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Professional Compensation Committee Meeting Minutes

2005 Annual Spring Meeting

The Professional Compensation Committee’s Meeting at the ABI’s Annual Spring Meeting was highlighted by a presentation by Committee Members Ed Malpass and Steve Schwaber on Professional Compensation Issues for Small Practitioners. The presentation addressed the numerous practice issue, financing smaller firms in bankruptcy cases including, staffing, expense, fee management and practice management issues. Ed and Steve’s presentation was well received and involved a great deal of audience participation.

During the business portion of the Professional Compensation Committee Meeting, it was announced that James D. Sweet of Murphy Desmond SC will be stepping down as Co-chair of the Professional Compensation Committee after his three year term in office ended at the conclusion of the annual meeting. Jim has been instrumental in providing leadership for the numerous and important projects which the Professional Compensation Committee has undertaken in the past three years including, the recently published handbook for non-attorney professionals: “Getting Paid: Retention and Compensation Bankruptcy Case as a Guide for Non-Attorney Professionals.” Jim’s hard work and dedication have greatly strengthened the Professional Compensation Committee and although he is departing as a Co-chair of the committee, Jim will remain active in the committee’s work and efforts.

Replacing Jim as Co-chair of the committee is Thomas A. Morrow, a director of AlixPartners LLC. Tom is highly experienced restructuring and turnaround professional whose engagements have included working as CRO of Core Mark and on the Kmart Bankruptcy. Tom is also a member of the board of directors of the Association of Insolvency and Restructuring Advisors. Tom is also the first non-attorney named as a co-chair of the Professional Compensation Committee.

Further, as noted above, the committee’s handbook on the hiring and compensation process for non-attorney professionals “Getting Paid” went on sale at the annual meeting. This book was the culmination of months of hard work by numerous Committee Members including Chip Bowles, Ed Malpass, Steve Schwaber, James Sweet, Mark Williams, Faye Knowles, Mitch Ryan, Bebe Barton, Richard Carmody, John Ames and Harry Greenfield. The book was also generously sponsored by Adams and Reese LLP; AlixPartners LLC; Fredrikson & Byron PA; FTI Corporate Finance; Greenebaum Doll & McDonald PLLC; King & Spalding LLP; Mesirow Financial Consulting LLC; Murphy Desmond SC and Norman, Wood, Kendrick & Turner.

Finally, members of the committee were given a brief update as to the progress of the ABI Chapter 11 Professional Fee Study (“Fee Study”). At the present time, the Fee Study’s reporter, Steven Lubben of Seaton Hall University School of Law, has selected the cases to be studied in the various divisions and, is currently in the process of gathering information and critical pleadings in those cases for his evaluation and empirical research input. Further updates on the Fee Study will be provided periodically to members of the Professional Compensation Committee as well as the ABI at large.

Finally, it was announced at the Professional Compensation Committee Meeting that its Winter Leadership Program will be a joint presentation with the Financial Advisors Committee and Litigation Committee. At the present time, the tentative nature of this three committee program will include a case study and mock trial of an actual objection to professional fees, a presentation of critical changes made in the area of professional compensation by the new law and, a panel discussion of compensation issues from actual bosses who employ and pay professional’s bills.

2004 Winter Leadership Conference

The committee will be teaming up with the Commercial Fraud Task Force to present “Court Oversight of Creditor Professional Fees in Consumer Bankruptcy Cases: Urban Myth or Developing Practice Area,” a discussion of issues relating to the allowance of creditor’s professional fees in chapter 7 and chapter 13 cases. In light of the increasing frequency of contracts that provide for attorney or “collection fees” in the world of consumer finance and the growing trend toward “nationalization” of consumer creditor practice in consumer bankruptcy cases, this is a topic of increasing importance to both debtor and creditor counsel. In addition, a review of “Waiver and Disclosure Issues in Bankruptcy Proceedings: Fleming, Jore, 11 U.S.C. §329 and Beyond,” will be discussed, as well as important developments in the “Area of Disclosure by Court-appointed Counsel in Bankruptcy Proceedings,” which will focus on the obligations of debtor’s counsel in consumer cases under 11 U.S.C. §329 and the developing impact of the recent decisions of Fleming and Jore in business proceedings.

2004 Annual Spring Meeting

On April 17, 2004, the Professional Compensation Committee conducted a joint educational program with the Ethics and Mass Torts Committees. This was the first tri-committee meeting at ABI that encompassed back-to-back time slots. Thus, the program lasted about 2.3 hours with a short break between sessions. Short business meetings for each committee followed the program. The program consisted of a panel discussion of a variety of substantive, compensation and ethics issues in mass tort cases, some of which are peculiar to these types of cases. We were fortunate to have three experienced panelists, each of whom has had intensive exposure to the issues in these types of cases: Hon. Leslie J. Tchaikovsky, U.S. Bankruptcy Judge for the Northern District of California; Theodore L. “Ted” Freedman, Kirkland & Ellis, New York; and Robert M. “Bob” Fishman, Shaw, Gussis, Fishman, Glantz & Wolfson LLC, Chicago. The panel discussion was moderated by Richard P. Carmody, Adams and Reese/Lange Simpson LLP of Birmingham, Ala. Also participating were the committee co-chairs: Richard “Rick” Meth, Pitney, Hardin LLP of Morristown, N.J. (Ethics); and James D. Sweet, Murphy & Desmond of Madison, Wis. and C. R. “Chip” Bowles Jr., Greenbaum, Doll & McDonald PLLC of Louisville, Ky. (Professional Compensation). Ted Freedman is one of the co-chairs of the Mass Tort Committee. Unfortunately, Hon. Judith K. Fitzgerald, Chief Bankruptcy Judge for the Western District of Pennsylvania, was unable to attend because of family illnesses (though she was instrumental in planning the program).

The panelists discussed the following issues:

• The status of the Asbestos Bill (S. 2290), its prospects for passage and the constitutionality of “rolling up” trusts established since 1993.
• When a case is “ripe” for filing so that it is not dismissed as a “bad-faith” filing. (SGL Carbon, 3d. Cir.)
• The cast of professionals usually appearing during a mass tort case, with elaboration on the roles and duties of special insurance counsel for the debtor and the future claimants’ representative and his/her counsel, who have duties of due diligence in valuing the debtor and establishing the parameters of the trust established under §524(g) of the Code.
• Whether insurance companies, particularly non-settling companies, have standing as claimants or parties-in-interest.
• The payment of “facilitation fees” by the debtor, its affiliates or the settling insurers to claimants’ attorneys who can influence the acceptance of a consensual plan of reorganization, and the potential conflicts that can result (Combustion Engineering and Western MacArthur).
• The retention of special counsel, particularly insurance counsel on a contingent-fee basis, under §328, the criteria for approval and the ability of the court to re-visit the fee arrangement as “improvident” (Matter of Barron – 5th Cir.).
• Payment of fees to counsel for committee members in addition to committee counsel (First Merchants Acceptance Corp. – 3d. Cir.) and payment of fees to those creditors making a “substantial contribution.”
• Contribution by the settling insurers to the payment of the debtor’s administrative expenses as part of a consensual plan of reorganization.

2003 Winter Leadership Conference

The joint meeting of the Ethics and Professional Compensation Committees featured an excellent presentation by Roberta DeAngelis, Acting Region 3 U.S. Trustee, John Tittle of Crossroads LLC, Robert Rosenberg of Latham & Watkins, and William H. Schorling of Klett Rooney Lieber & Schorling. An outline of the presentation and the remaining meeting agenda is set forth below.

A. Presentation: "The Service Professional's Nightmare: What to Do if Your Client Files for Bankruptcy, and How to Avoid Getting There..."

1. Can You Be Retained by the Debtor?
   1. Disinterestedness and Adverse Interest—Bowles, "Fighting Nazgul, Trolls and Orcs is Easy; Disclosing under Rule 2014 is Hard," April 2003 ABI Journal.
   2. Waiver of Pre-Petition Fees
   3. The Role of Special Counsel
   4. Officers, Directors and Shareholders
   5. Protocol on Dual Service of Financial Advisors—The "Delaware" Restrictions
   6. Debtor Affiliates ­ What is an "operating agreement"?
2. Getting Paid...and Keeping It!
   1. In re Pillowtex, 304 F.3d 246 (3d Cir. 2002), and Other Warnings—Friedlander and Nylen, "Accounts Receivable and Retainer Management: Lessons from Pillowtex," December/January 2003, ABI Journal.
   2. Retainers, Security Deposits and Other Payment Arrangements; Selection of Important Cases on Retainers and Pre-Petition Payments

      A. In re First Jersey Securities Inc., 180 F.3d 504 (3rd Cir. 1999), rev'g., In re Brennan, 187 B.R. 135 (Bankr. D. N.J. 1999). Case involving First Jersey and its 100 percent shareholder, Robert Brennan. Prior to Bankruptcy, First Jersey owed its law firm more than $389,000 for work done in the unsuccessful defense of securities fraud litigation, which resulted in a $75 million disgorgement order against First Jersey and Brennan. On the day of First Jersey and Brennan's chapter 11 filings, the law firm received stock ultimately sold for $600,003 to be held and ultimately sold by the law firm to provide the law firm with a $200,000 retainer for representing the debtors as special counsel under 11 U.S.C. §327(e) and to pay the debtors $250,000 in full satisfaction of their pre-petition fees. The balance of any sale proceeds would be returned to the debtors. While the transfer of the stock for the purposes set forth above was disclosed, the fact the transfer occurred within the 90-day preference period was not initially disclosed.

      The bankruptcy court found that the law firm did not receive a preference and that there was no conflict of interest by the possible receipt of the preference by the special counsel. The bankruptcy court also stated that the receipt of the preference did not disqualify the special counsel in this case. The district court affirmed.

      The Third Circuit reversed, holding that the receipt of an initially undisclosed preference under the facts of this case disqualified special counsel in this case. The Third Circuit also found the transfer in question was clearly a preference and that no defenses applied to the preference and remanded for further proceedings.

      B. In re Bressman, 214 B.R. 131 (Bankr. D. N.J. 1997) (Discussing problems with "non refundable retainer and discussing the types of retainers permissible in bankruptcy proceedings).

      1. The Professional on the Creditors' Committee—Fiduciary Duties. Supplemented by a handout prepared by John Tittle and Bowles, "They Filed Bankruptcy on Me!", published in the November 2003 ABI Journal.
      2. Privilege Issues
      3. Can the Committee Hire the Professional's Firm?
3. The Professional as Litigation Target.
   1. Creditor and Shareholder Lawsuits
   2. Malpractice Claims
   3. Issues Resulting from Prior Negotiations with a Pre-Petition Committee
4. Committee Business
   1. Ethics Committee:
      • ABI Journal: "Straight and Narrow"
      • Programs: Regional Conferences/Workshops, Coordination with Other Committees
      • Committee Projects
      • Other
   2. Professional Compensation Committee:
      • Committee Projects
      • Other

      C. Miscellaneous and "Good-Will"

2003 Annual Spring Meeting

The latest meeting of the Professional Compensation Committee was highlighted by a presentation of Jonathan Friedlander of the Chicago office of Kirkland and Ellis entitled "Accounts Receivable and Retainer Management Lessons from Pillowtex," which addressed possible responses to the numerous employment and professional compensation issues raised by the Third Circuit's decision in In re Pillowtex, 304 F.3d 246 (3rd Cir. 2002), and was based on his article of the same name published in the December/January 2003 issue of the ABI Journal. Jonathan discussed the various problems raised by Pillowtex and offered several possible solution to avoid the economically painful result suffered by the attorneys in Pillowtex.

In the business portion of the meeting, the committee discussed the status of its proposed employment and fee handbook for non-attorney professionals and decided that a new round of chapter drafts would be circulated for review by the authors of the chapters to further refine the final project, which is expected to be completed prior to the Winter Leadership Conference.

The second topic of discussion concerned what steps the committee could take to further define what constitutes connection for purposes of disclosure under Bankruptcy Rule 2016. It was decided that the committee would approach the Ethics Committee about a joint approach to this issue.

2002 Winter Leadership Conference

The Professional Compensation Committee of ABI met at 8:00 a.m. on Dec. 7, 2002, in conjunction with the ABI Winter Leadership Conference in Tucson, Ariz. A roster of those attending is available on request. The meeting was co-chaired by John Ames and Jim Sweet.

The first order of business was a discussion of the Handbook Project started by the committee in late 2001. An outline of the Handbook was adopted at the committee's Washington, D.C., meeting in April 2002, and some of the chapters were assigned to volunteers. Other chapters remained unassigned. The discussion resulted in a modification of the Handbook outline, and the assignment of the remaining chapters to volunteers. The balance of the Handbook discussion was deferred to the end of the meeting so the committee's educational program could proceed.

Chip Bowles then made two educational presentations: the first on how to get paid and avoid being conflicted out of involuntary bankruptcy proceedings, and the second on the concept of "ordinary course" professionals.

Following Mr. Bowles's presentation, the main committee meeting was adjourned at 9:30 a.m.

Following adjournment, a subcommittee, comprised of the volunteer authors of various chapters of the Handbook, met to establish protocols and timetables for completion of the work on the Handbook. A copy of a memo summarizing the protocols and time tables is attached to these minutes.

2001 Winter Leadership Conference

The meeting began with the introduction of the morning's speaker, Mr. C.R. "Chip" Bowles Jr., a lawyer with the firm of Greenbaum Doll & McDonald PLLC in Louisville, Ky. Mr. Bowles spoke on the topic of "Noisy Withdrawals and the Res Judicata Effect of Awards of Final Fee Applications."

Following Mr. Bowles's presentation, the committee turned to old business. For about one year, the committee has been discussing the idea of creating a handbook that could be used by debtor and committee legal counsel when the need for the employment of additional professionals in a bankruptcy case arises. The committee believes that there is a need for such a handbook to assist attorneys to explain to other professionals the process for getting appointed, and the process that must be followed to be sure those professionals are paid. The committee, by unanimous consent, outlined the contents of this handbook. While the details are yet to be firmed up, the working outline of the handbook is as follows:

Part 1—Retention

1. Who is a "professional person" who must be retained under §327?
2. What does it mean to be "disinterested"?
3. Procedures for applying for appointment (including forms of motion and affidavit under R. 2014(a) and R. 2016(b)).
4. Written fee agreements
5. Types of fee structures allowed under §328 for different types of professionals.
6. Monthly payment arrangements "subject to recoupment/disgorgement."
7. The concept of "ordinary" vs. "case" professionals.

Part 2—Compensation

1. Time-keeping and the lodestar method.
2. Itemization and limitation on expense reimbursements.
3. Applying to the court for approval of fees and costs.
4. Interim and final orders approving fees and costs.
5. Fee enhancements and the "Jay Alix Protocol."

The committee delegated to the co-chairs the task of editing the publication and seeking approval from ABI to go forward with the project. The co-chairs, once the publication is approved, were also delegated the authority to assign the writing of various chapters to members of the committee.

The committee also briefly discussed the seminar topics for the 2002 conferences. Various suggestions were made. The co-chairs were delegated the responsibility to contact various members of the committee to finalize a topic for the April conference in Washington, D.C.

1999 Winter Leadership Conference

The Professional Compensation Committee voted to present its own CLE program at the next available ABI general meeting (either in Washington, D.C., in the April/May time frame, or at the next Winter Leadership Conference). The working title of the seminar is, "Now That You Have Your Order, How Do You Get Paid?" Steve Schwaber (San Marino, Calif.) will "host" the program, and he has reported to James Sweet (Murphy & Desmond S.C., Madison, Wis.) that two other committee members are willing to work with him on the program. Mr. Schwaber was to provide the committee with a working draft of the program topics in January. At that time, he was also to provide the names of the other committee members who will assist with the presentation.

On a related matter, Mr. Sweet met for an hour with Richard P. Carmody (Lange, Simpson, Robinson & Somerville, Birmingham, Ala.) after the meeting to discuss a CLE program to be presented jointly by the Professional Compensation and Ethics Committees. (Mr. Carmody is a co-chair of the Ethics Committee.) The joint program will deal with issues of disclosure, recent cases relating to non-disclosure and disgorgement, retention issues and related topics. As soon as we have the details about the program from Mr. Carmody, the committee can meet to decide how and if it will proceed. Edward Malpass (Malpass & Associates, Irvine, Calif.) will head up the committee's brochure project. Its working title is, "What Every Professional Needs to Know About Dealing with a Bankruptcy Estate." It will be geared to accountants, turnaround specialists, realtors, bank counsel or anyone else looking to be paid from a bankruptcy estate. It will be a handbook on how to get appointed, how to make appropriate disclosures, how to apply for fees and the myriad other relationships a professional has with a bankruptcy estate. It will also include forms. Mr. Malpass will provide a working draft of an outline.

The committee voted unanimously to urge ABI to press Congress for an amendment to §330 of the Bankruptcy Code to re-insert the phrase, "...or to the debtor's attorney..." back into §330(a). There are now decisions around the country that state that the elimination of the phrase in the most recent legislative change was an oversight, and clearly the section makes no sense as currently written. Mr. Sweet is to write a letter to ABI Executive Director Sam Gerdano for presentation to the ABI Executive Committee regarding ABI taking an affirmative stance on this proposed amendment. It was suggested that it may be useful for the committee to undertake a research project regarding all of the local rules relative to the application process for the approval of fees and costs in a bankruptcy case. Some districts have no local rules at all, while others overwhelm you with local rules. It was then suggested that many of the "local rules" are not really local rules at all. Rather, they are U.S. Trustee "local guidelines" that become the "common law" of a particular jurisdiction.

The discussion on this topic then turned to the issue of R. 2016(b) and R. 2014(a) disclosures, and the U.S. Trustee's participation in the growing body of law regarding these disclosure rules. The idea for a possible joint CLE program with the Ethics Committee relating to these disclosures grew out of this conversation. Finally, it was suggested that Mr. Sweet should attempt to determine who, within the national U.S. Trustee structure, is in charge of the official fee guidelines. Once this person is identified, he is to contact the person and try to establish a liaison between the committee and the U.S. Trustee's office regarding the issues of disclosures and fees. One committee member suggested that it might be possible to draft some "model" disclosures that would provide counsel a "safe harbor," or at least come up with some proposed changes to the guidelines or the Rules to guide lawyers regarding their disclosure responsibilities. It was also suggested that the contact person at the U.S. Trustee's office could be included on the panel of the joint seminar with the Ethics Committee.

1999 Annual Spring Meeting

First the committee discussed a project being headed up by Peter Franklin at Locke, Purnell, Rain & Harrell in Dallas to update the working papers generated by the committee in connection with the extensive report on professional compensation published in the early '90s. (The report is on ABI Online at http://www.abiworld.org/abidata/online/TCnatrep.html.) Anyone interested in working on this project should contact Peter Franklin at (214) 740-8446.

At the last committee meeting, Ed Malpass of Irvine, Calif. suggested putting together a compensation guide to be published by ABI. The focus of this project will be to put together a step-by-step handbook for the practitioner regarding having his or her employment and compensation approved by the bankruptcy court. This project was discussed with Rick Meth, ABI Vice President-Publications, and awaits approval. Please contact Ed Malpass at (714) 453-8100 if you would like to work on this project.

Also at our meeting last December, Steve Schwaber suggested that the committee look into the ethical considerations with getting paid after the bankruptcy court has entered its order approving fees. Steve has agreed to make a presentation on this issue at the 1999 Winter Leadership Conference in La Quinta, Calif.

The meeting concluded with an presentation by Robert B. Millner from the Chicago office of Sonnenschein, Nath & Rosenthal on the subject of retainers as cash collateral. The committee thanks Rob for his presentation on this interesting and timely issue.