The Supreme Court of the United States recently addressed whether estate professionals could recover fees expended in defending fee applications. Baker Botts L.L.P. v. ASARCO LLC, 576 U.S. _____ (2015). A divided court ruled that the plain language of 11 U.S.C. § 330(a)(1) allowed compensation only for “actual, necessary services rendered[,]” and that to allow fees for defending fee applications would be contrary to the statute and the “American Rule” that each litigant pay her own attorneys’ fees unless a statute or contract provides otherwise.
In 2005, ASARCO, a copper mining, smelting, and refining company, filed for Chapter 11 bankruptcy protection. ASARCO obtained the Bankruptcy Court’s permission to hire two law firms, Baker Botts L.L.P. and Jordan, Hyden, Womble, Culbreth & Holzer, P.C. Among other services, the firms prosecuted fraudulent-transfer claims against ASARCO’s parent company and ultimately obtained a judgment against it worth between $7 and $10 billion. This judgment contributed to a successful reorganization in which all of ASARCO’s creditors were paid in full.
After ASARCO’s counsel filed fee applications under § 330(a)(1), ASARCO, controlled again by its parents company, objected to the compensation requested. After extensive discovery and a 6-day trial on fees, the Bankruptcy Court rejected ASARCO’s objections and awarded the firms approximately $120 million for their work in the bankruptcy proceeding plus a $4.1 million enhancement for exceptional performance. The court also awarded the firms over $5 million for time spent litigating in defense of their fee applications.
The Court of Appeals for the Fifth Circuit ultimately reversed the award of fees for defending the fee application, observing that §330(a)(1) provides “that professional services are compensable only if they are likely to benefit a debtor’s estate or are necessary to case administration.” In re ASARCO, L.L.C., 751 F.3d 291, 299 (5th Cir. 2014).
The Supreme Court’s Rationale
The Supreme Court’s affirmance of the Fifth Circuit was rooted in the “American Rule”: Each litigant pays his own attorney’s fees, win or lose, unless a statute or contract provides otherwise. Slip Op. at 3 (citing Hardt v. Reliance Standard Life Ins. Co., 560 U. S. 242, 252–253 (2010)). In a textual analysis, the Court reasoned that defending a fee application against a client was simply not a “service rendered” on behalf of the client. In so concluding, the Court rejected the law firms’ argument that the estate does benefit from lawyers defending fee applications.
The Court also rejected arguments by the United States as amicus curiae, which urged the Court to allow fees incurred defending fee applications on policy reasons and because such fees were part of the “reasonable compensation” awardable under § 330(a)(1). Justice Breyer’s dissent additionally argued that the “reasonable compensation” provision of § 330(a)(1) allows an award of fees incurred defending fee applications because in some cases, unless such fees are allowed, the fee award would be artificially low and, therefore, not “reasonable.” The Court rejected these arguments and stated in passing that Federal Rule of Bankruptcy Procedure 9011 could be used to militate against the risk of frivolous objections to fee applications. Potential Ramifications
An increase in objections to fee applications should be anticipated. Because defense fees will be unrecoverable, debtor’s counsel may be inclined to efficiently resolve objections rather than engage in protracted litigation.
We anticipate the most likely avenue bankruptcy professionals will employ will be to include a provision in engagement letters that fees incurred defending fee applications are expressly recoverable. This would address the American Rule by expressly providing, in a contract, that fees are recoverable. However, courts could refuse to uphold such provisions based on an argument that the Bankruptcy Code evidences Congress’s intent to preempt state law regarding compensation of bankruptcy professionals. Ultimately, congressional intervention and amendment of the Bankruptcy Code would be the most certain way to ensure fair compensation for bankruptcy professionals.