It’s always risky when the Supreme Court grants certiorari in a bankruptcy case. While the Court’s opinion may bring clarity to the narrow question upon which certiorari was granted, it often creates a host of unintended problems in other areas.
This month’s grant of certiorari to resolve the split between the Fifth and Ninth Circuits over the compensability of legal fees incurred by estate counsel in defending a fee award may present far more downside risk to bankruptcy professionals than upside potential. See In re ASARCO, L.L.C.), 751 F.3d 291 (5th Cir. 2014), cert. granted, Baker Botts L.L.P. v. ASARCO L.L.C., 2014 WL 3795992 (Oct. 2, 2014).
On the narrow question, the current strong majority view is that there is discretion to award fees for the successful defense of a fee award in an appropriate case. While the Fifth Circuit adopted aper se rule prohibiting such awards, it may have been better for bankruptcy professionals to leave that decision as the outlier than to risk its nation-wide adoption by the Supreme Court.
Since the statutory language is not very clear on the issue, the Court may resort to a policy approach and that risks new pronouncements about professional fees in bankruptcy that could implicate a host of compensation issues. While it is unlikely that the Court would return to the economy standard rejected by the Code, there is plenty of criticism of bankruptcy compensation practices in the academic literature and in reported decisions that may be brought to the Justices’ attention either by the Respondent or their law clerks’ research. That’s the downside. On the upside, the Court may aggressively affirm the comparable services approach. Anyone want to bet on the pro- or anti-bankruptcy lawyer views of each of the nine Justices?
Bankruptcy compensation has always been a hard sell since there is an intuitive negative reaction to professionals being well compensated when employees, pensioners and other creditors are taking a bath. That sentiment led to the now-rejected economy approach and the “bankruptcy haircut” known to older professionals who practiced under the Bankruptcy Act. In that sense, the ASARCO case is as good as any for this issue since the bankruptcy court called the case the most successful Chapter 11 in the history of the Code and the law firm’s success resulted in full payment of creditors.
On the other hand, the firm was handsomely compensated, with a fee award of more than $100 million plus a $4 million bonus. The Fifth Circuit’s opinion suggests that the Court thought that seeking compensation for fee defense costs on top of such a generous award was a bit too aggressive. It even used the kind of language that justified the old economy approach.
While in ASARCO the fee defense costs ran to several million dollars, in most cases issue is not of great importance. Let’s hope the Justices don’t “smell the blood of [a bankruptcy lawyer]” or decide to “grind his bones to make [their] bread.”