Service to the Estate and Ethics

Proposal #5: Fee Examiners


Background

There are no explicit provisions for the appointment of fee examiners in cases under the Bankruptcy Code. Some bankruptcy courts appoint fee examiners on the theory that the authority to do so exists under section 105 [ FN: See In re Continental Airlines Inc. , 138 B.R. 439 (Bankr. D. Del. 1992) (appointing fee examiner under section 105 in order to implement section 330), rev ’d on other grounds , United States v. Continental Airlines Inc. (In re Continental Airlines), 150 B.R. 334 (D. Del. 1993) (ordering that court could not limit access to fee examiner ’s report).] while others appoint them under certain circumstances to "look after the interests of the Estate." [ FN: See In re Columbus Mortgage and Loan Corp. of Rhode Island , 155 B.R. 297, 298 (Bankr. D.R.I. 1993) (reviewing fee applications, court stated that it is "saddled with the independent obligation to: (1) look as closely at the law and the facts of the case, as to the impassioned pleas of professionals in behalf of their fee requests; or (2) in appropriate cases, to appoint special counsel or an independent fee examiner to look after the interests of the Estate. ")] Fee examiners are appointed by bankruptcy judges to (a) review fee applications of professionals retained under section 327 and (b) submit a report to the court critiquing the professionals’ fee application. [ FN: See In re Maruko Inc. , 160 B.R. 633, 637 (Bankr. S.D. Cal. 1993) (describing fee examiner ’s duties).] The vast majority of fee examiners are appointed in large cases with multiple committees and, therefore, with a large number of professionals retained by the estate under section 327. [ FN: In re Columbus Mortgage , at 298 ( "In the majority of cases in this jurisdiction, however, the size of the case and shortage of funds in the first place, rules out the option of special counsel or the independent fee examiner, leaving the issue, again, with the Court. ")] All Commissioners and participants in the working group session agreed (i) that the appointment of a fee examiner was inappropriate and not sound policy, and (ii) that the Bankruptcy Code should provide that a fee examiner may not be appointed by the court.

Proposal

The Bankruptcy Code should explicitly preclude the appointment of fee examiners as an improper delegation of the court’s duty to review and award compensation under section 330. The proposal does not affect the court’s authority under section 1104(c) to appoint an examinerto investigate and report on certain aspects of a chapter 11 case, for example, a potential fraudulent transfer or particularly complicated claims estimation issues. [ FN: See, e.g. , In re Columbia Gas System Inc. , Case Nos. 91-803, 91-804 (Bankr. D. Del.) (court appointed examiner to evaluate complicated UCC oil and gas claims estimation issues).]

Reasons for the Change

Fee examiners are appointed to review fee applications and submit a report to the bankruptcy court critiquing the professional’s fee application. In this regard, fee examiners are akin to special masters, whose appointment is not permitted in bankruptcy cases. [ FN: Fed. R. Bankr. P. 9031.] Fee examiners are only involved in the fee application portion of a case and do not participate in any other part of a chapter 11 case. As a result, whether certain work was required and benefitted the estate is examined after the fact, with the benefit of hindsight, which in itself is not a proper criterion. The "amount of time" spent on a particular matter is of critical importance in determining whether or not it is compensable. [ FN: In re Garland Corp. , 8 B.R. 826, 829 (Bankr. D. Mass. 1981) ( "As a starting point, the time spent on the case is of major importance to the courts in passing judgment on fees. ")] The necessity of the time spent can only be fairly viewed at the time the services were rendered and not after the fact. [ FN: In re Ames Dep ’t Stores, Inc ., 76 F.3d 66, 72 (2d Cir. 1996) (holding necessity of work should be evaluated at time work was performed).]

The actual fee examiner process also runs counter to the requirements of section 330 for a full and fair fee determination by the court. In practice, the fee examiner process amounts to a negotiated fee haircut between the fee examiner and the professional. The professional submits its application to the fee examiner who reviews it and then sends a preliminary report on that professional’s fees only to that professional. The professional then answers any questions the fee examiner may have and negotiates both the amount of the fee examiner’s suggested discount as well as the language of the fee examiner’s report that will be filed with the court. At the end of this process, the court is presented with a negotiated fee and a consensual description of the professional’s application. This process is in sharp contrast to the direct fee application process to the court according to the U.S. trustee guidelines.

In large chapter 11 cases, fee examiners are appointed because judges feel they donot have the time and probably do not have the desire to perform the tedious task of reviewing fee applications. Irrespective of these reasons, bankruptcy judges should not be able to delegate this portion of their independent obligation imposed by the Code to review fee applications and oversee the professional fees in a case. Moreover, fee examiners are appointed by the judge, arguably perpetuating the same problems of cronyism that existed under the former Bankruptcy Act. The Code purposely removed any appointing power from the court and placed it in the office of the U.S. trustee. The court may not appoint a trustee under any of the chapters of the Code and may not appoint any members of an official committee. Court appointment of a fee examiner directly contravenes established Congressional policy.

Under the proposal, the judge should review the fee applications. Under the 1994 amendments, the U.S. trustee is placed in a position to assist the court by fulfilling its statutory obligation to examine fee applications and comment on them as it determines necessary. [ FN: 28 U.S.C. §586(a)(3)(A)(i) (1994).] It is the role of the U.S. trustee to review fee applications and the appointment of a fee examiner usurps this role as well. [ FN: Section 586(a)(3)(A)(i) & (ii) requires the U.S. trustee to review fee applications and file objections when appropriate.] The U.S. trustee should be the independent party to object to fee applications, when necessary, and the judge should make the determination based on that objection as well as any others. Fee examiners have become akin to special masters or "pseudo-special masters" and, as such, the Bankruptcy Code should preclude their appointment.

All interested parties, particularly the debtor-in-possession and all official committees, have a responsibility to review all fee applications submitted to the court. Greater compliance with this duty would alleviate the court’s burden significantly.

Competing Considerations

Fee examiners have principally been appointed in large cases with multiple committees and professionals where the court carries a heavy burden to review fee applications. It may be argued that in order to meet its obligation, the court should be able to designate an independent party to review the fee applications and file a report with the court.