Seeking Approval of Alternative Compensation Methods Under Section 328

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.

Duties of Counsel for a Debtor-in-Possession

What are the duties of the lawyer represent the debtor-in-possession? We know the DIP has fiduciary duties to the estate. Does this mean that the DIP’s attorney is actually counsel for the “estate”? This is not a question on a law school exam, but a very real and vexing practical issue that arises in situations when the DIP acts in ways that appear to compromise its fiduciary duties to the estate. Some courts facing this issue have relied on the designation of the lawyer as “counsel for the estate” as a way of expressing their frustration with cases in which counsel for DIPs have ratified the bad decisions of the individuals speaking for the DIPs. Although “counsel for the estate” is a convenient concept, there remains the need for more clarity in terms of describing specifics of the DIP’s fiduciary duties and the particular duties of DIP counsel. This is the task the Ethics Task Force took on in drafting its proposal Report on Duties of Counsel for a DIP as Fiduciary and Responsibilities to the Estate.

Limited Scope Representation: An Issue of Access to the Bankruptcy System

The problem of the high cost of consumer bankruptcy representation is well documented. The recent Consumer Bankruptcy Fee Study revealed a 24% increase in attorney fees post-BAPCPA for chapter 13 cases, with mean fees in some jurisdictions approaching $5,000. For no-asset cases filed under chapter 7, mean attorney fees have increased 48%—as high as $1,500 at the mean in some jurisdictions. 

For many chapter 13 filers, only a portion of the fee is paid to the attorney up front, with the fee balance to be paid through the plan. In a chapter 7, attorney fees must be paid up-front and in full leading many consumers in financial distress to simply conclude that they do not have the money to pay an attorney and to file their petition pro se. The Fee Study found that 5.8% of all chapter 7 cases are filed pro se. This statistic is reflective of a national random sample of cases filed post-BAPCPA. The incidence of pro se filings, however, is considerably higher in many jurisdictions. In the ten courts with the greatest number of pro se cases, 9.5% to 27.1% of all cases are filed without attorney representation.

The problem of pro se representation is compelling. Consumers typically lack the knowledge, judgment and skill needed to present their case, raise valid defenses and to make informed decisions. Moreover, creditors may have an interest in an expedited settlement of the matter, but an unrepresented and confused debtor may thwart such efforts.  In the name of pragmatism, judges may attempt to guide unsophisticated debtors through the process, but such interventions run the risk of compromising the essence of the adversarial system: judicial neutrality.

The burden that pro se debtors place on the court system has been widely recognized. Judges, trustees, and court staff have detailed the extra time and system resources eaten up by aiding pro se debtors who are attempting to navigate the bankruptcy process. Uninformed and misinformed self-representation unnecessarily increases the complexity of cases and the time needed to resolve them. Moreover, the likelihood that a judge will receive the full information needed to reach fair decisions is reduced. The high volume of pro se cases filed in some jurisdiction starkly reveals a disconnect between the idealized version of the bankruptcy system and the way it currently operates. After carefully considering problem of pro se debtors and their access to justice, the Task Force developed a proposal for “best practices” for Limited Scope Representation (“LSR”). 

Meaningful Disclosure Under Rule 2014

One of the frustrations experienced by all business bankruptcy attorneys seeking engagement in chapter 11 cases can be traced to the vague language of Rule 2014. The rule requires the disclosure of information necessary to determine whether the professional’s employment is in the best interest of the estate.

But what specific information should be disclosed and in what detail?  Currently, Rule 2014 does not limit the extent of disclosure of a professional’s connections with: (i) the debtor; (ii) any creditors of the debtor; (iii) other parties in interest; (iv) attorneys of the debtor, creditors, and parties in interest; (v) accountants for the debtor, creditors, and parties in interest; and (vi) the United States Trustee and persons employed by the U.S. Trustee’s office. The broad but undefined term “connection” has further led to confusion over the appropriate level of inclusiveness in disclosures. The uncertainty surrounding the meaning of “connection” has also led to attempts by professionals to argue that some important “connections are immaterial.” In other cases, professionals present a “phone book” sized disclosure documents, in which the meaningful connections are all but lost in the static. In deciding which connections are relevant, getting the judgment call wrong can be catastrophic for a lawyer; the failure to appropriately disclose connections is an independent basis for the disallowance of fees or even disqualification.

This context set the stage for the Ethics Task Force’s drafting of Proposed Rule 2014 (included in the Final Report). The Proposed Rule is an effort to provide clarity to professionals concerning what relevant connections must be disclosed, as well as to provide improved information for courts and other parties to use in determining a professional’s eligibility for employment.

The Bankruptcy Ethics Task Force's Final Report

Thanks to Bob and Credit Slips for the warm welcome.  In April, after two long years, we completed the American Bankruptcy Institute Ethics Task Force's Final Report. This week we will be guest blogging about “bankruptcy ethics” and discussing many of the issues we confronted as Reporters. We will also do our best to summarize the white papers, “best practices” narratives, and proposed rules presented in the Final Report.

Here is some background about the Task Force and its work product. In 2011, then-ABI President Geoffrey L. Berman asked us if we would serve as Reporters for the newly formed ABI National Ethics Task Force. The Task Force was constituted to address a problem familiar to all bankruptcy professionals and judges: state ethics rules do not always “fit” with the realities of bankruptcy practice. State ethics rules may also not be a perfect fit in the context of other types of practice, either—for example, states may not yet know how best to handle the increasingly interconnected digital and virtual world—but it is clear that the Model Rules do not fit neatly in a practice that involves numerous parties with changing allegiances, often departing from the classic two-party adversarial proceeding.