The U.S. Supreme Court has issued its opinion in Baker Botts v. Asarco, holding that professionals retained in bankruptcy cases cannot receive compensation for the costs of defending their fee applications. Even if you aren’t a bankruptcy professional, there are two things to keep in mind about this opinion. First, it won’t stop us restructuring professionals from doing our jobs. Second, the reality of commercial bankruptcy practice is often at odds with the pure textual analysis favored by the Supreme Court.
The holding itself is straightforward. Section 330 of the Bankruptcy Code authorizes retained professionals to receive reasonable compensation for “actual, necessary services rendered”. The Court, reviewing the statue, held that the language did not authorize a deviation from the ubiquitous “American Rule” which mandates that unless a statute or a contract provides otherwise, each party bears the costs of his own attorneys’ fees. Services rendered, it held, are those rendered to the client, not in defense of one’s own fee application. To be sure, this case did not have the kind of facts that engender sympathy for poor bankruptcy professionals. The primary firms in question received a combined award of $120 million in fees and a $4.1 million enhancement for exceptional performance (truly exceptional in the sense that all creditors in the case were paid in full). On top of this, however, the Bankruptcy Court also awarded $5 million for the costs of defense of the original fee applications. It was that additional attorneys’ fee award that the Supreme Court overturned.
This blogger is neither surprised by the High Court’s ruling, nor disheartened by it. But I am reminded that the general bar does not face the same challenges that come with the privilege of practicing under the Bankruptcy Code. Bankruptcy professionals likely face stricter scrutiny of their professional practice that any other legal or financial professional. We are required to obtain court approval of our engagement, rates, retainers, and staffing after conducting excruciating reviews of our connections to hundreds or thousands of parties to make certain we face no conflicts of interest. We must record our time in minute detail, in six minute increments, justifying the necessity, efficiency, and result of every action we take. We have to publicly file our time records, inviting scrutiny from any party that may choose to object. We are frequently constrained in what we can do for our client, for example when our fees are limited by the debtor’s agreement with its lender that no collateral of the lender will be used to litigate with the lender. We are forced to justify our fees at multiple levels, first with our client, then with the United States Trustee and/or the fee examiner, then with the court. Now, when all of this hard work is attacked, we can’t be paid for the defense.
I am not complaining about any of this. When there isn’t enough money to go around, every penny is precious. But the Supreme Court was entirely unmoved by these facts, stating that concerns about fee litigation instigated as a pressure tactic were “unsupported predictions.” The Court would be hard pressed to find a bankruptcy professional who could not provide it with a copy of spurious fee objection and the Bankruptcy Court’s order denying the same, often after a fight that takes months and eats up a considerable percentage of the professional’s award. And I believe that it is this disconnect between the “American Rule” and bankruptcy reality that has caused so many bankruptcy professionals to feel slighted by the Asarco opinion. Ordinary litigants can engage professionals of their choice and agree to compensate them as they choose even if the court does not award attorneys’ fees as part of the litigation. Bankruptcy professionals can’t even provide services to their clients or be paid by them without permission from someone else.
So pat your bankruptcy professional on the back and remember, we are the last general practitioners in the legal field. When a debtor files for bankruptcy, it all hits the fan. We juggle financing, employee compensation, contract review, tax liabilities, customer communications, and litigation; and that doesn’t include the part about reorganizing the debtor. But I’m a big girl. So I’ll put on my conservative black suit and head back to Bankruptcy Court to represent my clients, even knowing that someone may object to my fees and I won’t be paid for defending them; because that is part of the service to my client.