19 November 2015

SCOTUS in Review: US Supreme Court Bankruptcy Cases 2014-2015 -- Part 5

After a short break, it's back to my review of what the Supreme Court has recently done in connection with bankruptcy law. (Part 1, Part 2, Part 3, and Part 4.)

IV. Administration of the Estate: Attorneys’ Fees

In Baker Botts L.L.P. v. ASARCO LLC,[1] the work of the debtor’s attorneys helped lead to the rarest of all bankruptcy results: one where all creditors are paid in full. ASARCO, an integrated copper mining, smelting, and refining company, filed for relief under chapter 11 and retained Baker Botts and another firm as counsel for the debtor in possession. The firms represented ASARCO in a complex fraudulent conveyance action against its parent company and obtained a judgment valued between $7 and $10 billion.[2] Faced with this judgment, the parent provided cash to ASARCO sufficient to pay all its creditors in full. With the elimination of the interests of ASARCO’s creditors, its parent resumed control of the debtor and promptly caused it to object to the applications for attorneys’ fees of its counsel. After a six-day hearing, the bankruptcy court awarded attorney’s fees of over $120 million, plus a fee enhancement of $4.1 million for exceptional work and another $5 million for work involved in defense of the application.

On appeal, the district court largely affirmed the bankruptcy court and, in particular, held that Baker Botts was entitled to fees on the defense of its application.[3] The Fifth Circuit reversed and held that the attorneys were not entitled to fees in defense of their application because they, not the debtor, were the primary beneficiaries of that work.[4]

Notwithstanding the Fifth Circuit’s decision, the state of the law on this issue was confused[5] so the Supreme Court granted Baker Botts’s petition for certiorari and affirmed. Writing for the majority, Justice Thomas began with the “bedrock principle” of the so-called American Rule, in which each litigant pays its own fees unless a statute or contract provides otherwise.[6] The terms of retention of counsel by ASARO did not “provide otherwise” so the question became whether the policy, history,[7] or implications of Bankruptcy Code § 330 did so.

The majority concluded that the reference to “services” in Bankruptcy Code § 330(a)(1)(A) was limited to direct services to the debtor and that defense of a fee application was not such a direct service.[8] Moreover, defense fees were not indirect services to the debtor even though failure to award them would dilute the recovery of its professionals.[9] Third, the majority was unpersuaded that Bankruptcy Code § 330(a)(1)(6), which authorizes compensation for preparation of the underlying fee application, permitted fees for the defense of that application.[10] Finally, the majority rejected the argument that there should be a judicial exception for fees incurred in defending a fee application—subject as it is to attacks from multiple parties—because to do so would be to rewrite the statute.[11] Justice Sotomayor believed that the judicial exception discussion was unnecessary and thus concurred with the majority except with respect to that portion of Justice Thomas’s opinion. Justices Breyer, Ginsburg, and Kagan dissented.[12]

The majority opinion noted that, in addition to statutory reversals of the American Rule, contracting parties can agree to reallocate attorneys’ fees. This observation suggests that professionals retained by debtors or creditors’ committees under Bankruptcy Code § 327(a) could seek such a provision in their retention agreements. Alternatively, while it would not have been possible in the ASARCO case, a debtor could employ special counsel to vindicate the interests of its general bankruptcy counsel to payment of its fees. The fees of special counsel could be compensable as an expense of the estate under Bankruptcy Code § 330(a)(1)(B). Only time will tell if these alternatives will withstand objection.

[1] 135 S.Ct. 2158 (2015). Disclaimer: I was a party to an amicus brief supporting petitioners.
[2] According to the Court of Appeals for the Fifth Circuit, this “was the largest fraudulent transfer judgment in Chapter 11 history.” Asarco, L.L.C. v. Jordan Hyden Womble Culbreth & Holzer, P.C. (In re ASARCO, L.L.C.), 751 F.3d 291, 293 (5th Cir. 2014).
[3] ASARCO LLC v. Baker Botts, L.L.P. (In re ASARCO LLC), 477 B.R. 661, 675 (S.D. Tex. 2012) (“The time spent defending a fee application is necessary and beneficial to the bankruptcy system as a whole, and indirectly, to each estate participating in the system.”) (Citation and internal quotation marks omitted.)
[4] In re ASARCO, 751 F.3d 299 (“The primary beneficiary of a professional fee application, of course, is the professional.”).
[5] See 3 Collier on Bankruptcy ¶ 330.03[16][a] (16th ed. 2013).
[6] ASARCO, 135 S.Ct. at 2164. For a critique of the Court’s assertion that the American Rule dates back to the eighteenth century see Bruce A. Markell, Loser’s Lament: Caulkett and ASARCO, 35 Bankr. L. Letter 1 (August 2015).
[7] The Court failed to address the history of Bankruptcy Code § 330. For a thorough consideration of the award of fees in defense of fee applications in Chapter X cases see Brief for Amici Curiae Bankruptcy Law Scholars in Support of Petitioners, 2014 WL 7145500 (2014).
[8] ASARCO, 135 S.Ct. at 2165 (“Time spent litigating a fee application against the administrator of a bankruptcy estate cannot be fairly described as ‘labor performed for’–let alone ‘disinterested service to’–that administrator.”).
[9] Id. at 2166.
[10] The majority was not persuaded for the following reason:

The Government argues that because time spent preparing a fee application is compensable, time spent defending it must be too. But the provision cuts the other way a § 327(a) professional’s preparation of a fee application is best understood as a “service[e] rendered” to the estate administrator under § 330(a)(1), whereas a professional’s defense of that application is not.

[11] Id. at 2168 (“More importantly, we would lack the authority to rewrite the statute even if we believed that undercompensated fee litigation would fall particularly hard on the bankruptcy bar.”).
[12] The dissenters rejected the majority’s wooden focus on “actual, necessary services” language in Bankruptcy Code § 330(a)(1)(A) in light of the introductory phrase, “reasonable compensation.” Id. at 2170 (“[W]ork performed in defending a fee application may, in some cases, be a relevant factor in calculating ‘reasonable compensation.’”).

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