Pongetti v. Barron

IN THE UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

_____________________

No. 99-60833
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In The Matter Of: REBECCA MITCHELL BARRON

Debtor

-------------------------

CYNTHIA DANIELS

Appellant

v.

REBECCA MITCHELL BARRON; JOHN A BARRON; CHARLES EASLEY

Appellees

_________________________________________________________________

Appeal from the United States District Court
for the Northern District of Mississippi
_________________________________________________________________
August 28, 2000

Before KING, Chief Judge, and PARKER, Circuit Judge, and
FURGESON*, District Judge.

KING, Chief Judge:

Attorney Cynthia Daniels seeks review of a district court

order affirming a bankruptcy court order approving her

compensation in an amount less than that prayed for in her

*
District Judge of the Western District of Texas, sitting
by designation.
application for compensation. For the reasons that follow, we

reverse and remand.

I. FACTUAL AND PROCEDURAL BACKGROUND

Rebecca Mitchell Barron and John Barron were divorced in

1994. Under the terms of their separation agreement, Mrs. Barron

conveyed her interest in five tracts of real property to Mr.

Barron. As part of the same agreement, Mr. Barron was to make

four installment payments to Mrs. Barron totaling $210,000. Mr.

Barron paid the first installment of $50,000, but failed to make

any subsequent payments.

In February 1995, the Barrons remarried. Mr. Barron did not

re-deed any interest in the five properties to Mrs. Barron. Mrs.

Barron, however, forgave the balance of the $210,000 owed her

under the separation agreement. Shortly thereafter, she filed a

voluntary Chapter 7 bankruptcy case.

In September 1995, the Chapter 7 trustee (the “Trustee”)

filed an application seeking the appointment of Daniels as

Attorney for the Trustee. The application stated that Daniels

was “willing to work on a one-third (1/3) contingency basis of

the amount recovered in the filing of any preferential and/or

fraudulent complaints, if warranted.” Application For Employment

of Attorney Specially, filed Sept. 28, 1995, at 1, In re Barron,

No. 95-10538 (Bankr. N.D. Miss.). Both Randolph Lipscomb, Mrs.

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Barron’s divorce attorney and a creditor of the Chapter 7 estate,

and Mrs. Barron filed objections to the application. At a

hearing on the Trustee’s application to employ Daniels,1

Lipscomb’s attorney argued that appointment was premature because

this was likely an easy case that would simply require Daniels to

make a demand for the sums due under the settlement agreement.

Also, the attorney drew to the court’s attention the extent of

the debt owed to Mrs. Barron under the settlement agreement. See

Transcript of Hearing, Nov. 17, 1995, at 5, In re Barron, No. 95-

10538 (Bankr. N.D. Miss.) (“[I]f the court will look to page four

which is paragraph 8A in the separation agreement, part of a

court order approving divorce, and it provides for two hundred 10

thousand [sic] dollars in lump sum alimony, the money in four

scheduled payments, the first of which was [due on] June 22,

1994, the second June 22, 95, [sic] the third installment in 1996

and the 4th in 97 [sic].”). In November 1995, the bankruptcy

court approved the Trustee’s application, conditioning approval

of Daniel’s contingency fee upon an actual suit being filed

against Mr. Barron following filing of a demand letter.2

1
Mrs. Barron withdrew her objection prior to the hearing.
2
The bankruptcy court found that there was an “extreme
likelihood of litigation in this matter at some point in time,”
but expressed no view on the expected length or difficulty of any
such litigation. In re Barron, No. 95-10538 (Bankr. N.D. Miss.
Nov. 30, 1995) (Order Approving Employment of Attorney
Specially).

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 In March 1996, Daniels, acting on behalf of the Trustee,

filed a complaint against Mr. Barron. In April 1997, she moved

for summary judgment. After Mr. Barron filed a responsive

pleading, the bankruptcy court held a telephonic hearing, during

which it informed the parties that the terms of the separation

agreement remained in effect even after the Barrons’ remarriage.

Accordingly, in August 1997, the court granted judgment against

Mr. Barron in the amount of $160,000, the amount owed Mrs. Barron

under the separation agreement.

Daniels then filed an application for compensation seeking

$53,333.33, one-third of the recovery. Objections were filed by

the Barrons and a creditor who objected to payment of Daniels’s

fee in priority to his claim. The bankruptcy court held a

hearing, at the conclusion of which Daniels was asked to prepare

an itemization of her charges. In November 1997, the bankruptcy

court entered an order approving compensation for Daniels in the

amount of $24,431.25 with an additional expense allowance of

$2,500.00. In an accompanying opinion, the bankruptcy court

concluded that its approval of the contingency fee had been

improvident. Daniels appealed from this order to the district

court. The district court affirmed, and Daniels filed this

timely appeal.

II. DISCUSSION

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 A bankruptcy court’s determination of attorney’s fees is

reviewed for abuse of discretion. See In re Fender, 12 F.3d 480,

487 (5th Cir. 1994). “‘The abuse of discretion standard includes

review to determine that the discretion was not guided by

erroneous legal conclusions.’” In re Coastal Plains, Inc., 179

F.3d 197, 205 (5th Cir. 1999) (quoting Koon v. United States, 518

U.S. 81, 100 (1996)) (alteration in original). “The bankruptcy

court’s conclusions of law are reviewed de novo.” In re Texas

Securities, Inc., No. 99-11012, 2000 WL 955621, at *2 (5th Cir.

Jul. 7, 2000).

Section 328 of the Bankruptcy Code allows an attorney

seeking to represent a bankruptcy estate to obtain prior court

approval of her compensation plan. See 11 U.S.C. § 328(a) (“The

trustee . . . may employ or authorize the employment of a

professional person under section 327 or 1103 of this title . . .

on any reasonable terms and conditions of employment, including

on a retainer, on an hourly basis, or on a contingent fee

basis.”); In re National Gypsum Co., 123 F.3d 861, 862 (5th Cir.

1997) (“Under present § 328 the professional may avoid . . .

uncertainty by obtaining court approval of compensation agreed to

with the trustee (or debtor or committee).”). Under § 328, once

a compensation plan has received bankruptcy court approval, “the

court may allow compensation different from the compensation

provided under such terms and conditions after the conclusion of

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such employment, if 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.” 11 U.S.C. § 328(a) (emphasis added).

On appeal, Daniels argues that the bankruptcy court erred in

modifying her pre-approved compensation plan absent a proper

finding to support a conclusion that the contingency fee was

“improvident in light of developments not capable of being

anticipated at the time of the fixing of such terms and

conditions.” Id. In its opinion on the matter, the bankruptcy

court stated its understanding of the applicable law as follows:

The law, applicable to the issue now before this court,
has been clearly delineated by the Fifth Circuit Court of
Appeals in Matter of Nat. Gypsum Co., 123 F.2d 861 (5th Cir.
1997) decided October 8, 1997. Judge Reavley, writing for
the court, stated the following:

Prior to 1978 the most able professionals were
often unwilling to work for bankruptcy estates where
their compensation would be subject to the
uncertainties of what a judge thought the work was
worth after it had been done. [Footnote omitted] That
uncertainty continues under the present § 330 of the
Bankruptcy Code, which provides that the court award to
professional consultants "reasonable compensation"
based on relevant factors of time and comparable costs,
etc. Under present § 328 the professional may avoid
that uncertainty by obtaining court approval of
compensation agreed to with the trustee (or debtor or
committee). Thereafter, that approved compensation
may be changed only for the following reason:
"Notwithstanding such terms and conditions, the court
may allow compensation different from the compensation
provided under such terms and conditions after the
conclusion of such employment, if 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."

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 The court must therefore set the compensation
award either according to § 328 or § 330. If prior
approval is given to a certain compensation, § 328
controls and the court starts with that approved
compensation, modifying it only for developments
unforeseen when originally approved. If the most
competent professionals are to be available for
complicated capital restructuring and the development
of successful corporate reorganization, they must know
what they will receive for their expertise and
commitment. Courts must protect those agreements and
expectations, once found to be acceptable.

In re Barron, No. 95-10538, at 6 (Bankr. N.D. Miss. Nov. 4, 1997)

(quoting National Gypsum, 123 F.3d at 862-63) (emphasis added).

It is obvious from the bankruptcy court’s discussion in its

opinion that it relied on our statement in National Gypsum that

approved compensation could be modified for “developments

unforeseen when originally approved.” The bankruptcy court

stated:

At the time of the approval of the contingency fee
arrangement, the court did not anticipate the substantial
amount of the subsequent recovery resulting from the
fraudulent conveyance cause of action against Mr.
Barron. . . .

The fraudulent conveyance suit never went to trial.
Once the court reviewed the motion for summary judgment
filed on behalf of the trustee, the outcome was easily
determined . . . .

. . . .

Speaking in sports parlance, this adversary proceeding
became a “slam dunk.” It was not perceived as such when the
contingency fee application was approved.

Id. at 7-8. In doing so, the bankruptcy court applied the

incorrect legal standard.

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 Although both National Gypsum and Texas Securities, which

cites National Gypsum, involved a challenge to the bankruptcy

court’s determination of the appropriate amount of compensation

to award an attorney, each of those cases turned on the question

of whether the bankruptcy court had erred by applying § 330

rather than § 328. In neither case were we required to construe

§ 328 or determine whether developments relied upon by the

bankruptcy court were of the type contemplated by the provision.

Our mention in both cases of “developments unforeseen” was simply

a shorthand reference to the appropriate standard set forth in

the statute: a bankruptcy court may only depart from a

compensation scheme approved under § 328(a) “if 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. 11 U.S.C. § 328(a)

(emphasis added); see also In re Reimers, 972 F.2d 1127, 1128

(9th Cir. 1992). The bankruptcy court here should have relied

upon the plain language of the statute rather than our shorthand

reference to it. It is not enough that the developments were

simply unforeseen. We leave to the bankruptcy court the task of

applying the correct legal standard in the first instance.

III. CONCLUSION

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 For the foregoing reasons, we REVERSE the district court’s

affirmance of the bankruptcy court’s order and REMAND for further

proceedings consistent with this opinion.

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