Can bankruptcy lawyers recover compensation for fees incurred through defending a fee application against a bankruptcy client’s objections?
This case presents the Supreme Court with the opportunity to decide whether courts have the authority to grant defense-fee awards when a law firm defends itself against its bankruptcy client’s objections to legal fees. ASARCO argues that § 330 of the Bankruptcy Code (“the Code”) does not permit awards for compensation to bankruptcy practitioners for successfully defending fee applications. In opposition, Baker Botts contends that § 330 gives courts broad discretion to award compensation for services that are necessary to the administration of bankruptcy cases, including successfully defending fee applications. The Supreme Court’s decision in this case will impact the compensation of bankruptcy lawyers and the rights of bankruptcy clients.
Questions as Framed for the Court by the Parties
Section 330(a) of the Bankruptcy Code grants discretion to bankruptcy judges to award "reasonable compensation for actual, necessary services rendered by" an attorney or other professional employed by the estate. 11 U.S.C. §330(a)(1). Before any compensation may be awarded, the Code requires professionals to complete a detailed fee application, to which any party in interest may object. It is undisputed that the preparation of such a fee application is compensable. But the circuits have now divided over whether defending it is likewise compensable. The Ninth Circuit, like the vast majority of lower courts, has held that bankruptcy judges may award compensation for the defense of a fee application, at least when the defense is meritorious and successful. It so held in part because categorically denying compensation would undermine the statutory requirement that bankruptcy professionals' compensation not be diluted compared to that of non-bankruptcy practitioners. But the Fifth Circuit, in the judgment below, held that such compensation is never authorized by §330(a).
The question presented is whether Section 330(a) of the Bankruptcy Code grants bankruptcy judges discretion to award compensation for the defense of a fee application.
In 2005, Respondent ASARCO, a copper mining company, filed for bankruptcy protection under Chapter 11 of the federal Bankruptcy Code (the “Code”) due to mounting cash-flow and litigation problems. Prior to this Chapter 11 filing, Grupo Mexico (“Grupo”), ASARCO’s parent company, took ASARCO’s controlling interest in the Southern Copper Corporation (“SCC”). Petitioners Baker Botts and Jordan, Hyden, Womble, Culbreth & Holzer (collectively, “Baker Botts”), bankruptcy counsel for ASARCO, successfully sued Grupo for the fraudulent transfer of SCC and recovered between $7 and $10 billion, the largest such judgment in bankruptcy history. As a result of the new cash flow stemming from this litigation, ASARCO was able to exit out of more than four years of bankruptcy. Specifically, Baker Botts helped ASARCO to minimize its existing debt, increase its cash flow, and resolve its litigation problems.
Baker Botts’ work was commended as “probably the most successful Chapter 11 of any magnitude in the history of the Code.” Baker Botts thus applied for attorney fees under the Code, including a 20 percent enhancement for exceptional performance; however, ASARCO, which was again controlled by Grupo, objected to virtually every aspect of the fee structure accompanied by large-scale discovery requests.
The bankruptcy court rejected each one of ASARCO’s objections and approved the primary award of almost $130 million plus reimbursement for Baker Botts’ litigation costs (roughly $5 million) for defending these fee-application objections. The district court eventually affirmed the bankruptcy court’s $5 million defense-fee award. ASARCO appealed to the Court of Appeals for the Fifth Circuit (“Fifth Circuit”) and arguing that Chapter 11 of the Code did not authorize bankruptcy judges to grant these defense-fee awards.
The Fifth Circuit affirmed the primary award but reversed the district court’s grant of defense-fee awards. The Fifth Circuit found such awards outside the bankruptcy court’s discretion because these awards were not for services directly benefiting ASARCO’s bankruptcy estate. The Fifth Circuit, however, acknowledged that its ruling conflicted with that of other courts of appeals, which hold that bankruptcy judges do possess the power to award defense-fee awards.
In October 2014, the Supreme Court of the United States granted Baker Botts’ petition for certiorari review in order to determine whether defense-fee awards are available to bankruptcy attorneys. Oral argument is scheduled for Wednesday, February 25, 2015.
The Supreme Court must determine whether § 330 of the Code (“§ 330) allows courts to award compensation to practitioners for defending fee applications. Section 330(a)(1) states that bankruptcy judges “may award . . . reasonable compensation” to attorneys that work on behalf of a bankruptcy estate. In determining this reasonable compensation, § 330(a)(3)(C) requires courts to consider whether the attorney’s services were “necessary to the administration of, or beneficial . . . toward the completion” of the bankruptcy case.
Baker Botts contends that § 330 permits awards to compensate for defense-fee awards because defending fee applications qualifies as “an actual, necessary servic[e].” ASARCO, however, argues that § 330 does not permit courts to award compensation for defense-fee awards because the costs are not necessary to assisting the trustee in bankruptcy.
DOES § 330 ALLOW BANKRUPTCY PRACTITIONERS TO BE COMPENSATED FOR DEFENSE-FEE AWARDS?
Baker Botts argues that courts have the discretion to grant defense-fee awards because defending fee applications qualifies as “an actual, necessary servic[e].” Baker Botts points out that defense-fee awards are not listed as one of the “narrow exclusions from compensability” listed in the Code. Baker Botts contends that, if Congress wanted to prevent defense-fee awards, Congress would have explicitly excluded them from this list. Baker Botts also argues that the use of the word “may” in § 330(a)(1) suggests that a bankruptcy judge has “discretion” to award such defense-fee awards. Baker Botts further argues that defense-fee awards qualify as “reasonable compensation” for core services because courts have repeatedly interpreted “other federal statutes” to permit this type of compensation. Baker Botts points out that the Supreme Court already permitted the granting of defense-fee awards in Commissioner, INS v. Jean and that the reasoning used in that case should also be applied to this one.
ASARCO counters that the Supreme Court should adopt a “plain-text reading” of § 330. ASARCO points out that the Code states that § 330’s definition of “reasonable compensation” applies only to “a professional employed under § 327.” ASARCO thus argues that § 330(a)(1) cannot be understood without reference to § 327. ASARCO points out that § 327 states that attorneys can be appointed to “represent or assist the trustee in carrying out the trustee’s duties under the Code.” ASARCO argues that, when § 330(a)(1) is understood as being complementary to § 327, the compensation mentioned in § 330(a)(1) was only intended for services performed for the client. ASARCO contends that “self-interested” work, such as defending fee applications, thus should not qualify. ASARCO further argues that the language of § 330(a)(1) supports this interpretation. ASARCO explains that Congress used the word “rendered” in order to convey that attorneys should only be compensated for work that they performed for the client. Further, ASARCO argues that, when a law firm defends a fee application, the firm’s actions do not benefit the client, the “trustee[,] or . . . the estate.” Such actions, according to ASARCO, are only for the benefit of the law firm itself.
UNDER WHAT CIRCUMSTANCES IS THERE AN EXCEPTION TO THE "AMERICAN RULE"?
The American Rule states, “each party to litigation bears its own costs.” Baker Botts thus argues that § 330(a)(3)(C) creates a statutory exception to the American Rule. ASARCO, however, argues that § 330(a)(3)(C) does not create such an exception.
Baker Botts argues that § 330(a)(3)(C) specifically authorizes courts to consider services that are necessary “at the time at which service was rendered.” Baker Botts contends that defense-fee awards fall within this timeframe and thus should be part of a statutory exception to the American Rule. Baker Botts explains that defending a fee application is a necessary aspect of resolving bankruptcy cases because fee applications are mandatory in bankruptcy cases. Baker Botts adds that filing a fee application entails allotting “time to respond to objections and justify the fee application before the court.” Thus, Baker Botts contends that the process of defending a fee application qualifies as a necessary “administrative expense” that is compensable under § 330(a)(3)(C).
ASARCO, on the other hand, argues that courts can only grant defense-fee awards when the litigant “invokes an exception to the American Rule, such as alleging that the other party made allegations in bad faith.” ASARCO further explains that the lack of statutory language regarding a certain type of compensation is not enough to suggest that there is an exception to the American Rule for that type of compensation. ASARCO emphasizes that § 330(a)(1) does not affirmatively state that courts can award compensation to bankruptcy practitioners for “engag[ing] in litigation adverse to the estate.” ASARCO contends that neither 327(a) nor 330(a)(1) are meant to shift fees from one bankruptcy party to the other. ASARCO thus concludes that, since there is no language in either statute explicitly stating that courts can shift the fees associated with litigation of fee applications, no exception to the American Rule applies.
This case presents the Supreme Court with the opportunity to decide whether bankruptcy attorneys can recover defense-fee awards when a law firm defends itself against its bankruptcy client’s objections to legal fees. While Baker Botts contends that § 330 permits courts to award compensation for defense-fee awards, ASARCO vigorously disagrees. The Supreme Court’s decision in this case will impact the compensation of bankruptcy lawyers and the rights of bankruptcy clients.
COMPENSATION OF BANKRUPTCY LAWYERS
Bankruptcy lawyers in New York City and Florida, in support of Baker Botts, argue that bankruptcy attorneys should receive defense-fee awards because the Code does give bankruptcy judges the authority to grant such awards. These bankruptcy professionals assert that these defense-fee awards are “part and parcel” of a reasonable compensation for bankruptcy cases. These professionals also explain that the lack of such adequate compensation will discourage “competent professionals” from representing bankruptcy clients in the future. Further, the bankruptcy professionals add that the Fifth Circuit’s ruling will create a perverse incentive for bankruptcy clients to challenge bankruptcy attorneys’ fees with no economic disincentive.
In opposition, several law school professors, in support of ASARCO, argue that bankruptcy attorneys should not receive defense-fee awards because the plain meaning of the Code does not give bankruptcy judges the authority to grant such awards. These law school professors assert that defense-fee awards have historically not been considered an integral part of a reasonable compensation for bankruptcy cases. Further, these law school professors explain that granting defense-fee awards would subvert the “bankruptcy priority structure” by shrinking the bankruptcy estate for other creditors and claimants. Thus, the professors argue that maximizing compensation for bankruptcy attorneys goes against the Code’s goal of maximizing the recovery of the bankruptcy creditors and claimants.
LEGAL RIGHTS OF BANKRUPTCY CLIENTS
Several bankruptcy law scholars, in support of Baker Botts, argue that the Court should permit defense-fee awards for bankruptcy cases because bankruptcy clients should be treated no differently than other legal clients. These scholars explain that the defense-fee awards in bankruptcy must be provided so competent professionals will not leave the legal field to the detriment of clients. A pair of former bankruptcy judges, also in support of Baker Botts, add that the goal of “parity” among lawyers, whether bankruptcy or tax, also benefits the bankruptcy estate. Specifically, the judges argue that more competent professionals will ensure that the debtor’s estate is properly handled.
Nevertheless, other law school professors, in support of ASARCO, counter that the Code does not authorize defense-fee awards because bankruptcy lawyers should only be paid for services that benefit their client and the bankruptcy estate. These professors argue that spending estate funds to pay additional defense-fee awards will not result in the estate’s betterment because further liquidation of the estate will only undermine the client’s and creditor’s interests in bankruptcy. These professors thus explain that the rights of clients and creditors in bankruptcy should trump a lawyer’s desire to augment his or her own fees.
This case presents the Supreme Court with the opportunity to decide whether, when a law firm effectively defends itself against its bankruptcy client’s objections to a fee application, a court may grant a law firm compensation. ASARCO argues that § 330 does not permit awarding compensation to bankruptcy practitioners for successfully defending fee applications. Contrarily, Baker Botts asserts that § 330 gives courts broad discretion to grant compensation for services that are necessary to the administration of bankruptcy cases, including successfully defending fee applications. The Supreme Court’s decision in this case will impact the compensation of bankruptcy lawyers and the rights of bankruptcy clients.
- Joel Milliman: Baker Botts Fees Upheld in ASARCO Case, Wall Street Journal (Aug. 22 2011).
- Ama Sarfo: Baker Botts Wins $5.2M In Asarco Bankruptcy Fee Fight, Law 360 (Mar. 28, 2013).