ABI Commission to Study the Reform of Chapter 11
IV. Proposed Recommendations: Commencing the Case 55
exclusion of distributions to the debtor from the compensation calculation could encourage trustees to administer the estate in a manner that restricts recoveries or liquidates assets for the benefit of parties in interest other than the debtor in order to maximize the trustee’s compensation. Other Commissioners suggested that such conduct likely would be a violation of the trustee’s fiduciary duties, which should be a sufficient deterrent of such conduct. The Commissioners debated these points, focusing on the alignment of section 326(a) with a trustee’s fiduciary duties to better serve the estate. The Commission ultimately was not able to reach a consensus on the issue. Nevertheless, several Commissioners believed that certain modifications could add value to cases and eliminate ambiguities in the application of section 326 to chapter 11 business cases.200
8. costs in chapter 11 cases
Recommended Principles:
• The Bankruptcy Code should be clarified to expressly permit professionals retained pursuant to section 327 or 1103 of the Bankruptcy Code to seek the court’s approval, at the outset of the engagement or of a particular matter, of alternative fee arrangements in lieu of the traditional hourly billing model. Such alternative fee arrangements could include the following: fixed fees, flat fees, task-specific fees, and contingent fees. Courts should assess the reasonableness of, and the potential benefits to the estate from, a professional’s proposed alternative fee arrangement at the time that the court is evaluating the professional’s original retention application or at the outset of the matter or engagement that will be subject to the proposed alternative fee arrangement. The professional seeking an alternative fee arrangement should bear the burden of proving by a preponderance of the evidence that the arrangement is reasonable, has been thoroughly reviewed with the client, and is reasonably likely to be beneficial to the estate. Section 328
should be clarified to incorporate this approval standard.
• Once a court has approved an alternative fee arrangement, it should not alter the approved arrangement once the matter or engagement has terminated unless, in accordance with section 328 as it currently provides, the “terms and conditions [of the arrangement] prove to [be] improvident in light of developments not capable of being anticipated at the time of the fixing of such terms and conditions.” Courts should not review alternative fee arrangements under the lodestar method, which is applicable to the hourly billing model.
• Congress should amend sections 328 and 330 to clarify that alternative fee arrangements based in whole or in part on non-hourly billing models are permitted and subject to review solely under section 328, in accordance with the changes proposed in these principles.
200 Such beneficial modifications to section 326(a) might include limiting the exclusionary language of that section to “chapter 7 debtors and individual chapter 11 debtors” (rather than “the debtor”) and expanding the concept of disbursements to moneys, property, or other value disbursed or turned over to parties in interest.