Riker Danzig secured a victory on an issue of first impression in the U.S. Court of Appeals for the Second Circuit in a January 6, 2009, decision. In the opinion, the circuit court upheld a district judge’s ruling that the contingency fee arrangement was “pre-approved and, thus, could not be changed unless an event occurred that was “incapable of anticipation.”
In the decision, In re Smart World Technologies, et al., the Unsecured Creditors’ Committee of Smart World, a free dial-up Internet Service Provider that declared bankruptcy in 2000, sought to invalidate the contingency fee arrangement approved when the firm was retained to represent Smart World in a legal action for breach of contract with another Internet Service Provider, Juno Online Services, which had purchased Smart World’s subscriber list in a post-bankruptcy sale. After a recovery in the litigation, the Unsecured Creditors’ Committee objected to the fee award claiming that the arrangement had not been “pre-approved” and that unforeseen circumstances should invalidate the fee arrangement.
The circuit court rejected these arguments, including assertions that the “divergence of positions between Smart World and its creditors” and an “unusually prolonged litigation” (including Riker Danzig’s earlier, successful appeal in the case), constituted unanticipated circumstances sufficient to invalidate the fee agreement. Instead, the court found that a pre-approved fee structure should be upheld under the bankruptcy statute at issue, 11 U.S.C. 328(a), unless there are “developments not capable of being anticipated.”
Riker Danzig partner Alex Kress, who led the team representing Smart World, believes that the decision, while significant, will not lead more attorneys to pursue pre-approval of fees in bankruptcy cases. “Pre-approval will remain the exception rather than the rule,” Mr. Kress explained. “Most bankruptcy attorneys use ‘fee for services’ arrangements and bankruptcy courts generally preserve a retrospective ‘reasonableness’ review of those arrangements.”
Still, Mr. Kress believes the decision will be important for those circumstances, like the Smart World case, when contingency fee arrangements are the only practical way for the debtor to obtain quality representation. “The court’s opinion gives clarity and confidence to contingency-type arrangements,” stated Mr. Kress. “It helps to make people feel more confident in taking on these engagements, knowing that their fee agreements will be honored except in a very limited range of circumstances.”
