Check Your Partners’ Rates: The “Intra-Firm” Rate Cap Of In Re Fleming Companies, Inc.
Written by Robert J. Keach
Bernstein, Shur, Sawyer & Nelson
Portland, Maine

At first blush, the recent decision of the Delaware Bankruptcy Court in In re Fleming Companies, Inc., 2003 WL 23018828 (Bankr. D. Del. 2003), appears to be just another example of a not-terribly-pleased bankruptcy judge exercising discretion to reduce fees in yet another mega bankruptcy case. However, chapter 11 practitioners in cases large and small should avoid dismissing the result and look carefully at the rationale. Certain language in the decision should trouble us all, suggesting, as it does, that our own partners’ hourly rates may provide a cap on what we can charge for even complex chapter 11 work.

In analyzing the applications before her, Judge Walrath noted that the UST’s contention that debtors’ counsel charged higher rates for the services of bankruptcy attorneys than for services of comparable non-bankruptcy attorneys with similar experience, and she noted that information supplied by debtors’ counsel seemed to confirm this fact. She noted that the firm charged $50 per hour less for a corporate partner, an IP partner and a litigation partner than it charged for a bankruptcy partner “admitted to practice the same year.” Id. at *5. In response to debtors’ counsel’s protestations that this was the wrong test, the court stated:

We disagree. In enacting the Bankruptcy Code provisions which allow compensation to attorneys, Congress sought to encourage qualified attorneys to develop bankruptcy expertise by assuring that they would be compensated at the same level as their peers in other practice areas….Thus, we conclude that the hourly rates of bankruptcy practitioners must be commensurate with the hourly rates charged by their peers in other practice areas. To assess this we will require that [debtors’ counsel] provide a schedule of the hourly rates of all its attorneys and paralegals in all practice areas and offices.

Id. (citations omitted; emphasis supplied). Thus, the clear implication of the court’s decision is that the bankruptcy lawyers could not be paid at higher rates than their own partners in other specialties with the same level of experience.

The court’s apparent reference in this analysis was to §330(a)(3) of the Bankruptcy Code. The relevant subsection provides that one of the factors in determining reasonable compensation for a bankruptcy professional is “whether the compensation is reasonable, based on the customary compensation charged by comparably skilled practitioners in cases other than cases under this title.” 11 U.S.C. §330(a)(3)(E)(emphasis supplied). The statutory language (and the court’s decision) highlights the question of what set of “comparably skilled practitioners” one looks to in applying the test. The Fleming decision suggests that one looks to lawyers in the same firm with the same seniority. However, other decisions—and the purpose of the statute—suggest that a broader focus is required.

As one court stated in interpreting this subsection, ‘[t]he court must be guided not merely by what rate the applicant charges its nonbankruptcy clients, but what range of rates is charged by attorneys of comparable competence for comparable services in the comparable community or marketplace.” In re Temple Retirement Community, Inc., 97 B.R. 333, 342 (Bankr. W.D. Tex. 1989). In an appropriate case, the “marketplace” the court looks to may be the “entire nation.” In re El Paso Refinery, L.P., 257 B.R. 809, 832 (Bankr. W.D. Tex. 2000). See also, In re NKI, Inc., 228 B.R. 584, 585 (Bankr. D. S.C. 1998)(“The court cannot properly apply the ‘comparably skilled practitioners’ factor in §330(a)(3)(E) without considering what rates are supported in the marketplace for comparably skilled practitioners.”).

Thus, while the rates charged by nonbankruptcy lawyers in the applicant’s own firm might be a place to start, to make such rates an effective cap on bankruptcy lawyers is to read the statute too narrowly. If the bankruptcy group of a particular firm is more highly regarded than, say, its corporate group, and can thus command justifiably higher rates in the marketplace, limiting the bankruptcy lawyers to the rates charged by the corporate lawyers arguably contradicts, rather than enforces, §330. If a firm has a “superstar” bankruptcy lawyer capable of handling “national” cases, his “comparable” in the “marketplace” may be a “superstar” M&A lawyer at another national firm, not the less-skilled M&A lawyer in his own firm. Reviewing the firm’s schedule of nonbankruptcy rates may simply be irrelevant to the inquiry.

Nonetheless, the language in Fleming exists and, given the court that issued the decision, is likely to have some influence in proceedings within and without the District of Delaware. The rationale is sure to be inserted an objection to your fee application in a future case.

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Securities
Trading Orders Questioned

Business Reorganization
and Financial Advisors Committees to Present
Joint Panel on “Cutting-edge”
DIP Financing