Litigation

Supreme Court: Bankruptcy Lawyers Not Entitled To Fees For Defending Fee Requests

WASHINGTON, D.C. — (Mealey’s) The U.S. Bankruptcy Code does not allow bankruptcy courts to award fees to attorneys for successfully defending their fee applications, the U.S. Supreme Court held June 15 in a 6-3 decision, affirming a Fifth Circuit U.S. Court of Appeals ruling denying a $5 million fee award to attorneys who worked on the Chapter 11 case of ASARCO LLC (Baker Botts, LLP, et al. v. ASARCO, LLC, No. 14-103, U.S. Sup.) [lexis.com subscribers may access Supreme Court briefs in this case]. 

(Opinion available.  Document #48-150626-009Z.

In an opinion written by Justice Clarence Thomas, the majority held that Congress followed the American Rule for compensating bankruptcy attorneys when it enacted Section 330(a)(1) of the Bankruptcy Code, which permits bankruptcy courts to “award . . . reasonable compensation for actual, necessary services rendered by” professionals. 

“Time spent litigating a fee application against the bankruptcy estate’s administrator cannot be fairly described as ‘labor performed for’ — let alone ‘disinterested service to’ — that administrator,” the majority said, citing Woods v. City Nat. Bank & Trust Co. of Chicago (312 U. S. 262, 268 [1941] [enhanced opinion available to lexis.com subscribers]).  “Had Congress wished to shift the burdens of fee-defense litigation under §330(a)(1), it could have done so, as it has done in other Bankruptcy Code provisions, e.g., §110(i)(1)(C).” 

Dissent

Chief Justice John G. Roberts Jr. and Justices Antonin Scalia, Anthony M. Kennedy and Samuel Anthony Alito Jr. joined in the opinion.  Justice Sonia Sotomayor filed an opinion concurring in part and concurring in the judgment, while Justice Stephen G. Breyer filed a dissenting opinion, in which Justices Ruth Bader Ginsburg and Elena Kagan joined. 

In the dissent, the minority criticized the majority’s reliance on the American Rule and agreed with the U.S. government, as amicus curiae, “that compensation for fee-defense work ‘is properly viewed as part of the compensation for the underlying services in [a] bankruptcy proceeding.’”  The minority said attorney fees for defending fee applications are allowed under bankruptcy courts’ “broad discretion to decide what constitutes ‘reasonable compensation.’” 

“In some cases, the extensive process through which a bankruptcy professional defends his or her fees may be so burdensome that additional fees are necessary in order to maintain comparability of compensation,” the minority said. 

Fee Requests

ASARCO filed a petition under Chapter 11 of the Bankruptcy Code in 2005 in the U.S. Bankruptcy Court for the Southern District of Texas due in part to asbestos and environmental claims.  ASARCO’s plan of reorganization was confirmed and became effective in 2009.  Baker Botts and Jordan Hyden Womble Culbreth & Holzer served as co-counsel to ASARCO during the bankruptcy and received standard quarterly compensation awards for their fees and expenses throughout the case totaling $120 million.  In their final fee applications, the firms requested enhanced fees based on the exceptional results in the case, including one of the largest actual damage awards in U.S. history in a fraudulent conveyance action that returned to ASARCO $6 billion to $9 billion in stock in Southern Peru Copper Co. (SCC) and $1 billion in cash.

 ASARCO objected to the requests, but the Bankruptcy Court found that a fee enhancement was appropriate because the SCC judgment “resulted in the recovery of a substantial asset for the estate.”  The court awarded more than $4 million in fee enhancements and $5 million for preparing and defending the fee applications. 

On appeal, the U.S. District Court for the Southern District of Texas affirmed the fee enhancement awards for both law firms.  However, it reversed the Bankruptcy Court’s determination that the firms could recover fees for pursuit of the fee enhancement, finding that such fees were not compensable because they did not benefit the estate.  After the court remanded the case for the Bankruptcy Court to determine what part of the $5 million award was for litigation of the lodestar fees and what part was for pursuit of the fee enhancement, the Bankruptcy Court held that none of the award was for pursuit of the fee enhancement. 

Section 330(a)

Both sides appealed to the Fifth Circuit U.S. Court of Appeals, which on April 30, 2014, upheld the enhanced fee awards to both law firms but reversed the award of fees associated with litigating the firms’ fee applications (In re:  ASARCO LLC, et al., No. 05-21207, S.D. Texas Bkcy. [ASARCO LLC v. Jordan Hyden Womble Culbreth & Holzer P.C., 5th Cir., No. 12-40997, ASARCO v. Baker Botts, 5th Cir., No. 12-40998]).  The Fifth Circuit said that Section 330(a)(1) of the Bankruptcy Code limits compensation to professional services that “are likely to benefit a debtor’s estate or are necessary to case administration.”  

Baker Botts and Jordan Hyden filed a petition for writ of certiorari with the Supreme Court, which granted the petition to answer the question presented:  “Whether §330(a) grants bankruptcy judges discretion to award compensation for the defense of a fee application.”  The case was argued Feb. 25. 

American Rule

In affirming the Fifth Circuit, the majority said Section 330(a) of the Bankruptcy Code provides no exception to the American Rule, under which each litigant pays his own attorney fees unless a statute or contract provides otherwise. 

“This text cannot displace the American Rule with respect to fee-defense litigation.  To be sure, the phrase ‘reasonable compensation for actual, necessary services rendered’ permits courts to award fees to attorneys for work done to assist the administrator of the estate, as the Bankruptcy Court did here when it ordered ASARCO to pay roughly $120 million for the firms’ work in the bankruptcy proceeding.  No one disputes that §330(a)(1) authorizes an award of attorney’s fees for that kind of work,” the majority said.  “But the phrase ‘reasonable compensation for actual, necessary services rendered’ neither specifically nor explicitly authorizes courts to shift the costs of adversarial litigation from one side to the other — in this case, from the attorneys seeking fees to the administrator of the estate — as most statutes that displace the American Rule do.”

 The majority rejected the law firms’ argument that fee defense litigation is part of the “services rendered” to the estate administrator under Section 330(a)(1), calling such a position “untenable.” 

“We decline to adopt a reading of §330(a)(1) that would allow courts to pay professionals for arguing for fees they were found never to have been entitled to in the first place.  Such a result would not only require an unnatural interpretation of the term ‘services rendered,’ but a particularly unusual deviation from the American Rule as well,” the majority held. 

Counsel

The petitioners are represented by Aaron M. Streett, G. Irvin Terrell, Michelle S. Stratton and Shane Pennington of Baker Botts in Houston; Evan A. Young of the firm’s Austin, Texas, office; Omar J. Alaniz of the firm’s Dallas office; William Bradford Reynolds of the firm’s Washington office; and Shelby A. Jordan and Nathaniel P. Holzer of Jordan Hyden in Corpus Christi, Texas. 

ASARCO is represented by Jeffrey L. Oldham, Bryan S. Dumesnil, Bradley J. Benoit and Heath A. Novosad of Bracewell & Giuliani in Houston and Paul D. Clement and Jeffrey M. Harris of Bancroft in Washington. 

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