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Fifth Circuit Jettisons <i>Pro-Snax</i> 'Material Benefit' Standard for Bankruptcy Professional Compensation

By Alex M. Sher and Mark G. Douglas

Professionals retained in a bankruptcy case by a trustee, a Chapter 11 debtor-in-possession (DIP) or an official committee may be awarded “reasonable compensation” for “actual, necessary services” performed on behalf of their clients under section 330 of the Bankruptcy Code. In assessing whether particular services should be compensable, most courts, including the U.S. Courts of Appeal for the Second, Third and Ninth Circuits, examine whether “the services were objectively beneficial toward the completion of the case at the time they were performed” ' an approach sometimes referred to as the “reasonableness” test.

The Fifth Circuit, however, established a different standard for professional compensation in Andrews & Kurth LLP v. Family Snacks, Inc. (In re Pro-Snax Distribs., Inc.), 157 F.3d 414 (5th Cir. 1998). In Pro-Snax, the Fifth Circuit ruled that, to be compensable under section 330, services must result in “an identifiable, tangible, and material benefit to the bankruptcy estate.” The “material benefit” test, which focuses on outcomes rather than reasonable expectations, endured for 17 years.

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