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Seeking Approval of Alternative Compensation Methods Under Section 328

posted by Lois R. Lupica & Nancy Rapoport

What is the appropriate use of Section 328? Professionals sometimes use section 328 as an alternative means for seeking approval of employment applications, but actually section 328 applies to getting pre-approval for alternative (non-lodestar) modes of compensation. The standard of review for fees earned via compensation structures approved under section 328 is far more restrictive than the standard of review for estate-paid professionals’ fees generally. The Ethics Task Force's proposed Framework for Pre-Approval of Terms for Retention and Compensation Under 11 U.S.C. § 328  suggests specific steps that parties seeking pre-approval of their compensation structures should take. Given how many professionals seek payment of success fees, we think that this part of our Report is a must-read for them.

Our advice?  We suggest that the application for pre-approval should be explicit (“We are seeking approval under section 328”) and should take affirmative steps to meet the party’s burden of proof that an alternative compensation method is appropriate. Bare assertions that a compensation practice is “standard in the industry” is insufficient to meet the party’s burden of proof. Evidence is key here, not mere assertions.

Lawyers in particular should take care that the proposed compensation method is reasonable under the relevant state ethics rule on fees (Rule 1.5). 

Keep in mind that Bankruptcy Courts have the discretion to say “no” to a proposed alternative method of compensation. Making the case up front can save you time, anguish and money at the back-end.

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