Compensation issues are always thorny in bankruptcy cases. Typically the pie is too small for every party involved to receive as large a piece as they would like, or think they are entitled to. But when a reorganization plan pays a 100% dividend to unsecured creditors, the Fifth Circuit said a $1 million “enhancement fee” is OK. CRG Partners Group, LLC v. Neary (In re Pilgrim’s Pride Corp.) No. 11-10774 (5th Cir. August 10, 2012).
The Fifth Circuit in Pilgrim’s Pride addressed the specific question of whether the “Purdue Rule” announced by the Supreme Court, precluding enhancement fees in federal civil rights cases, applied in bankruptcy cases. In finding that Purdue was not binding authority, and that the case presented extraordinary facts and a fee application for “superior services that contributed to outstanding results,” the Court approved $5.98 million in fees (based upon the lodestar calculation method), and an addition $1 million “enhancement fee” for chief restructuring advisors CRG Partners.
When Pilgrim’s Pride filed for bankruptcy protection in December 2008, such a successful outcome did not seem very likely. It had lost almost $1 billion the year before, and was operating at a negative cash flow. It was expected that unsecured creditors would not receive much, and that pre-petition shareholders would get nothing. According to the bankruptcy court, the hiring of CRG Partners, “facilitated a number of [highly effective] changes …”. When the Plan was confirmed, it provided for a”100% return to all of the Debtors’ secured and unsecured creditors, and the Debtors’ pre-petition shareholders received $450 million in new equity interests.” The Bankruptcy Court observed,
[T]he result in this case [was] rare and exceptional. One hundred percent dividend cases are rare in Chapter 11, and rarer still in large cases such as this. And what made this case truly exceptional was that it emerged from bankruptcy in about a year, and the Court can’t begin to estimate how much was saved in administrative costs due to this quick emergence from bankruptcy.
Despite the outstanding outcome, the bankruptcy court initially denied CRG’s $1 million fee enhancement application, because it failed to “satisfy the strict requirements of the Supreme Court’s 2010 holding in Purdue. On appeal, the district court held that Purdue was not “binding authority in a bankruptcy proceeding.” On remand, the bankruptcy court relied on In re Mirant Corp. and awarded the $1 million fee enhancement, and certified its order for direct appeal to the Fifth Circuit.
The Fifth Circuit, in a careful analysis of the framework used to evaluate fee applications under the Bankruptcy Code and case law, determined that the “enhancement fee” met the standard and criteria found under the “lodestar method,” the 12-factor Johnson test, and Section 330(a) of the Code. The Fifth Circuit concluded,
In sum, we have consistently held that bankruptcy courts have broad discretion to adjust the lodestar upwards or downwards when awarding reasonable compensation to professionals employed by the estate pursuant to Section 330(a).
… In [the]… rare [100% dividend] cases, the professionals may potentially receive an enhancement only after transforming a carcass into a cheetah, so to speak, thereby enlarging the pie that is shared by all of the debtor’s creditors.”
In finding that the Purdue did not sub silentio overrule bankruptcy precedent that allows enhanced fees in exceptional cases, and abiding by the rule of orderliness (in which a panel of three judges may not unilaterally overrule or disregard precedent), the Fifth Circuit affirmed the bankruptcy’s court order awarding CRG the $1 million fee enhancement.
When the recovery pool is expanded by bankruptcy and restructuring professionals, value is added for all parties’ benefit.
For further information, contact the Thompson & Knight LLP Creditors' Rights Group.