Lawyers in probate and fiduciary matters, and in bankruptcy and receivership matters, are frequently entitled to seek payment of their fees from a corpus of trust or estate funds. Unlike in employment litigation and civil rights cases, the entitlement to fees is not always tied to success. But sometimes, legitimate questions arise about the appropriateness or reasonableness of such fee demands, and litigation can ensue. The U.S. Supreme Court has now agreed to decide the question of whether or not lawyers making such fee applications are entitled to be paid for the time and effort they spend pursuing their fees. The ultimate question before the Court is whether or not lawyers are entitled to “fees for fees.”
Late last month, the Supreme Court heard oral argument in the case of Baker Botts LLP v. ASARCO LLC. Although the case arises in the bankruptcy context, it also has potential broad impact in other areas, including probate and fiduciary cases in which lawyers are often entitled to fees for their services to a trust or an estate. The question is whether the time a lawyer spends defending a challenge to his or her fees is of benefit to the underlying estate, or solely for that lawyer’s own benefit.
Statutes in numerous jurisdictions provide for payment of fees to counsel who provide services to trusts and estates. Similarly, the Bankruptcy Code provides for compensation for “necessary” services rendered by professionals on behalf of the estate, and the same principles often apply in the state receivership context. In Baker Botts, the respondent, a reorganized debtor, did not contest the law firm’s entitlement to compensation under applicable sections of the Bankruptcy Code. But they did argue that when there is adversarial litigation over the reasonableness or appropriateness of such a fee application, the parties seeking those fees should not be compensated for their time and effort defending their fees. Rather, in that context, they argue that the so-called American Rule, under which all parties pay their own costs and fees, should prevail. The Fifth Circuit adopted that position and, on appeal, this dilemma was the subject of multiple amicus briefs and of specific questions posed during oral argument by Justices Scalia and Sotomayor. (Argument Recap: click here.)
Of course, there are statutes that provide for fee-shifting under certain circumstances. Federal statutes provide for the payment of fees to prevailing counsel in employment discrimination cases and in civil rights cases. In the civil rights context, Congress has specifically authorized the payment of “fees for fees” in appropriate circumstances. The question before the Supreme Court is whether courts may create other, judicial exceptions to the American Rule where there is no specific statutory authorization. Although the Court’s anticipated decision in Baker Botts would be limited on its face to the Bankruptcy Code, the decision could have a substantial effect in other contexts, such as state court probate and fiduciary disputes, and state court receivership matters.
State courts around the country have often denied the payment of “fees for fees” in the probate or fiduciary context, but it remains a hotly contested issue between the fiduciaries who retain counsel and the affected beneficiaries. Even when counsel may ultimately be entitled to some payment for services rendered to the trust or estate, beneficiaries would typically argue that the time and effort necessary to pursue a fee application, particularly in the face of a legitimate challenge to its reasonableness, does not benefit them or the estate and is therefore not compensable. The ultimate touchstone is the difference between services that are rendered for the benefit of the trust or estate, versus services that are merely in counsel’s own interest.
When the Supreme Court decides Baker Botts, presumably later this term, it is expected to clarify the limited circumstances, if any, in which counsel pursuing a contested fee application can also be compensated for the time spent in defense of that application. While the decision will necessarily be limited on the facts of that case to the Bankruptcy Code, and perhaps to certain distinctions between that Federal statute and other Federal fee-shifting statutes, the decision could also have far-reaching implications in a number of other state court and common law contexts. Beneficiaries of trusts and estates would benefit greatly from a clearly articulated and consistently applied standard under which applications for “fees for fees” would be determined. It is hoped that the Supreme Court’s decision would provide an important first step in clarifying the law in this area.