, “reasonably likely to benefit the estate” standard endorsed by our
sister circuits.
1Woerner filed a joint petition with his wife Gail Woerner. Because Gail Woerner was
subsequently dismissed from the case, we refer to Woerner as the only debtor.
2 We leave undisturbed the remainder of that opinion.
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I. FACTUAL AND PROCEDURAL BACKGROUND
A. Events Before Woerner Filed for Bankruptcy
In 2006, Woerner and Texas Skyline, Ltd. formed a limited partnership
for the purpose of undertaking a real estate venture. Within the partnership,
DPRS—a company Woerner owned—was the sole general partner, Woerner
was a limited partner with a 49.99% interest in the partnership, and Texas
Skyline was the sole investor and a limited partner in the project. Over the
course of the next three years, Woerner misappropriated funds from the
partnership for personal use. When Texas Skyline discovered Woerner’s
activities, it sued him in state court for breach of the partnership agreement
and breach of fiduciary duties. The case proceeded to a bench trial on April 27,
2010. After the parties rested, the state court announced an oral ruling in
favor of Texas Skyline and set a remedies hearing for May 14, 2010.
Woerner and his state-court trial counsel met with B & N on May 4, 2010
to discuss filing for bankruptcy. B & N agreed to the representation and filed
Woerner’s voluntary petition for Chapter 11 bankruptcy relief on May 13—the
night before the state-court remedies hearing. That filing triggered the
Bankruptcy Code’s automatic stay provision, which brought the state-court
proceeding to a halt. See 11 U.S.C. § 362(a).
B. B & N Litigates Woerner’s Chapter 11 Case
In the ensuing eleven months, B & N provided services that it claimed
were worth $134,800 in legal fees. On May 18, 2010, with B & N’s assistance,
Woerner filed mandatory disclosure documents with the bankruptcy court—
namely, schedules and a statement of financial affairs.
B & N also defended Woerner in adversary proceedings that were
brought to prevent Woerner from discharging liabilities. On August 4, 2010,
Texas Skyline initiated an adversary proceeding with the bankruptcy court
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under 11 U.S.C. § 523(a)(4) for breach of fiduciary duty. Texas Skyline then
fought to lift the stay of the state-court judgment. Woerner contested and lost,
and the stay of state-court proceedings was lifted. Woerner also contested
adversary proceedings brought by John Baker II, one of the other active
creditors in this case. On November 2, 2010, Woerner filed Amended
Schedules (b) and (c) and also amended his Statement of Financial Affairs.
B & N helped Woerner negotiate with his creditors. Woerner and the
adversarial creditors agreed to mediation with a bankruptcy judge. Talks with
Texas Skyline broke down, but on December 17, 2010, B & N filed a Joint
Motion to Compromise with the bankruptcy court, which B & N maintained
would have resolved this case. Yet Baker insisted that the settlement was
merely a proposal, objected to it, and refused to execute it. For these
negotiation services, B & N sought over $6,000.
B & N also investigated the concealment of some of Woerner’s assets and
subsequently amended Woerner’s financial disclosures to include
approximately $9,000 of additional personal assets, including investments,
jewelry, firearms, and fur coats that were not originally disclosed. This
concealment prompted Baker to move to convert Woerner’s case from a
Chapter 11 reorganization to a Chapter 7 trustee-administered liquidation.
See 11 U.S.C. § 1112(b)(1) (requiring the bankruptcy court to convert or dismiss
a Chapter 11 case upon finding “cause”). Texas Skyline moved to intervene in
the motion to convert. B & N litigated Woerner’s attempts to press for a motion
to approve the settlement and oppose the motion to convert. The billing records
show that the firm (1) prepared a motion to sell some of Woerner’s personal
property for the purpose of funding an appeal from the state-court judgment;
(2) started investigating potential causes of action against Texas Skyline and
Baker; (3) drafted a disclosure statement and reorganization plan; and
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(4) deposed a representative from Texas Skyline about potential
mismanagement of partnership assets.
C. Woerner’s Case Is Converted to Chapter 7, Ending B & N’s
Representation
The bankruptcy court conducted a hearing on the pending motions,
denying the motion to approve the settlement and granting the motion to
convert on April 20, 2011. As the bankruptcy court summarized in its oral
ruling on the fee application, “the Court found that it was appropriate to
convert this case to Chapter 7 because the Court was of the opinion . . . that
[Woerner] w[as] not forthright as [a] Debtor[] under the Bankruptcy Code in
terms of listing [his] assets and giving proper evaluations.” On September 3,
2011, B & N filed an application for approximately $134,000 in fees under
§ 330. Following the U.S. Trustee’s objection, B & N amended its fee
application. B & N ultimately sought $130,656.50 in fees, and $5,793.37 in
expenses. The Trustee renewed its objection to the fees. Texas Skyline also
objected, arguing that all of the fees were unreasonable because (1) Woerner
never had the means to fund a Chapter 11 reorganization and (2) B & N’s
actions were dilatory and required creditors to incur unnecessary attorney’s
fees.
D. The Bankruptcy Court Disallows Most of B & N’s Requested Fees
The bankruptcy court then conducted a hearing on the fee request.
B & N offered testimony from Woerner’s nonbankruptcy counsel and two
attorneys from B & N to prove that (1) Woerner brought the case for a
legitimate purpose and (2) the litigation costs were driven up by Texas
Skyline’s alleged intransigence.
The bankruptcy court took the fee application under advisement and
entered an oral ruling on April 11, 2012. Citing Pro–Snax, the bankruptcy
court explained that, for a service to be compensable under § 330, fee
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applicants must prove that the service resulted in an “identifiable, tangible,
and material benefit to the bankruptcy estate,” Pro–Snax, 157 F.3d at 426.
Applying that standard, the bankruptcy court awarded the expenses in full but
only $19,409.00 in fees—an 85% reduction. The bankruptcy court arrived at
$19,409.00 by considering separately each category of fees (such as case
administration, resisting a motion to lift the stay, preparing bankruptcy
schedules, and similar categories), granting some in whole and some in part,
and denying others. Most of the disallowed fees were denied due to B & N’s
lack of success. Specifically, the bankruptcy court found much of B & N’s billed
time was not of identifiable benefit to the estate. The district court entered its
final order affirming the bankruptcy court on January 17, 2013. It ruled that
the record supported finding that B & N’s fees were unreasonable under § 330
and Pro–Snax. The district court observed that the bankruptcy court
“specifically invoked Pro–Snax at the hearing on fees, and appears to have
relied upon it in determining to reduce [B & N]’s fees based on the limited
success and lack of benefit to the estate.” It declined to entertain B & N’s
argument that Pro–Snax was wrongly decided and rejected B & N’s contention
that the opinion’s operative language was dicta, concluding that Pro–Snax
supplied the governing standard for attorney compensation under Chapter 11
in the Fifth Circuit. Correspondingly, the district court found no error in the
bankruptcy court’s application of Pro–Snax to B & N’s fee application.
II. JURISDICTION AND STANDARD OF REVIEW
B & N timely filed a notice of appeal from the bankruptcy court’s order
to the United States District Court for the Western District of Texas under 28
U.S.C. § 158(a)(1) and Federal Rule of Bankruptcy Procedure 8002(a). The
district court had jurisdiction over Woerner’s Chapter 11 bankruptcy case
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under 28 U.S.C. §§ 157, 158, and 1334. We have jurisdiction over this timely
appeal from the district court’s order under 28 U.S.C. §§ 158(d)(1) and 2107(b).
This Court reviews the district court’s decision “by applying the same
standard of review to the bankruptcy court’s conclusions of law and findings of
fact that the district court applied.” In re Cahill, 428 F.3d 536, 539 (5th Cir.
2005) (per curiam). Moreover, this Court reviews the bankruptcy court’s award
of attorney’s fees for abuse of discretion. Id. (citing In re Coho Energy, Inc.,
395 F.3d 198, 204 (5th Cir. 2004); In re Barron, 325 F.3d 690, 692 (5th Cir.
2003)). “An abuse of discretion occurs where the bankruptcy court (1) applies
an improper legal standard[, reviewed de novo,] or follows improper procedures
in calculating the fee award, or (2) rests its decision on findings of fact that are
clearly erroneous.” Id. (citing In re Evangeline Ref. Co., 890 F.2d 1312, 1325
(5th Cir. 1989)).
III. DISCUSSION
B & N argues that this Court’s interpretation of § 330 in Pro–Snax is
erroneous, and that remand to the bankruptcy court is warranted in order for
that court to assess B & N’s request for attorney’s fees under the correct legal
standard. The U.S. Trustee agrees with B & N that Pro–Snax was wrongly
decided but maintains that remand is unnecessary because B & N is not
eligible for any fees beyond those awarded by the bankruptcy court even under
the more lenient prospective standard that B & N and the U.S. Trustee
advocate. Texas Skyline contends that this Court should affirm the district
court’s ruling regardless of our disposition of Pro–Snax because B & N is not
entitled to the fees it seeks under any standard. We address these issues—the
viability of Pro–Snax and the need for remand—in turn.
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A. The Proper Standard for Awarding Attorney’s Fees Under § 330
B & N and the U.S. Trustee contend that the “hindsight” or “material
benefit” standard we enunciated in Pro–Snax conflicts with the text and
legislative history of § 330 and unnecessarily places us at odds with our sister
circuits. We agree.
1. Statutory Framework
a. Reorganization Under Chapter 11 of the Bankruptcy Code
When a debtor commences a bankruptcy case, a legal entity known as
the “estate” is created. 11 U.S.C. § 541(a). The estate contains all of the
debtor’s property, subject to exceptions not applicable here. Id. When a debtor
files a case to reorganize under Chapter 11, the debtor becomes the debtor-in-
possession of the estate and takes on the rights, powers, and fiduciary duties
of a trustee. Id. §§ 1101, 1106–1108; see also CFTC v. Weintraub, 471 U.S. 343,
355 (1985). The debtor-in-possession retains control over the property of the
estate and must repay creditors according to the terms of a reorganization
plan. 11 U.S.C. §§ 1115(b), 1123, 1142. The proponent of a reorganization
plan—usually, but not necessarily, the debtor-in-possession—must provide a
court-approved disclosure statement that contains “adequate information”
about the assets, liabilities, and financial affairs of the debtor sufficient to
enable creditors to make an “informed judgment” about the plan. Id. §§ 1121,
1125. Creditors may accept or reject the reorganization plan in a special voting
process governed by the Bankruptcy Code. Id. § 1126.
If the creditors accept the reorganization plan, it must then be confirmed
by the bankruptcy court. Id. § 1129. The confirmation of the reorganization
plan typically brings the bankruptcy case to an end. Id. § 1141.
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b. Compensation to Professionals Under Chapter 11
The debtor-in-possession may ask the bankruptcy court for permission
to employ professionals, including attorneys, to assist the debtor-in-possession
with the reorganization of the bankruptcy estate. Id. § 327.
Congress has enacted a uniform scheme for retaining and compensating
such attorneys under 11 U.S.C. §§ 327–330. First, under § 327(a), the debtor
must obtain the bankruptcy court’s approval to employ the attorney. Then,
under § 330(a)(1)(A), an attorney who has been employed under § 327(a) may
request “reasonable compensation for actual, necessary services rendered.”
The bankruptcy court may exercise its discretion, upon motion or sua sponte,
to “award compensation that is less than the amount . . . requested.” Id.
§ 330(a)(2). Section 330(a)(3) further directs courts to “consider the nature, the
extent, and the value of” the legal services provided when determining the
amount of reasonable compensation to award, “taking into account all relevant
factors, including”:
(A) the time spent on such services;
(B) the rates charged for such services;
(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;
(D) 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;
(E) with respect to a professional person, whether the person is
board certified or otherwise has demonstrated skill and
experience in the bankruptcy field; and
(F) whether the compensation is reasonable based on the
customary compensation charged by comparably skilled
practitioners in cases other than cases under this title.
Id. § 330(a)(3) (emphasis added).
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Section 330(a)(4) further lists those services for which a court may not
approve compensation:
(A) Except as provided in subparagraph (B), the court shall not allow
compensation for—
(i) unnecessary duplication of services; or
(ii) services that were not—
(I) reasonably likely to benefit the debtor’s estate; or
(II) necessary to the administration of the case.
Id. § 330(a)(4) (emphasis added).
2. The Pro–Snax Retrospective, “Material Benefit” Standard
The underlying bankruptcy case at issue in Pro–Snax was initiated when
creditors filed an involuntary Chapter 7 bankruptcy petition against the
debtor. Pro–Snax, 157 F.3d at 416. The bankruptcy court later converted the
case to Chapter 11 upon the debtor’s consent and appointed a Chapter 11
trustee soon thereafter. Id. The debtor proposed a plan of reorganization, but
the bankruptcy court denied confirmation of the plan based largely on the
creditors’ objections. Id. at 416–17. The court then converted the case back to
a Chapter 7 proceeding. Id. at 417.
The law firm Andrews & Kurth (“A & K”) provided legal services to the
debtor both before and after the case had been converted to Chapter 11. Id. at
416–17. Upon A & K’s fee application, the bankruptcy court awarded A & K
$30,000 in fees and $7,500 in expenses. Id. at 417 n.4. The district court
reversed the award on the ground that § 330 precluded A & K from being
compensated from the assets of the estate for work performed after the Chapter
11 trustee had been appointed. Id. at 419. The district court remanded the
case to the bankruptcy court, however, for a recalculation of fees in light of the
creditors’ concession that A & K was entitled to compensation for the work it
performed before the Chapter 11 trustee was appointed. Id. at 419. In so
doing, the district court instructed the bankruptcy court to consider the
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“backdrop of the American Rule, any statutory exceptions to that rule
applicable in this case, and the usual standards for the award of fees to be paid
by other parties to the litigation.” Family Snacks, Inc. v. Andrews & Kurth,
L.L.P. (In re Pro–Snax Distribs., Inc.), 212 B.R. 834, 839 (N.D. Tex. 1997).
On appeal, our Court divided its discussion of the merits into two parts.
We first took up the issue of “whether a Chapter 11 debtor’s attorney may be
compensated for work done after the appointment of a trustee under § 330(a)
of the Bankruptcy Code.” Pro–Snax, 157 F.3d at 416. After considering the
statutory language of § 330, congressional intent, and public policy, this Court
ultimately concluded that § 330, on its face, precludes any award of fees to a
debtor’s attorney for that attorney’s work performed after a Chapter 11 trustee
has been appointed. Id. at 425–26. The Supreme Court later vindicated this
holding in Lamie v. U.S. Trustee, 540 U.S. 526 (2004), and our opinion today
has no effect on this holding.
In the second, briefer part of the opinion, of relevance here, we discussed
the applicable standard to evaluate A & K’s fee application for the services it
rendered to the debtor before the trustee was appointed. This Court considered
two possible tests advocated by the parties. A & K urged the use of a
“reasonableness” test—“whether the services were objectively beneficial
toward the completion of the case at the time they were performed.” Id. at 426
(emphasis added). The creditors, on the other hand, advanced a hindsight
approach—whether the services “resulted in an identifiable, tangible, and
material benefit to the bankruptcy estate.” Id. (emphasis added). Citing only
In re Melp, Ltd., 179 B.R. 636 (E.D. Mo. 1995), we adopted the stricter
“hindsight” or “material benefit” measure, expressing our reluctance “to hold
that any service performed at any time need only be reasonable to be
compensable.” Id. It is this standard that we reconsider today.
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3. The Text, History, and Application of § 330
a. The Text of § 330
Section 330 gives a bankruptcy court discretion to determine the amount
of reasonable compensation. But the statute also constrains that discretion by
requiring the court to “tak[e] into account” a set of listed factors, including
“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.” 11 U.S.C. § 330(a)(3)(C) (emphasis added).
The statute reinforces this point in an accompanying section: a court
must disallow any compensation when the services “were not reasonably likely
to benefit the debtor’s estate or necessary to the administration of the case.”
Id. § 330(a)(4)(A)(ii) (punctuation omitted); see In re ASARCO, L.L.C., 751 F.3d
291, 299 (5th Cir.), cert. granted, 135 S. Ct. 44 (2014) (“Section 330 states twice,
in both positive and negative terms[,] that professional services are
compensable only if they are likely to benefit a debtor’s estate or are necessary
to case administration.” (citation omitted)); In re Ames Dep’t Stores, Inc., 76
F.3d 66, 71 (2d Cir. 1996) (referring to “reasonably likely to benefit the debtor’s
estate” as an “inverse construction” of § 330(a)(3)(C)), abrogated on other
grounds by Lamie, 540 U.S. 526. Read together, a court may compensate an
attorney for services that are “reasonably likely to benefit” the estate and
adjudge that reasonableness “at the time at which the service was rendered.”
Section 330, then, explicitly contemplates compensation for attorneys
whose services were reasonable when rendered but which ultimately may fail to
produce an actual, material benefit. “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). The statute
permits a court to compensate an attorney not only for activities that were
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“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. 3
b. The Legislative History of § 330
The legislative history of § 330 provides additional support for this
reading. When Congress enacted § 330 in 1978, it relaxed the previously
stringent standard that bankruptcy courts applied in reviewing professional
fee awards. 3 Collier on Bankruptcy ¶ 330.LH[4] (16th ed. 2015). Under the
old regime, our Court enforced a “strong policy . . . that estates be administered
as efficiently as possible.” In re First Colonial Corp. of Am., 544 F.2d 1291,
1299 (5th Cir. 1977) (citations omitted), superseded by statute, 11 U.S.C. § 330.
This policy originated in the idea that “[s]ince attorneys assisting the trustee
in the administration of a bankruptcy estate are acting not as private persons
but as officers of the court, they should not expect to be compensated as
generously for their services as they might be were they privately employed.”
Id. (citation omitted); see also Mass. Mut. Life Ins. Co. v. Brock, 405 F.2d 429,
432–33 (5th Cir. 1968) (holding that the interest of the public—especially the
debtor and creditors—could limit compensation to a debtor’s counsel),
superseded by statute, 11 U.S.C. § 330.
3 In re Taxman Clothing Co. provides a concrete example:
Suppose that [debtor’s attorney] had been seeking to recover . . . $330,000 and
that he had had a 90 percent chance of winning a judgment for that amount
and successfully defending the judgment in this court. An expenditure of
$85,000 in attorney’s fees would not be unreasonable when the expected
benefit was $297,000 ($330,000 x .9), so if the attorney performed competently
but simply was unlucky and lost he would have a good claim for his fees . . . .
49 F.3d at 313.
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But “[i]n enacting section 330, Congress intended to move away from
doctrines that strictly limited fee awards” and instead provide compensation
“commensurate with the fees awarded for comparable services in non-
bankruptcy cases.” In re UNR Indus., Inc., 986 F.2d 207, 208–09 (7th Cir.
1993) (citing, inter alia, H.R. Rep. No. 95–595, at 329–30 (1978), reprinted in
1978 U.S.C.C.A.N. 5963, 6286). To that end, § 330 instructs courts to award
“reasonable compensation” for “actual, necessary services” based on “the
nature, the extent, and the value of such services.” 11 U.S.C. § 330(a).
Congress took a further step in 1994 when it “codif[ied] many of the factors
previously considered by courts in awarding compensation and reimbursing
expenses.” 3 Collier on Bankruptcy ¶ 330.LH[5]; see Bankruptcy Reform Act
of 1994, Pub. L. No. 103-394, § 224, 108 Stat. 4106, 4130–31 (1994). 4 In
particular, Congress added the language at issue here: §§ 330(a)(3)(C)
and 330(a)(4)(A).
The drafting history of those provisions suggests that Congress
considered and specifically rejected an actual-benefit test. The Senate version
of the Bankruptcy Reform Act of 1994 contained the seed of the eventual
guidelines for reasonable compensation contained in § 330. See S. 540, 103d
Cong. § 309 (as reported by S. Comm. on the Judiciary, Oct. 28, 1993). The Bill
reported out of the Senate Judiciary Committee differed in at least one
important respect from the eventual Act, however. That Senate draft
instructed courts only to consider “whether the services were necessary in the
administration of or beneficial toward the completion of a case under [the
4 For example, our circuit was among the first to conclude that the factors developed
for determining reasonable attorney’s fees in the non-bankruptcy context were “equally
useful” in assessing bankruptcy attorney’s fees. First Colonial, 544 F.2d at 1299 (applying
factors from Johnson v. Georgia Highway Express, Inc., 488 F.2d 714, 717–19 (5th Cir. 1974),
to a bankruptcy fee determination). Those same factors formed the foundation for the 1994
revision. See 3 Collier on Bankruptcy ¶ 330.LH[5] n.12.
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Bankruptcy Code].” Id. After adopting a floor amendment, however, the
Senate added the words “at the time at which the service was rendered” after
the word “beneficial.” See 140 Cong. Rec. 8383 (1994) (setting out amendment
1645 to S. 540); S. 540, 103d Cong. § 310 (as passed by Senate, Apr. 26, 1994);
see also Lamie, 540 U.S. at 539–40 (discussing amendment 1645). The House
version of the legislation did not include any guidelines for determining the
reasonableness of attorney compensation. See generally H.R. 5116, 103d Cong.
(as reported by H. Comm. on the Judiciary, October 4, 1994). The legislative
process therefore strongly suggests that Congress could not have intended the
language in § 330 to impose an actual-benefit requirement determinable by a
court only at the completion of the case.
c. The Application of § 330 in Other Circuits
In light of the plain language of § 330(a)(4)(A) after the 1994
amendments, the Second, Third, and Ninth Circuits have rejected the actual-
benefit test in favor of a prospective standard. In In re Ames Department
Stores, Inc., the Second Circuit expressly rejected an approach that would
make fee awards “contingent upon a showing of actual benefit to the estate,”
opting instead to give effect to the statute’s “reasonably likely to benefit the
debtor’s estate” standard. 76 F.3d at 71–72. The Third Circuit similarly
rejected the actual-material-benefit standard, concluding that it departed from
the statute by imposing a “heightened standard” and requiring evaluation “by
hindsight.” In re Top Grade Sausage, Inc., 227 F.3d 123, 131–32 (3d Cir. 2000),
abrogated on other grounds by Lamie, 540 U.S. 526. Finally, the Ninth Circuit
held that § 330(a)(4)(A) superseded that court’s past precedent, which had
“requir[ed] that the services actually provide an ‘identifiable, tangible and
material benefit to the [debtor’s] estate.’” In re Smith, 317 F.3d 918, 926–27
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(9th Cir. 2002) (quoting In re Xebec, 147 B.R. 518, 523 (B.A.P. 9th Cir. 1992)),
abrogated on other grounds by Lamie, 540 U.S. 526. 5
Pro–Snax’s only citation in support of the actual-benefit test was In re
Melp, a case that interpreted the pre-1994 version of § 330. See 179 B.R. at
639 (quoting pre-1994 language). Indeed, the only other circuit precedents to
apply an actual-benefit requirement either were decided before 1994 or relied
entirely on pre-1994 precedent for determining “reasonable compensation.” 6
As discussed above, though, whereas the pre-1994 statutory language did not
provide guidance on whether to consider the reasonable likelihood a service
would benefit the estate, the post-1994 language foreclosed an actual-benefit
test by requiring that the court evaluate the likelihood of benefit to the estate
at the time the service was rendered. All other circuits that have construed
the post-1994 version of § 330 have recognized this distinction. Pro–Snax’s
reliance on Melp is misplaced and puts us out of step with our sister circuits. 7
4. The Prospective, “Reasonable at the Time” Standard
We conclude that § 330 embraces the “reasonable at the time” standard
for attorney compensation endorsed by our colleagues in the Second, Third,
5 The Seventh Circuit has applied a similar rule without specifically relying on the
post-1994 guidelines. See In re Taxman Clothing Co., 49 F.3d at 314–16 (holding that the
bankruptcy court abused its discretion in granting a fee award to an attorney whose
preference action did not have a reasonable likelihood of benefiting the estate).
6 See In re Kohl, 95 F.3d 713, 714 (8th Cir. 1996) (“[A]n attorney fee application in
bankruptcy will be denied to the extent the services rendered were for the benefit of the
debtor and did not benefit the estate.” (quoting In re Reed, 890 F.2d 104, 106 (8th Cir. 1989));
In re Lederman Enters., Inc., 997 F.2d 1321, 1323 (10th Cir. 1993) (“An element of whether
the services were ‘necessary’ is whether they benefited the bankruptcy estate.”); Grant v.
George Schumann Tire & Battery Co., 908 F.2d 874, 882–83 (11th Cir. 1990) (interpreting
pre-1994 § 330 as requiring that attorney’s appeal bring a benefit to the estate).
7 We note that courts within our own Circuit have applied Pro–Snax unevenly. See,
e.g., In re Broughton Ltd. P’ship, 474 B.R. 206, 209 n.5 (Bankr. N.D. Tex. 2012) (collecting
cases and observing that “[l]ower courts have adopted differing views of what type of
retrospective analysis should be employed and have disagreed whether a prospective analysis
may be considered in determining whether Pro–Snax is satisfied”).
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and Ninth Circuits. As explained above, the text and legislative history of
§ 330 contemplate a prospective standard for the award of attorney’s fees
relating to bankruptcy proceedings—one that looks to the necessity or
reasonableness of legal services at the time they were rendered. Under this
framework, if a fee applicant establishes that its services were “necessary to
the administration” of a bankruptcy case or “reasonably likely to benefit” the
bankruptcy estate “at the time at which [they were] rendered,” see 11 U.S.C.
§ 330(a)(3)(C), (4)(A), then the services are compensable.
In assessing the likelihood that legal services would benefit the estate,
courts adhering to a prospective standard ordinarily consider, among other
factors, the probability of success at the time the services were rendered, the
reasonable costs of pursuing the action, what services a reasonable lawyer or
legal firm would have performed in the same circumstances, whether the
attorney’s services could have been rendered by the Trustee and his or her
staff, and any potential benefits to the estate (rather than to the individual
debtor). See, e.g., In re Strand, 375 F.3d 854, 860–61 (9th Cir. 2004); In re Top
Grade Sausage, Inc., 227 F.3d at 132; In re Ames Dep’t Stores, Inc., 76 F.3d at
72; In re Taxman Clothing Co., 49 F.3d at 313–15. 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 . . . .” (emphasis added)); In re Smith, 317 F.3d at 926; In re Top Grade
Sausage, Inc., 227 F.3d at 132; In re Ames Dep’t Stores, Inc., 76 F.3d at 71; cf.
Johnson, 488 F.2d at 718 (instructing courts to consider “the results obtained”
by an attorney seeking compensation); see also In re Pilgrim’s Pride Corp., 690
F.3d 650, 656 (5th Cir. 2012) (affirming the continued relevance of the Johnson
factors).
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Insofar as Pro–Snax precludes resort to this prospective analysis, we
overrule those portions of the opinion. We recognize, however, that Pro–Snax’s
principal holding remains valid, and we observe that our ruling today is not
intended to limit courts’ broad discretion to award or curtail attorney’s fees
under § 330, “taking into account all relevant factors,” 11 U.S.C. § 330(a)(3).
Having articulated a new standard, we now must decide whether remand is
warranted in order for the bankruptcy court to assess B & N’s attorney’s-fee
application under the appropriate standard.
B. The Need for Remand to Analyze B & N’s Attorney’s-Fee Request
We review a bankruptcy court’s fee determination for abuse of discretion,
and remand is warranted when the bankruptcy court “(1) applies an improper
legal standard or follows improper procedures in calculating the fee award, or
(2) rests its decision on findings of fact that are clearly erroneous.” Cahill, 428
F.3d at 539.
B & N asserts that remand is compulsory because the bankruptcy court
premised its findings of fact and conclusions of law on Pro–Snax’s now-
erroneous “material benefit” standard. Both Texas Skyline and the U.S.
Trustee counter that remand is unnecessary because this Court can affirm the
district court’s ruling on any ground supported by the record, e.g., Zuspann v.
Brown, 60 F.3d 1156, 1160 (5th Cir. 1995), and because there is “no reasonable
possibility that the outcome would be different” on remand, Sims v. ANR
Freight Sys., Inc., 77 F.3d 846, 849 (5th Cir. 1996) (citing Joshi v. Fla. State
Univ. Health Ctr., 763 F.2d 1227, 1236 (11th Cir. 1985)). The U.S. Trustee
points out that when the bankruptcy court denied B & N’s motion to certify the
matter for direct appeal, it indicated that the case was “not a good candidate”
because the disposition would be the same “whether you don’t or you do apply
the results oriented component of Pro–Snax.” But although the bankruptcy
court stated its impression that the outcome would be the same under either
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standard, it did not conduct its analysis with an eye toward the prospective
inquiry whether the services were “reasonable at the time” they were rendered.
Cf. In re Missionary Baptist Found. of Am., Inc., 712 F.2d 206, 211, 213 (5th
Cir. 1983) (remanding where the bankruptcy court failed to set forth findings
of fact and conclusions of law under each element of the relevant test). In the
absence of findings of fact premised on a prospective rule, we cannot say with
certainty that there is “no reasonable possibility that the outcome would be
different” on remand, Sims, 77 F.3d at 849.
Because our opinion today announces a new legal rule, and out of an
abundance of caution given the complex facts of the case before us, we remand
this matter for the bankruptcy court to evaluate whether B & N is entitled to
fees under the prospective, “reasonable at the time” standard.
IV. CONCLUSION
For the foregoing reasons, we overrule Pro–Snax’s attorney’s-fee
standard and join our colleagues in the Second, Third, and Ninth Circuits in
prescribing a prospective, “reasonable at the time” standard for the award of
attorney’s fees in a Chapter 11 bankruptcy proceeding. We therefore VACATE
the award of attorney’s fees and REMAND this matter to the district court. We
further direct the district court to remand to the bankruptcy court to apply the
newly announced standard to the facts of this case. 8
8 In light of the extensive record and in the interest of judicial economy, we leave it in
the sound discretion of the bankruptcy court whether it can decide this question on the
existing record or whether further factual development is warranted.
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E. GRADY JOLLY, Circuit Judge, specially concurring:
I concur in Judge Prado’s thorough and comprehensive writing and write
separately only to synthesize the legal standard that we now adopt:
A bankruptcy court’s analysis of attorney fee awards ordinarily
should begin and end by applying the statutory language in 11
U.S.C. § 330. This analysis usually can be reduced as follows: (1)
a court is permitted, but not required, to award fees under § 330
for services that could reasonably be expected to provide an
identifiable, material benefit to the estate at the time those
services were performed (or contributed to the administration of
the estate); and (2) courts may consider all other relevant equitable
factors, as stated in § 330(a)(3), including as one of those factors,
when appropriate, whether a professional service contributes to a
successful outcome.
Our opinion today does not require a bankruptcy court to award fees for
any service that can be characterized as reasonable as of the time it was
performed, as the bankruptcy courts remain restricted by the terms of § 330,
which require compensable services to be both “actual” and “necessary.” 11
U.S.C. § 330(a)(1)(A). Thus, a bankruptcy court evaluating the prospective
reasonableness of an attorney’s litigation strategy should consider whether the
services were targeted to obtain an identifiable, material benefit. An
identifiable benefit distinguishes an actual benefit from a speculative one, and
a material benefit distinguishes a necessary benefit from an irrelevant one.
Because I read Judge Prado’s writing to endorse these views, I am
pleased to concur in his fine opinion.
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