Bankruptcy proceedings involve a high degree of uncertainty. The process, to Blawgletter's eye, resembles an all-out wrestling match — but one with potentially dozens of grapplers grunting and struggling to pin each other. These combatants, moreover, align, disalign, appear, and disappear as the bankruptcy moves towards completion. And deal-making (plus the occasional betrayal) seems a pre-eminent skill.
Contingent fee arrangements also involve imperfect information and risk. Lawyers that enter into them vow to furnish labor and materials on the bet that they'll recover for their clients enough for them (the lawyers) to reap a premium on their time.
The intersection of bankruptcy and contingent fee work thus compounds the peril for contingent fee lawyers. But can they manage the risk?
The Second Circuit today provided some comfort to these paladins battling for bankrupts and their creditors. The court held that a bankruptcy court's blessing of a contingent fee deal made the retention of the law firm a "pre-approved" arrangement under 11 U.S.C. 328(a) and thus greatly restricted the court's ability to revisit the terms later. Riker, Danzig, Scherer, Hyland & Perretti v. Official Comm. of Unsecured Creditors (In re Smart World Technologies LLC), No. 08-1721-bk (2d Cir. Jan. 6, 2009).
As the court summarized:
[S]ection 328(a) permits a bankruptcy court to forgo a full post-hoc reasonableness inquiry if it pre-approves the “employment of a professional person under section 327 . . . on any reasonable terms and conditions of employment, including on a retainer, on an hourly basis, on a fixed or percentage fee basis, or on a contingent fee basis.” Id. § 328(a). Where the court pre-approves the terms and conditions of the retention under section 328(a), its power to amend those terms is severely constrained. It may only “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.” Id. These two inquiries are mutually exclusive, as “[t]here is no question that a bankruptcy court may not conduct a § 330 inquiry into the reasonableness of the fees and their benefit to the estate if the court already has approved the professional’s employment under 11 U.S.C. § 328.” In re B.U.M. Int’l, Inc., 229 F.3d 824, 829 (9th Cir. 2000).
Riker, Danzig, slip op. at 7-8.
The court concluded that pre-approval under section 328(a) barred the bankruptcy court's after the fact second-guessing and reduction of the law firm's contingent fee.
Our feed anticipates a lot of contingent fee bankruptcy work in 2009.