Chapter 7 Trustee's Counsel's Effort to Enter Into Hedging Transaction With Respect to Anticipated Contingency Fees was Impermissible Fee Sharing
In re Winstar Comms., Inc., Nos. 01-1430 (KJC)–01-462(KJC), -- B.R. --, 2007 WL 4268775 (Bankr. D. Del. Dec. 4, 2007) (Judge Kevin J. Carey)
Professionals retained by the Chapter 7 Trustee of the estate of debtor Winstar Communications, Inc. filed a motion to approve a hedging transaction with a lender under which they would receive a fixed price payment from the lender in return for the lender paying all or some of the contingency fees that counsel would receive for representing the trustee in an adversary proceeding. The United States Bankruptcy Court for the District of Delaware found that this transaction was a form of fee sharing that was prohibited under 11 U.S.C. § 504. Accordingly, the Court denied the motion, without prejudice to the professionals’ ability to seek the approval of a revised arrangement.
The Chapter 7 Trustee of the estate of debtor Winstar Communications, Inc. retained special litigation counsel in connection with an adversary proceeding against Lucent Technologies, Inc. The Trustee also retained a special litigation consultant. Each was to be awarded a contingency fee as compensation for their services.
The Trustee was successful at trial and the judgment was approximately $300,000,000.00. Lucent appealed to the United States District Court for the District of Delaware, which affirmed, and there is currently an appeal pending before the United States Court of Appeals for the Third Circuit.
Trustee’s counsel and consultant asked the United States Bankruptcy Court for the District of Delaware to approve a hedging transaction with Credit Suisse Loan Funding LLC under which they would receive from Credit Suisse an undisclosed fixed price. In return, Trustee’s counsel and the consultant agreed to pay to Credit Suisse the full amount of their contingency fees, up to $10,000,00.00, while keeping the price paid by Credit Suisse. If the contingency fees were to exceed $10,000,00.00, they would share their fees in excess of $10,000,00.00. Credit Suisse waived any right that it might have had to object to the settlement or other disposition of the adversary proceeding.
The United States Trustee objected to this arrangement, arguing that, under 11 U.S.C. § 504, it constituted impermissible fee sharing “by a person receiving compensation or reimbursement under section 503(b)(2) or 503(b)(4)” Although the Court did not disagree with the contention that the proposed arrangement did not violate any of the policies that section 504 was promulgated to advance, the Court nonetheless found that section 504 clearly forbade such a transaction. Accordingly, the Court was bound to apply the statute as written and deny the motion.
However, although the Court denied the motion to approve the transaction, the denial was without prejudice to the parties' rights to seek approval of a transaction that would comply with section 504.
