In a recent post, I noted the recent 10th Circuit case of In re Commercial Financial Services, Inc., 427 F.3d 804 (10th Cir., 10/25/05). In that case, the 10th Circuit cut a $1.9 million fee request by Houlihan, Lokey, Howard & Zukin Capital (“Houlihan”) by over $1 million. The 10th Circuit focused, among other things, on boilerplate-type language in the retention application stating that Houlihan’s fee request would be “[s]ubject to the approval of the court” as well as to “final review by the Bankruptcy court as to the relative fairness” of the proposed fee. In essence, the 10th Circuit adopted the “reasonable” standard of Bankruptcy Code section 330(a) in reviewing the appropriateness of Houlihan’s monthly fixed fee request.
Last week, in Houlihan, Lokey v. NorthWestern Corp. (In re NorthWestern Corp.), 2005 WL 3018590 (D. Del., 11/8/05), Judge Farnan for the District Court for the District of Delaware affirmed in part and reversed in part a fee order of the bankruptcy court, holding that since the Bankruptcy Court had already approved Houlihan’s $175,000 monthly fee as “reasonable” in Houlihan’s retention order, the Bankruptcy Court erred by applying the “reasonable” standard of Bankruptcy Code section 330(a) instead of the “improvident” standard of Bankruptcy Code section 328(a). Under this standard, the Court noted, “only ‘developments not capable of being anticipated at the time of the fixing of [the] terms and conditions’ of engagement may render a previously approved term improvident.”
Additionally, in allowing the fixed monthly fees, the District Court found that the potential for duplication of services by Houlihan and Lazard Freres (the Debtor’s financial advisor), which the Bankruptcy Court had found “could not have been foreseen … at the time it approved the Committee’s application,” was a “clearly erroneous” finding of fact because “whether or not those services were inappropriately duplicative, the potential for duplication was certainly not unforeseeable.”
The crux of the District Court’s analysis in reversing the Bankruptcy Court’s decision regarding the standard of review applicable to a monthly fixed fee retention agreement is provided below:


BACKGROUND

Houlihan’s final fee application requested payment of monthly fees totaling $2,275,000.00 for thirteen months of work at the approved rate of $175,000 per month, a transaction fee of $2,018,750.00, and reimbursement of actual, necessary expenses of $108,541.42. On February 10, 2005, and April 5, 2005, the Bankruptcy Court held hearings on Houlihan’s final fee application. No objection was raised to the final fee application by any party, including the fee auditor or the United States Trustee. On May 5, 2005, the Bankruptcy Court issued the Fee Order and an accompanying Memorandum Opinion (the “Opinion”), In re Northwestern Corp., 325 B.R. 346 (Bankr. D. Del. 2005). The Fee Order awarded Houlihan the full transaction fee, but reduced the monthly fee by 50% to a total of $1,137,500.00 and the amount requested for reimbursement of actual, necessary expenses to $93,109.40….

DISCUSSION
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II. The Parties’ Contentions

Houlihan contends that the Bankruptcy Court abused its discretion in two ways: first, by applying an improper legal standard by reviewing the terms and conditions of Houlihan’s engagement pursuant to § 330(a) of the Bankruptcy Code; and second, by erroneously finding that duplication of services by Houlihan and Lazard Freres & Co. LLC (“Lazard”), NorthWestern’s financial advisor, rendered Houlihan’s monthly fee improvident within the meaning of § 328(a) of the Bankruptcy Code. In response, NorthWestern filed an Answering Brief (D.I.10) in which it indicated agreement with the Bankruptcy Court’s Fee Order and Opinion, but offered no argument of its own.

III. Whether The Bankruptcy Court Abused Its Discretion By Reviewing Houlihan’s Fee Under § 330(a) Of The Bankruptcy Code

Section 330(a) of the Bankruptcy Code allows a court to award less than the total amount of compensation requested by a professional for work performed in connection with a bankruptcy proceeding. 11 U.S.C. § 330(a)(2). In determining the appropriate amount of compensation under § 330(a), a court must conduct an analysis based on reasonableness. 11 U.S.C. § 330(a)(3). However, once the Bankruptcy Court has determined that the terms and conditions of a professional’s compensation are reasonable, it may thereafter reduce that compensation only if it determines, under § 328(a), that “such terms and conditions prove to have been improvident in light of developments not capable of being anticipated at the time of the fixing of such terms and conditions.” In re Federal Mogul-Global Inc., 348 F.3d 390, 397 (3d Cir. 2003).
Here, the Bankruptcy Court, in the Retention Order, had determined that the terms of the Engagement Letter were reasonable, including the term that fixed Houlihan’s monthly fee at $175,000. Therefore, in reviewing Houlihan’s final fee application, the Bankruptcy Court was constrained to apply only the legal standard of § 328(a). The Court concludes that, to the extent that the Bankruptcy Court based its decision to reduce Houlihan’s monthly fee on a reasonableness analysis under § 330(a), it applied an improper legal standard and thus, abused its discretion.

IV. Whether The Bankruptcy Court Abused Its Discretion By Finding That Houlihan’s Monthly Fee Was Improvident Within The Meaning of § 328(a) Of The Bankruptcy Code

Although the Bankruptcy Court’s Opinion contains an extensive discussion of the reasonableness of Houlihan’s compensation, its conclusion appears to be based primarily on a finding that duplication of services by Lazard and Houlihan rendered Houlihan’s previously approved monthly fee improvident within the meaning of § 328(a). See In re NorthWestern, 325 B.R. at 353-54.
Under § 328(a), only “developments not capable of being anticipated at the time of the fixing of [the] terms and conditions” of engagement may render a previously approved term improvident. 11 U.S.C. § 328(a). To support its finding of improvidence under § 328(a), the Bankruptcy Court found that the duplication of services by Lazard and Houlihan could not have been foreseen by the Bankruptcy Court at the time it approved the Committee’s application to retain Houlihan. Id. at 354. However, as the Bankruptcy Court pointed out in its Opinion, the duplicative services that concerned it were clearly set forth in the respective engagement agreements of the two firms. Id. at 351. Thus, whether or not those services were inappropriately duplicative, the potential for duplication was certainly not unforeseeable. The Court concludes, therefore, that the Bankruptcy Court abused its discretion by basing its reduction of Houlihan’s monthly fee on a clearly erroneous finding of fact.
The Bankruptcy Court did not explain its decision to award reimbursement of actual, necessary expenses of $93,109.40 rather than the $108,541.52 requested by Houlihan. However, Houlihan does not dispute that reduction, so the Court will affirm that portion of the Bankruptcy Court’s award. Finally the Court concludes that the Bankruptcy Court did not abuse its discretion in awarding Houlihan a transaction fee of $2,018,750.00.

CONCLUSION

Having found that the Bankruptcy Court abused its discretion in reducing Houlihan’s monthly fee, the Court will reverse the Fee Order of the Bankruptcy Court and approve Houlihan’s final fee application for monthly fees totaling $2,275,000.00. The Court will affirm the Bankruptcy Court’s award of a transaction fee of $2,018,750.00 and reimbursement of actual, necessary expenses of $93,109.40.

© Steve Jakubowski 2005