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.
Id.
[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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