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United States Court of Appeals,
Fifth Circuit.
No. 96-10357.
In the Matter of NATIONAL GYPSUM COMPANY, Debtor.
DONALDSON LUFKIN & JENRETTE SECURITIES CORPORATION, Appellant,
v.
NATIONAL GYPSUM COMPANY, Appellee.
Oct. 8, 1997.
Appeal from the United States District Court for the Northern
District of Texas.
Before REAVLEY, BARKSDALE and STEWART, Circuit Judges.
REAVLEY, Circuit Judge:
Donaldson Lufkin and Jenrette Securities Corp. (DLJ), retained
by National Gypsum Company in its Chapter 11 bankruptcy
reorganization, appeals the district court's affirmance of the
bankruptcy court's fee order reducing the final DLJ fee from
$2,400,000 to $2,000,000. Because we read the bankruptcy court's
initial order to approve an agreed fee for DLJ, the court was
required to follow § 328 instead of § 330 of the Bankruptcy Code.
(11 U.S.C.) The fee order is reversed.
Background
National Gypsum Company as the debtor-in-possession recorded
its agreement with DLJ for professional services in a detailed
letter dated April 16, 1991. The agreed compensation to DLJ was to
be $125,000 per month. Application was made to the bankruptcy
court for approval of this retention agreement, and the court's
order of June 20, 1991 granted that approval "upon the terms and
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conditions of that certain engagement letter dated April 16, 1991."
The order ended with these words: "The Court retains the right to
consider and approve the reasonableness and amount of DLJ's fees on
both an interim and final basis."
Three subsequent orders were entered by the bankruptcy court
during the 23 months of the Chapter 11 reorganization, all
approving extension of the retention agreement under the terms and
conditions set forth in the original order of June 20, 1991. In
three applications for interim payments by DLJ, it set forth the
full $125,000 per month obligation. When the final application was
made on June 7, 1993, DLJ claimed, by virtue of the agreed monthly
fee, $2,825,000 beyond the amount of the previous interim payments.
National Gypsum Company raised objections to that amount, and all
parties then agreed to a balance owing DLJ of $2,400,000. However,
after a hearing, the bankruptcy court reduced the amount allowed to
$2,000,000 as its judgment of reasonable compensation in the light
of hourly compensation that had been allowed in similar bankruptcy
cases in the same district. The district court affirmed the
bankruptcy court's order on the ground that the latter did not
abuse its discretion in analyzing the reasonableness of the fees
under § 330. The district court ruled that § 328 was inapplicable
because the order of the bankruptcy court was conditioned upon
final approval by that court of the reasonableness of the
compensation.
Discussion
Prior to 1978 the most able professionals were often unwilling
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to work for bankruptcy estates where their compensation would be
subject to the uncertainties of what a judge thought the work was
worth after it had been done.1 That uncertainty continues under
the present § 330 of the Bankruptcy Code, which provides that the
court award to professional consultants "reasonable compensation"
based on relevant factors of time and comparable costs, etc. Under
present § 328 the professional may avoid that uncertainty by
obtaining court approval of compensation agreed to with the trustee
(or debtor or committee). Thereafter, that approved compensation
may be changed only for the following reason: "Notwithstanding
such terms and conditions, the court may 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."
The 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. If the most competent
professionals are to be available for complicated capital
1See In re Benassi, 72 B.R. 44, 47 (Bankr.D.Minn.1987) citing
H.R.Rep. No. 595, 95th Cong. 1st Sess. 330 (1977), reprinted in
1978 U.S.Code Cong. & Admin. News 5963, 6286; In re Confections
by Sandra, 83 B.R. 729, 732 (9th Cir. BAP 1987); Lief M. Clark,
Paying the Piper: Rethinking Professional Compensation in
Bankruptcy, 1 Am. Bankr.Inst. L.Rev. 231, 232 (1993).
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restructuring and the development of successful corporate
reorganization, they must know what they will receive for their
expertise and commitment. Courts must protect those agreements and
expectations, once found to be acceptable.
Decision
In June of 1991 the bankruptcy court could have refused to
approve the compensation to which National Gypsum Company and DLJ
had agreed. The court could have approved the retention of DLJ
and, if DLJ would accede, left the award of compensation to be set
by the court according to § 330. The court did not do this. It
expressly approved the terms of the agreement. The reasonableness
of those terms, in the event of anticipated circumstances and
performance, was decided.2 By retaining "the right to consider and
approve the reasonableness and amount of DLJ's fees on both an
interim and final basis," the court merely recited its control of
the compensation in the event of subsequent and unanticipated
circumstances affecting the reasonableness of that agreed fee.
While we do not reach the question, we assume the award of the
bankruptcy court would have been within its discretion when the
agreed compensation was disregarded.
2In re Reimers, 972 F.2d 1127 (9th Cir.1992)(holding that the
bankruptcy court erroneously applied the law by altering the terms
of payment without finding those terms to have been "improvident"
in light of unforeseeable developments); In re Dividend
Development Corp., 145 B.R. 651 (Bankr.C.D.Cal.1992)(section 328
anticipates that the court make a determination as to the
reasonableness of a fee arrangement at the beginning of a case);
3 Collier on Bankruptcy ¶ 328.03 (15th ed.1996)("a court may not
revisit the prior determination as to the "reasonableness' of an
agreement previously approved unless and until it determines that
the terms and conditions proved to be "improvident' ").
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