Compensation for bankruptcy professionals employed in bankruptcy cases is governed by Section 330 of the Bankruptcy Code. Section 330(a)(1) of the code provides, in pertinent part, that "the court may award to ... a professional person employed under Section 327 or 1103—(A) reasonable compensation for actual, necessary services rendered." Professionals whose employment is approved by the bankruptcy court consequently must file fee applications, to be reviewed and approved by the court for work performed in the bankruptcy case.

The issue of whether Section 330(a)(1) entitles estate professionals to fees incurred in connection with defending fee applications was recently before the U.S. Supreme Court in Baker Botts v. Asarco LLC, 576 U. S. ____ (2015). In an opinion delivered by Justice Clarence Thomas on June 15, the Supreme Court in a 6-3 decision affirmed the judgment of the U.S. Court of Appeals for the Fifth Circuit and held that estate professionals are not so entitled.

Facts

Asarco LLC, a copper mining, smelting and refining company, filed for Chapter 11 bankruptcy protection in 2005. Baker Botts and Jordan, Hyden, Womble, Culbreth & Holzer were retained by Asarco, with the approval of the bankruptcy court, to provide legal representation during Asarco's bankruptcy case. Asarco's successful Chapter 11 reorganization was due in large part to the prosecution by the two law firms of fraudulent transfer claims against Asarco's parent company, which resulted in a judgment against the parent company worth between $7 billion and $10 billion, according to the opinion. Collection of the judgment allowed for the payment in full of Asarco's creditors, and Asarco was able to emerge from bankruptcy with a healthy balance sheet. Asarco's law firms filed their fee applications and requested that they be awarded an enhancement to their fees. The newly reorganized debtor, now controlled by its parent company, objected to the law firms' fee applications. After a six-day trial, the bankruptcy court overruled Asarco's objections and awarded the law firms $120 million in fees, together with a $4.1 million enhancement for "exceptional performance," the opinion said. The bankruptcy court awarded an additional $5 million for fees incurred by the firms in defending their fee applications. Asarco appealed the award of fees to the district court, which held that the additional fees incurred by the firms in defending their fee applications were recoverable. Asarco appealed the district court decision and the Fifth Circuit reversed, ruling that counsel's fees incurred in defending their fee applications were not recoverable. On appeal from the Fifth Circuit—this time by the two law firms—the U.S. Supreme Court granted certiorari, and affirmed the judgment of the Fifth Circuit.

The Court's Analysis

  • The majority opinion:

In the majority opinion, Thomas analyzed the interplay between the American Rule (which provides that each party must pay its own attorney fees "unless a statute or contract provides otherwise") and Section 330(a)(1) of the Bankruptcy Code, which, as noted above, governs compensation for estate professionals.

The majority opinion focused its analysis on whether the text of Section 330(a)(1) displaced the American Rule with respect to fee-defense litigation. The majority noted that the express language of Section 330(a)(1), which provides for reasonable compensation for actual, necessary services rendered, "necessarily implies loyal and disinterested service in the interest of" the estate (citing Woods v. City National Bank & Trust Co. of Chicago, 312 U.S. 262 (1941). It rejected the arguments proffered by the law firms and the United States as amicus curiae that fee-defense litigation should be considered a service rendered to the estate under Section 330(a)(1) of the code. The court reasoned that, by its very nature, fee-defense litigation effectively benefits only the fee applicant and could not reasonably be viewed as "labor performed for another" or as "disinterested service to" the estate.

The United States also made a public-policy argument that "awarding fees for fee-defense litigation is a 'judicial exception' necessary for the proper functioning of the Bankruptcy Code." The court rejected this argument as being "flawed" and "irrelevant." Simply put, "Section 330(a)(1) itself does not authorize the award of fees for defending a fee application, and that is the end of the matter."

  • The dissenting opinion:

Justice Stephen Breyer wrote for the dissent and reasoned that the Bankruptcy Code grants courts a great deal of discretion in determining how to award "reasonable compensation" for services rendered, and "it is within a bankruptcy court's discretion to consider as 'relevant factors' the cost and effort that a professional has reasonably expended in order to recover his or her fees." In short, the dissent concluded that the explicit language of Section 330(a)(1) of the Bankruptcy Code provides a sufficient statutory exception to the American Rule, and the fees incurred in successful fee-defense litigation should be recoverable pursuant to Section 330(a)(1).

Potential to Change Landscape

The effects of the Baker Botts decision remain to be seen. Some have predicted an increase in the filing of frivolous objections to valid and meritorious fee applications. With fee-defense litigation fees no longer recoverable from the estate and professionals now left to "foot the bill" for these fees, it is foreseeable that those seeking to obtain a quick reduction in Chapter 11 professional fees will take a "what do we have to lose?" approach and object to fee applications as a matter of course. This potential consequence was raised by the United States in its briefing: Thomas pointed to Federal Rule of Bankruptcy Procedure 9011 and the possibility of issuing sanctions and an award of attorney fees against parties acting in bad faith as a deterrent. However, as a practical matter, the potential for sanctions under Rule 9011 will not necessarily deter the filing of frivolous objections and eliminate the time and cost associated with defending against such objections. Moreover, even if attorney fees were awarded to a fee applicant under Rule 9011, the ability to collect such fees will necessarily depend on the financial wherewithal of the sanctioned party to honor an award granted under Rule 9011.

Practically speaking, the Baker Botts decision provides objecting parties with another weapon in their attempt to convince fee applicants to compromise the fees requested in fee applications. As we all know, litigation can be expensive. The law firms in this case incurred approximately $5 million in fees in connection with the fee-defense litigation and were ultimately successful in achieving an award for the fees requested. With the benefit of hindsight, these firms may very well have agreed to shave millions of dollars in valid fees in order to avoid the cost—and the headache—of defending each time entry contained in their fee applications. It is unclear how the bankruptcy bar will adjust to the Baker Botts decision, but this decision certainly has the potential to change the landscape of fee-defense litigation. It may well be that only congressional action will provide the appropriate solution to this potential problem. On a larger scale, this case highlights the issue of whether existing rules and laws provide sufficient deterrent to "frivolous litigants" and their counsel.

This article originally appeared in The Legal Intelligencer and is republished here with permission from law.com.