In February, we told you about Judge Walrath’s recent opinion in In re Boomerang Tube, Inc., which rejected a variety of different arguments, including a contractual work-around, that sought to circumvent the Supreme Court’s decision in Baker Botts LLP v. ASARCO, LLC. In ASARCO, the Supreme Court held that professionals representing debtors and creditors’ committees cannot be reimbursed by the estate for fees incurred in defending objections to their fees. Not even two months later and it now appears clear that Boomerang Tube is the law of the land in Delaware.
On February 1, 2016, Bankruptcy Judge Shannon posted a letter to counsel regarding his order to retain debtors’ counsel in In re New Gulf Resources (15-12566). Judge Shannon had approved the retention of debtors’ counsel but deferred consideration of a request for a fee premium payable in the event counsel was forced to litigate its fees. The United States Trustee had objected to this provision based on ASARCO. Judge Shannon deferred consideration because, at the time, the issue was pending before Judge Walrath in Boomerang Tube. On Friday, January 29, 2016, the Boomerang Tube opinion was published and that next Monday, Judge Shannon announced that he concurred with the opinion and ordered counsel to submit a revised order to clarify the terms of their retention.
Only one week later, Bankruptcy Judge Sontchi too issued a letter to counsel in In re Samson Resources Corporation (15-11934) regarding the retention of debtors’ counsel. Judge Sontchi had previously approved counsels’ retention applications but had stated in the approval orders that the application provisions that permitted the reimbursement for fees and expenses incurred in connection with litigating with third parties over legal services provided under their respective engagement letters would not be effective until further order of the court. A hearing on these provisions had been set for January but was subsequently cancelled by the court. In his letter docketed on February 8, 2016, Judge Sontchi stated his agreement with Judge Walrath’s reasoning in Boomerang Tube because the reimbursement provisions were not statutory or contractual exceptions to the American Rule (each party must pay its own attorneys’ fees absent explicit statutory authority to the contrary) and are not reasonable employment terms. As such, he instructed counsel to submit revised orders regarding the retention applications.
Boomerang Tube was focused on an ASARCO work-around proposed by counsel for the creditors’ committee. At the end of the Boomerang Tube opinion Judge Walrath included a footnote making clear that the court would reach the same conclusion on any such fee defense provisions included in a retention agreement filed by any professional under section 328(a) of the Bankruptcy Code. Judge Shannon and Judge Sontchi have now expanded Boomerang Tube and formally applied its reasoning to debtor’s counsel as well.
Three of Delaware’s six bankruptcy judges have now officially expressed their opinion rejecting ASARCO work-arounds in engagement letters for professionals seeking retention under section 328(a) of the Bankruptcy Code. Though we do not have the transcripts, it has been reported that two other Delaware bankruptcy judges have mentioned informally that they too would adopt Boomerang Tube and apply it in their courts. On February 26, 2016, Judge Gross reportedly stated during a disclosure statement hearing in In re Magnum Hunter Resources Corp. (15-12533) that he would be inclined to agree with his colleagues if asked to rule on Boomerang Tubeissues. And, at a February 29, 2016 omnibus hearing in In re Newbury Common Associates. LLC (15-12507), Judge Silverstein reportedly stated that she too would follow Judge Walrath’s ruling.
With at least three and as many as five of the six Delaware bankruptcy judges having made their opinions clear, it appears certain that Boomerang Tube is the law of Delaware and professionals will not be permitted to include in their engagement materials contractual work-arounds designed to circumvent the Supreme Court’sASARCO ruling. It is still unclear how courts in other jurisdictions will approach these attempted circumventions; however, the Delaware courts are very influential nationwide and we would expect to see similar efforts rejected by courts in other jurisdictions.