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Fifth Circuit Jettisons <i>Pro-Snax</i> 'Material Benefit' Standard for Bankruptcy Professional Compensation
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.
The Fifth Circuit finally abandoned the material benefit test in Barron & Newburger, P.C. v. Tex. Skyline, Ltd . (In re Woerner), 783 F.3d 266 (5th Cir. 2015). In Woerner , the court, after agreeing to a rehearing en banc of a previous panel ruling upholding Pro-Snax , reasoned that both the text of section 330 and its legislative history require a court to consider the reasonableness of services provided at the time the services were performed, rather than evaluating the material benefit of the services with the assistance of hindsight.
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