Recently, I pointed to a case where a law firm got tripped up on language in a retention order stating “compensation will be [insert approved terms], or as otherwise may be allowed by the Court upon proper application thereof.” See In re Toohey, 2005 WL 2850417 (Bankr. W.D. Ky., 10/27/05).
Along these lines, the 10th Circuit in In re Commercial Financial Services, Inc.,, (2005 WL 274669) (10th Cir., 10/25/05), cut a $1.9 million fee request by Houlihan, Lokey, Howard & Zukin Capital (“Houlihan”). Here, among other things, the Court focused 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.
The case provides a rare glimpse into high-stakes contested fee hearings, with the Court noting:

In its brief, Houlihan goes to great pains to distinguish the quality and nature of its work from all of the other financial advisors present in the case in an apparent effort to demonstrate that its employees were of an entirely superior class and should not be compared with the other financial advisors [like DSI, Intecap, Policano, and ABS LLC]…. Even if we were to assume Houlihan was more skilled than the other financial advisors in this case, we note the bankruptcy court awarded Houlihan’s employees a fee at the “high end” of the pay scale for comparable financial advisors. Houlihan, however, has provided no legitimate basis for concluding it is a categorically superior financial firm.

Significant chunks of the Court’s opinion follow for those interested in the juicy details supporting this judicial slam:

At the hearing, Houlihan provided testimony that it was not its custom to bill on an hourly basis. In addition, it maintained that its services were not comparable to the other professionals in this case because (1) Houlihan did not consider them competitors with equivalent marketplace value and (2) the other professionals “provided bits and pieces of services that Houlihan provided all of.”
[I]n its final order, the bankruptcy court found Houlihan’s requested fees unreasonable under 11 U.S.C. § 330 and instead awarded it a total of $904,000…. In determining a reasonable fee, the bankruptcy court initially assessed the number of hours worked by the various Houlihan professionals in each period, irrespective of the varying difficulty of the work. The court then compared the experience of the Houlihan professionals to that of the other professionals, InteCap, Policano, ABS LLC, and DSI, who were retained in the case and noted the hourly fees charged by the other professionals in this case. The court also determined the rates for less experienced professionals comparable to Houlihan’s younger associates… The court next examined Houlihan’s rates in previous cases and pointed out that, in those cases, Houlihan’s senior employees had earned between $356 to $409 averaged hourly rates. Based on its independent examination of the record, the court determined that the individual rates for Houlihan’s professional employees should be: $400 an hour (Mr. Kramer); $390 an hour (Mr. Hilty); $300 an hour (Ms. Aalto); $275 an hour (Mr. Mooney) [a significant reduction from their “normal hourly rates”]. The respective hourly rates multiplied by the actual hours worked by each individual amounted to the total fee of $904,000 awarded by the bankruptcy court….


The award of professional fees in bankruptcy cases is governed by 11 U.S.C. § 330…. Houlihan insists the bankruptcy court erred in rejecting its request for normal marketplace compensation and imposing compensation based on an hourly rate. Houlihan argues: (1) 11 U.S.C. § 330’s language and case law do not require professionals to be compensated on an hourly basis; (2) Houlihan’s monthly rate constituted compensation at a market rate which bankruptcy courts are obliged to follow, and; (3) the bankruptcy court unfairly changed Houlihan’s rates from what the court initially authorized. In addition, Houlihan argues the bankruptcy court erred by comparing the rate of other professionals involved in the bankruptcy proceeding because Houlihan’s services were uniquely applied to this complex matter.

A. The Bankruptcy Court Used Hours to Evaluate the Reasonableness of Houlihan’s Requested Fee

Houlihan argues its rates are reasonable because measuring time on a monthly basis is common marketplace practice. Houlihan’s market-based argument confuses acceptable billing methods with whether the rate used under such methods is reasonable. While it may be true that other firms involved in bankruptcy cases bill on a monthly rate, that does not inform the reasonableness inquiry. To answer that question, a bankruptcy court must ask, among other things, how much time a professional firm spent on a case to earn the fee. Without some method of comparison between monthly fees billed in various cases, such as time spent on a project, a bankruptcy court will be consigned to approving any monthly fee plucked out of “the marketplace.” Houlihan provided no basis for comparison, [FN6] so the bankruptcy court had to create its own based on hours worked. To merely copy monthly billing rates from competitors in unrelated proceedings invites a finding of reasonableness simply because their monthly billing system is common, even though those firms might actually have committed a substantially divergent amount of resources to the case. We decline to allow billing at a monthly rate to be an automatic insulator from the reasonableness inquiry. Nor is Houlihan’s mantra of the “the marketplace” sufficient to preclude a bankruptcy court from using a constructive hourly rate to compare divergent fees in multiple unrelated proceedings.

[FN 6] As the bankruptcy court pointed out, “Houlihan [ ] failed to establish that the services rendered in those [previous] matters were comparable to the services it rendered in this case.”

Based on the statutory language alone, under 11 U.S.C. § 330(a)(3), a bankruptcy court is directed to consider at least five factors, among which four either explicitly or implicitly direct a bankruptcy court to examine the amount of time spent on a project. The statute does not specify the unit of time to be used, but hours appear to be a useful measure for comparison with other professionals’ services, for determining a rate, and especially for evaluating whether the actual amount of time spent was reasonable. Houlihan concedes that during some months it spent very little time on the case but still billed at the monthly rate. Thus, using a monthly time frame as the only basis for determining fees obscures the actual amount of effort devoted to the case. The lack of any case law requiring a bankruptcy court to evaluate professional fees on an hourly basis does not foreclose the court’s discretionary ability to do so. Houlihan’s repeated statements that the purpose of the statute was to create flexibility in fee determinations only supports the bankruptcy court’s actions rather than proscribing them.
It is important to make two additional observations. First, the record clearly demonstrates Houlihan knew and acknowledged its proposed monthly fee contract was only a proposal and was subject to the fee procedures articulated by the bankruptcy court. This included the bankruptcy court’s orders requiring Houlihan to record the number of hours it worked. Moreover, the bankruptcy court specifically reserved its final determination of the reasonableness of requested fees. In fact, at the hearing on March 9, 1999, held to address the other parties’ objections to Houlihan’s fee arrangement, Mr. Kramer testified he understood Houlihan’s fees were “subject to the approval of the Court … as to the relative fairness or whatever the exact standard is.” Thus, Houlihan’s claims that the bankruptcy court impermissibly changed the terms of its compensation and “violated all notions of fundamental fairness” by imposing an hourly compensation standard after Houlihan had completed its work are without merit. Similarly, its assertions that no party objected to its proposed rates during the pendency of the bankruptcy proceedings ignore the repeated statements of the UCL Trust that the reasonableness of the proposed fee would be determined by the court when the appropriate time came.
Second, even though Houlihan frames the issues as legal questions throughout its brief, it continually invites this Court to evaluate the discretionary determination of whether its proposed fees were in fact reasonable. Houlihan frequently references the undisputed evidence about the high quality of its complicated and unique work which adheres more to the question of reasonableness than to whether the bankruptcy court was authorized under the statute to consider a constructive hourly rate. We decline Houlihan’s implicit invitation. The bankruptcy court did not overstep its powers under § 330(a) by requiring Houlihan to keep track of its hours.
B. The Bankruptcy Court’s Power to Determine Comparative Fees
Houlihan further argues that the court erred in imposing an improper effective hourly rate because it (1) ignored evidence of Houlihan’s prior effective hourly rates charged in bankruptcy cases and (2) compared Houlihan’s services to other financial professionals involved in the case.
If a bankruptcy court determines a proposed fee is unreasonable, it may “award compensation that is less than the amount of compensation that is requested.” 11 U.S.C. § 330(a)(2). In determining the new amount, the bankruptcy court looks to the factors in 11 U.S.C. § 330(a). Ordinarily, the statute requires bankruptcy courts to look at “the customary compensation charged by comparably skilled practitioners in cases other than cases under this title.” 11 U.S.C. § 330(a)(1)(E).
Despite its protests, Houlihan eventually provided the bankruptcy court with fees from prior bankruptcy proceedings in which it was required to keep time records. The bankruptcy court used this evidence to calculate Houlihan’s effective hourly rate in prior bankruptcy proceedings as $262 to $3,271 an hour, with an average rate of $1,371 an hour. Houlihan argues that because the effective hourly rate requested in this case was only $751 an hour, 44% less than its average in other bankruptcy proceedings, the requested fee was reasonable on an hourly basis.
However, the $1,371 an hour average rate determined by the court and relied upon by Houlihan as a point of comparison includes success or transaction fees. The bankruptcy court also calculated the effective hourly rate for Houlihan’s prior engagements excluding transaction fees and derived an average blended hourly rate of $409 an hour. Additionally, the bankruptcy court examined a subset of six cases where no transaction fee was awarded and derived an average fee of $356. On appeal, Houlihan argues that the bankruptcy court’s calculation of Houlihan’s effective hourly rate from six prior engagements is flawed because it fails to account for the absence of a transaction fee in those cases. Houlihan argues, “in this engagement, Houlihan Lokey not only had the right to seek a transaction fee, but it was specifically contemplated that Houlihan Lokey would be seeking such an incentive fee. To the contrary, in the six engagements referred to by the Bankruptcy court, a success or transaction fee was not available to Houlihan Lokey, and thus not part of the available compensation package.”
In light of the record, Houlihan’s argument is puzzling. According to Richard Chesley, Houlihan’s general counsel, chief legal officer and a senior vice president in the financial restructuring group, [and Jones, Day partner] Houlihan chose not to seek a transaction fee in this case. This makes the present case more analogous to the six non-transaction fee cases used by the bankruptcy court to calculate Houlihan’s effective hourly rate, not less. The theoretical availability of a transaction fee in this case is an insufficient basis to distinguish the prior six cases for the obvious reason that the transaction fee was not actually requested. Additionally, the rate imposed by the bankruptcy court ($353.32 an hour) was within the range established by Houlihan’s evidence ($262 to $1,371 an hour), not far from the average in all cases excluding transaction fees ($409 an hour), and was right at the average rate charged in other non-transaction fee cases ($356 an hour). Finally, and most importantly, there is nothing in the statute that requires the bankruptcy court to award success or transaction fees or to account for them in the calculation of a reasonable fee. In light of this, we cannot say the bankruptcy court impermissibly ignored Houlihan’s proffered evidence of its prior bankruptcy case rates.
Additionally, the bankruptcy court looked to the other financial advisors in the case who were working for the unsecured creditors. Specifically, the bankruptcy court looked at the rates charged by other financial firms in the case, namely, InteCap, Policano, ABS LLC, and DSI. In any event, the court was apparently placed in this position because Houlihan was unable to provide the court any useful information concerning hourly rates Houlihan charged for other financial work outside of Chapter 11 proceedings.
In its brief, Houlihan goes to great pains to distinguish the quality and nature of its work from all of the other financial advisors present in the case in an apparent effort to demonstrate that its employees were of an entirely superior class and should not be compared with the other financial advisors. [FN9] The principle distinction Houlihan attempts to create comes from its routine request for monthly, as opposed to hourly, fees and that the functions performed by each were not identical. [FN10]

[FN9] Houlihan calls the court’s comparison of its services to the other financial advisors in the case an “overly simplistic and arcane ‘apples to oranges’ approach” that is “unsupported by the applicable law or the factual record.”
[FN10] Thus, Houlihan argues DSI provides day-to-day managing of bankrupt companies, Policano is essentially an accounting firm that does not do valuations, Intecap primarily provides litigation support including evaluations of third party claims, and ABS provided only specialized and “highly discrete” financial analysis.

Houlihan’s efforts are unconvincing primarily because the statute only requires “comparably skilled practitioners,” 11 U.S.C. § 330(a)(1)(E), not identically skilled or functionally equivalent ones. The professionals the bankruptcy court used as comparisons to Houlihan were also financial advisers, who Houlihan concedes are “highly competent and qualified.” [FN11] Moreover, the bankruptcy court focused on the educational background and professional experience of all financial advisors in this case. To the extent Houlihan provided more services than the other financial professionals it was compensated by receiving more hours of billable time. Thus, because the statute only requires looking at the comparable skill of the financial advisers and not exact functional equivalence, it was proper for the court to compare all financial advisors.

[FN11] Nevertheless, Houlihan calls the comparison a “vacant conclusion that their services were substantially comparable.”

Houlihan attempts to distinguish the other financial advisors based on the fact they charge hourly rates, as opposed to Houlihan’s method of monthly billing, and that the other advisors were not employed for the entire duration of the proceedings. Both arguments fail. As we have already pointed out, Houlihan’s differentiation in this case between monthly and hourly billing methods is untenable and does not insulate it from comparison to other firms. Moreover, the difference in the amount of time spent on the case between Houlihan and the other financial advisors is reflected in the total amount of money received, not the rate at which the advisor bills. Finally, even if we were to assume Houlihan was more skilled than the other financial advisors in this case, we note the bankruptcy court awarded Houlihan’s employees a fee at the “high end” of the pay scale for comparable financial advisors. Houlihan, however, has provided no legitimate basis for concluding it is a categorically superior financial firm.

Steve Jakubowski

Hat tip to Ryan Zeller

© Steve Jakubowski 2005