Document Type
Research Memorandum
Publication Date
2009
Abstract
(Excerpt)
Although the Bankruptcy Code establishes a clear prohibition against the sharing of fees by persons receiving compensation or reimbursement under section 504, it is unclear whether bankruptcy attorneys may be permitted to enter into “hedging” arrangements in order to obtain downside protection against risks associated with appeal. Ultimately, what is needed to decide this issue is a determination of what constitutes “sharing” of compensation within the meaning of the Code. Recently, in In re Winstar Communications, Inc., 378 B.R. 756 (Bankr. D. Del. 2007), the bankruptcy court found no ambiguity in the statute, and gave the term “sharing” its plain meaning, when it rejected a proposed hedge transaction between attorneys retained by a Chapter 7 Trustee and a lending institution. Id. at 761. This memorandum will argue that the proposed hedge transaction should have been allowed because latent ambiguity exists in the term “sharing,” and because the proposed agreement did not appear to offend the policy considerations underlying section 504. Part I of this memorandum describes fee sharing generally under section 504, including the policy considerations underlying the prohibition against fee-sharing, as well as the leading cases that have addressed the issue in the context of professional ethics. Part II examines judicial treatment of section 504, providing examples of impermissible fee-sharing arrangements, as well as fee arrangements that have been allowed. Part III focuses on In re Winstar, how the court came to its conclusion, and why the court’s reasoning is flawed. This memorandum concludes with a discussion of the impact that In re Winstar may have on the larger context of bankruptcy law, professional ethics and compensation.