Results May be a Relevant Factor to Awards of Bankruptcy Professional Compensation, Says Sixth Circuit in In re Village Apothecary, Inc.

By Uzzi O. Raanan

When deciding what is “reasonable compensation” to award to bankruptcy professionals, including trustees and their counsel, can courts consider the ultimate “results obtained” by the professionals as one of the lodestar factors, even though this factor is not specifically included among the factors enumerated in 11 U.S.C. § 330(a)(3)?  The Sixth Circuit Court of Appeals recently answered this question in the affirmative.  See In re Village Apothecary, Inc., 2022 WL 3365131 (2022).  To read the full opinion, click here.

In Village Apothecary, the debtor’s chapter 7 trustee retained special counsel (the “Firm”) to investigate and pursue potential legal claims worth at least $1,655,962.  After a year-long investigation, the Firm identified possible claims against the debtor’s former president.  The Firm drafted a complaint but ultimately determined 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. § 330, asking for a little over $37,000, representing 90.6% of the estate’s total assets.

The bankruptcy court approved only half of the requested fees.  It relied on various lodestar factors, balancing the “amount in controversy” with the “results obtained” by counsel, concluding that the level of success was minimal because it resulted in no distribution to the non-administrative creditors.

On appeal, the district court affirmed, disagreeing with the Firm’s argument that “results obtained” could no longer be used as a lodestar factor under section 330(a)(3).

On appeal of the district court’s decision, the Sixth Circuit Court of Appeals affirmed again.  The Sixth Circuit started out by explaining how professional fees are handled under 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 do 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 crafted 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 of 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 other 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 codified in section 330(a)(3).  Rather, courts may also consider factors not expressly enumerated 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 Sixth Circuit ultimately concluded that the bankruptcy court did not abuse its discretion by reducing the Firm’s fees by half.