On February 25, 2016 we discussed decisions by two judges of the United States Bankruptcy Court for the District of Delaware adopting and expanding upon Judge Walrath’s decision in In re Boomerang Tube, Inc., which held that a bankruptcy estate may not compensate professionals under section 330(a)(1) of the Bankruptcy Code for fees incurred in defending fee applications. One of the decisions we discussed was Judge Shannon’s letter ruling in New Gulf Resources. As a reminder, prior to the Boomerang Tube ruling, New Gulf Resources filed an application seeking to retain Baker Botts as counsel in its bankruptcy case, which included a request for approval of a “fee premium” payable in the event of litigation over Baker Botts’ fees. Judge Shannon filed a letter noting that he agreed with the holding of Boomerang Tube and requesting that the parties submit an order clarifying the terms of Baker Botts’ retention in accordance with Boomerang Tube. Judge Shannon subsequently invited Baker Botts to file a responsive brief on the question and upon reviewing such brief, ultimately rejected the request for a fee premium.
Baker Botts’ Brief
Baker Botts submitted a brief in support of its “fee premium” request. In the brief, Baker Botts asserted that the fee premium was not compensation for fee defense costs, and accordingly, neither the United States Supreme Court’s decision in Baker Botts v. ASARCO, nor Judge Walrath’s decision in Boomerang Tube, had any bearing on the request. Baker Botts asserted that the fee premium was reasonable compensation pursuant to section 330 of the Bankruptcy Code when taking into account that (i) other professionals in similar cases charged comparable or even higher rates, (ii) Baker Botts charged a comparable rate, inclusive of the fee premium, to other similarly-situated clients, and (iii) the current state of the oil and gas industry has increased the overall demand for restructuring professionals at Baker Botts.
Baker Botts further asserted that the fee premium did not seek a reimbursement for hourly fees incurred in association with defense of any fee application, but rather the flat premium compensated Baker Botts for, among other things, the “risk associated with the collection of fees from a debtor client and the high demand for Baker Botts’ services, particularly given the firm’s oil and gas expertise and the depressed oil price environment.” Baker Botts further noted that had it simply opted to charge the debtors its standard rates, which are approximately ten percent higher than the rates being charged in New Gulf, the firm likely would not have faced a challenge from the Office of the United States Trustee.
The Bankruptcy Court’s Decision
On March 16, 2016, the Bankruptcy Court filed a letter noting that it had reviewed Baker Botts’ submission in support of the fee premium. In his letter, Judge Shannon stated that he stood by his earlier determination that the structure proposed by Baker Botts ran afoul of the holdings in ASARCO and Boomerang Tube. While Judge Shannon “acknowledge[d] the creative approach,” he did not find a meaningful distinction between the fee premium in New Gulf and the fee structure Judge Walrath rejected in Boomerang Tube.
New Gulf is simply the latest case in Delaware to reject a contractual work-around to the ASARCO decision. It remains to be seen whether bankruptcy courts outside of Delaware will follow the ruling in Boomerang Tube prohibiting the contractual work-arounds rejected there and in New Gulf and whether other professionals will test the limits of ASARCO, in Delaware and elsewhere, by designing different creative methods to avoid the same result. We will continue to report on these developments.