IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
No. 99-11012
In The Matter Of: TEXAS SECURITIES, INC.,
Debtor
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M. BRUCE PEELE,
Appellant,
versus
JAMES CUNNINGHAM,
Appellee.
Appeal from the United States District Court
For the Northern District of Texas
July 7, 2000
Before REYNALDO G. GARZA, JOLLY, and HIGGINBOTHAM, Circuit Judges.
HIGGINBOTHAM, Circuit Judge:
M. Bruce Peele seeks review of the bankruptcy court's ruling
on his final application for fees. Because we find that the ruling
was inconsistent with 11 U.S.C. § 328(a), we REVERSE and REMAND for
the recalculation of Peele's fees.
Hill, Held, Metzger, Lofgren & Peele, P.C., ("Hill & Held")
was employed as special litigation counsel to represent the trustee
for Texas Securities, Inc. The original Employment Order, dated
April 6, 1994, provided that the law firm was to be employed on a
contingent fee basis, giving it a 40% fee for assets recovered for
the debtor Texas Securities. Peele is the successor to the law
firm. The original Employment Order did not specify whether the
fee provision was governed by 11 U.S.C. § 328 or 11 U.S.C. § 330.
On October 20, 1995, the bankruptcy court entered an order
modifying the original order that approved Hill & Held's
employment. The modifying Order provides that the Hill & Held firm
shall, consistently with the applicable provisions of the
Bankruptcy Code, including but not limited to Sections 327 and
328, submit all interim and final fee applications on the
following basis: (i) all work completed prior to September 8,
1995, shall be submitted in accordance with the April 6, 1994
Order authorizing employment of Hill & Held on a contingency
fee basis; (ii) as to all work pending as of September 8,
1995, the fees associated with said work shall be calculated
using a blended formula which Hill & Held contends represents
reasonable compensation based upon the April 6th contingency
fee arrangement for work performed prior to September 8th and
the hourly fee arrangement for work performed after September
8th; and (iii) as to all new work commenced after September
8th, Hill & Held shall submit its fee applications based upon
hourly rates in effect as of September 8, 1995.
The Order further states that it "does not modify, in any respect,
this Court's authority to review this and all employment orders in
accordance with Section 328 of the Bankruptcy Code." The only
Bankruptcy Code sections referenced in the Order are §§ 327 and
328.
When Peele submitted his final fee request, the bankruptcy
court reduced the amount from that requested by $ 40,102.32. The
bankruptcy court's order on final applications for fees, dated
March 24, 1999, states that it analyzed the fee requests in
2
accordance with the "lodestar" formula provided for by 11 U.S.C. §
330(a)(1). Peele requested contingent fees of $591,234 and hourly
fees of $69,503. He billed the hourly fees at a rate of $201.19
per hour. The bankruptcy court approved payment of $620,634.68,
without distinguishing between contingent and hourly fees and
without explaining the reason for the reduction from the amount
Peele requested.
Peele appealed the order on final applications for fees to the
district court, arguing that the bankruptcy court erred in
reviewing his fee application under 11 U.S.C. § 330 rather than §
328. The district court affirmed the bankruptcy court's ruling,
and Peele appealed that order to this court.
The bankruptcy court's conclusions of law are reviewed de
novo. See In the Matter of Pro-Snax Distributors, Inc., 157 F.3d
414, 421 (5th Cir. 1998).
Peele argues that the hourly rate for work performed after
September 8, 1995 is not subject to the lodestar formula of §
330(a). Section 328(a) provides for retainer, hourly or contingent
fee compensation, and Peele contends that the modifying Order
established that he would be compensated in part on a contingent
fee basis and in part on an hourly fee basis. Consequently, the
bankruptcy court could not shift his compensation to the lodestar
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formula of § 330. We agree.1 The modifying Order establishes a
combination of contingent fee and hourly fee compensation pursuant
to § 328(a).
We have interpreted § 328 to limit the power of the bankruptcy
court to alter the compensation of professionals: "[t]he 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." In the Matter of National Gypsum Co. v. Donaldson
Lufkin & Jenrette Securities Corp., 123 F.3d 861, 862-63 (5th Cir.
1997); see also United States v. Ruff, 99 F.3d 1559, 1567 (5th Cir.
1996)(holding that commission of business broker was fixed under §
328 where agreement was approved by court and underlying service
had been completed). Section 328 applies when the bankruptcy court
approves a particular rate or means of payment, and § 330 applies
when the court does not do so. See Unsecured Creditors' Comm. v.
Puget Sound Plywood, 924 F.2d 955, 960 (9th Cir. 1991). Once the
1
The dissent of our able colleague emphasizes the court's
stated intention in the introductory paragraph of the Order to
adopt Hill & Held's recommendation that included a "lodestar
approach" for future work. The court's Order, however, specified
an hourly rate in providing that "as to all new work commenced
after September 8th, Hill & Held shall submit its fee applications
based upon hourly rates in effect as of September 8, 1995." The
suggestion of counsel notwithstanding, the bankruptcy court ordered
the specific hourly rate in effect as of September 8, 1995, and the
court specified that the Order was entered under § 328.
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bankruptcy court has approved a rate or means of payment, such as
a contingent fee, the court cannot on the submission of the final
fee application instead approve a "reasonable" fee under § 330(a),
unless the bankruptcy court finds that the original arrangement was
improvident due to unanticipated circumstances as required by §
328(a). See National Gypsum, 123 F.3d at 862; In re Reimers, 972
F.2d 1127, 1128 (9th Cir. 1992).
In this case, the court approved a contingent fee arrangement
in the original Employment Order and in the modifying Order of
October 20, 1995 approved the contingent fee basis for work
performed prior to September 8, 1995 and an hourly rate for work
performed thereafter. The modifying Order establishes a mode of
compensation governed by § 328, and the bankruptcy court could not
alter that compensation on Peele's submission of the final fee
application without making a finding that the modifying Order was
improvident due to unanticipated circumstances. Since the
bankruptcy court made no such finding, the court could not shift
any part of Peele's compensation to the lodestar formula of §
330(a)(1).
We REVERSE and REMAND with instructions that the bankruptcy
court redetermine Peele's fees in accordance with § 328 rather than
the lodestar formula of § 330(a)(1). On remand, the court should
apply the contingent fee at the rate originally agreed to, the
blended rate described in the modifying Order, and the hourly rate
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specified in the modifying Order, which is that in effect at Hill
& Held on September 8, 1995.
REVERSED and REMANDED.
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REYNALDO G. GARZA, Circuit Judge, dissenting:
The majority reverses the district and bankruptcy courts and
remands with instructions that the bankruptcy court redetermine
Peele’s fees in accordance with § 328 rather than § 330. The
majority found that the district court should apply the contingent
fee at the rate originally agreed to, the blended rate described in
the modifying order, and the hourly rate specified in the modifying
Order. I must respectfully dissent, however, because the
bankruptcy court in the present case did not approve a specific
rate to be used in calculating fees based on the blended or hourly
method of compensation. Rather, the bankruptcy court’s Modified
Employment Order differentiated between types of compensation based
upon the date that services were performed for the bankruptcy
estate. Under the Modified Employment Order, pre-September 8
matters would be paid on a contingency fee basis, post-September 8
matters would be paid on an hourly fee basis, and matters pending
as of September 8 would be paid on either a contingent or hourly
fee basis.
The first method of compensation consisted of a 40% contingent
basis for services completed prior to September 8, 1995. The
parties would be able to calculate with certainty the amount that
Peele would be compensated based on the contingent fee arrangement,
and the bankruptcy court agreed to it. However, the bankruptcy
court and Peele did not agree on the rate to be used after
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September 8, 1995, and no such rate was included in the Order. The
Modified Employment Order does not provide a definitive hourly rate
or even a range of hourly rates.2 Under § 328, the bankruptcy
court may approve a professional’s employment based on any
“reasonable terms and conditions of employment.” 11 U.S.C. § 328.
Because the Modified Employment Order did not establish a post-
September 8 hourly rate of compensation, the bankruptcy could not
possibly have made a prior determination of the reasonableness of
the “terms and conditions of employment” or given prior approval to
the compensation requested by Peele. Thus, the bankruptcy court
and Peele did not agree that § 328 would apply to the entire final
fee application.
The Modified Employment Order states that the employment
agreement was being modified “to (i) affirm the contingency fee
arrangement with regard to completed work; (ii) pay for work-in-
progress on a contingency/hourly fee basis, plus expenses; and
(iii) pay for future work performed on behalf of the estate
utilizing the lodestar approach, plus expenses.” (emphasis added).
2
The majority concludes that the hourly rate is specified in
the Modified Employment Order as that “in effect at Hill & Held on
September 8, 1995.” (emphasis added) However, the Modified
Employment Order merely sets the hourly rate as that “in effect as
of September 8, 1995.” It is unclear to which specific rate the
Modified Employment Order refers. The majority assumes that the
rate to which the Modified Employment Order refers is that in
effect at Hill & Held, but it does not explain why. The Modified
Employment Order gives no indication that the rate in effect at
Hill & Held on September 8 had been mutually agreed upon or given
prior court approval.
9
The lodestar approach refers to a formula involving the
multiplication of the number of hours reasonably expended in a case
by the hourly compensation rate prevailing in the community for
similar work. The resulting figure is then subject to adjustment
to reflect factors such as the difficulty and quality of the
representation. In accordance with the lodestar approach, Peele’s
final fee application included an analysis of the factors to be
considered in adjusting the lodestar. If the bankruptcy court was
without authority to reduce Peele’s fees, except for developments
unforeseen when the fees were approved, there would be no need to
mention the lodestar approach in the modified order or to address
the factors in the fee application.
The Modified Employment Order states that it did “not modify
in any respect, this Court’s authority to review this and all
employment orders in accordance with Section 328 of the Bankruptcy
Code.” Peele argues that this language establishes that the entire
agreement is governed by § 328. However, the bankruptcy court’s
reservation of its authority to review the terms and conditions of
employment orders pursuant to § 328 does not necessarily imply that
the entire Order is actually controlled by § 328. Reserving
authority is not the same as exercising it. The Modified
Employment Order did not set a specific post-September 8
compensation rate, rendering § 328 inapplicable to the review of
post-September 8 compensation.
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The only part of the agreement that § 328 governs is the 40%
contingent fee agreement because the court expressly approved and
established that amount in both the Original and Modified
Employment Orders. This arrangement enabled the bankruptcy court
to grant its prior approval because the court could evaluate the
reasonableness of the specified amount in advance. In contrast,
the bankruptcy court was not able to grant its prior approval to
the post-September 8 compensation because no rate on which the
blended fees and hourly fees would be based had been determined or
disclosed, and thus an analysis of the reasonableness of such an
arrangement could not be made in advance.
In accordance with congressional intent, the bankruptcy and
district courts correctly decided to apply the reasonableness
standard of § 330 to the present case. If a district court fails
to clearly determine the hourly rate of compensation, then § 328 is
inapplicable, and § 330 governs by default. As this Court
explained in Donaldson Lufkin & Jenrette Securities Corporation v.
National Gypsum Company, professionals may avoid § 330 and the
“uncertainties of what a judge thought the work was worth after it
had been done” by proceeding under § 328. Id. at 862-3. However,
§ 328 applies only where prior agreement on a rate of compensation
has eliminated uncertainty and courts need not engage in judicial
guesswork to determine the rate. As in the present case, where
ambiguity exists as to whether court approval has been given to a
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specific, mutually agreed-upon hourly rate of compensation,
Congress intended § 330 to govern. See National Gypsum, 123 F.3d
861 (5th Cir. 1997) (holding that bankruptcy courts must set
compensation awards for professional consultants either according
to § 330, which governs compensation of officers based on
reasonableness, or § 328, which permits professionals to obtain
prior court approval of certain compensation agreed to with the
trustee, debtor, or committee) (citing 11 U.S.C. §§ 328, 330).
In conclusion, I part company with the majority because of a
combination of factors. First, the majority relies on ambiguous
language in the Modified Employment Order that fails to clearly
disclose the hourly rate of compensation. See supra footnote 1.
Second, the majority overlooks the discussions of the lodestar
approach in the Modified Employment Order and the final fee
application. Third, it is uncertain whether the parties agreed that
§ 328 would apply to the entire Modified Employment Order. Thus,
I find that the bankruptcy and district courts were correct in
deciding that § 330 must control the post-September 8, blended and
hourly rate employment compensation arrangements, while § 328
governs the pre-September 8, 40% contingency fee employment
compensation arrangement. Therefore, I respectfully dissent.
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