Fee Dispute Hotline
(312) 907-7275

Assisting with High-Stakes Attorney Fee Disputes

The NALFA

News Blog

Category: Bankruptcy Fees / Expenses

Fees for Defending Fees – Post-Asarco Cases

December 4, 2017

A recent article by Benjamin Feder, “Fees for Defending Fees – Recent Rulings Permit Contractual Circumvention of Supreme Court’s Baker Botts v. Asarco Decision,” reports on post-Asarco cases.  This article was posted with permission.  The article reads:

The Supreme Court two years ago ruled in Baker Botts v. Asarco that bankruptcy professionals entitled to compensation from a debtor’s bankruptcy estate had no statutory right to be compensated for time spent defending against objections to their fee applications.  Since then, “estate professionals,” i.e., those retained in a bankruptcy case by a trustee, debtor in possession or an official committee of creditors, have sought ways to limit the potentially harsh impact of that decision.  A subsequent opinion in a Delaware bankruptcy case, In re Boomerang Tube, declined to allow Baker Botts to be circumvented by contract.  However, decisions in another Delaware case, Nortel Networks, and more recently in a New Mexico case, Hungry Horse LLC, have distinguished Boomerang Tube and permitted contractual provisions that allow payment for the defense of fees.  The pragmatic approach taken in Hungry Horse in particular offers a template that other courts will likely be urged to adopt.

In every bankruptcy case, the retention of estate professionals must be approved by the bankruptcy court. Their fees and expenses are paid out of the debtor’s bankruptcy estate and are subject to review and approval by the bankruptcy court pursuant to Section 330 of the Bankruptcy Code.  Objections from other parties have always been a recognized hazard for such professionals.  Prior to Baker Botts a majority of courts permitted the recovery of fees incurred in defending against such challenges.

The Court’s analysis in Baker Botts was straight-forward.  Under American jurisprudence, each side in a litigated dispute bears its own attorneys’ fees unless there is an applicable statute or agreement that provides otherwise.  Section 330(a)(1) of the Bankruptcy Code states: “After notice to the parties in interest and . . . a hearing . . . the court may award to . . . a professional person . . . reasonable compensation for actual, necessary services[.]”  The Court ruled that the plain text of Section 330(a) does not support a deviation from the “American Rule” regarding attorneys’ fees.  The Court’s majority stated, “[t]he word ‘services’ ordinarily refers to ‘labor performed for another.’”  Since Baker Botts was litigating to defend its own fees, the Court reasoned that it was not providing an “actual, necessary service” to the bankruptcy estate and therefore was not entitled to compensation for such time.

Baker Botts makes clear that the Bankruptcy Code does not provide a statutory exception to the American Rule.  The question remaining is whether estate professionals can sidestep it by contract.

In Boomerang Tube, Judge Mary Walrath answered that question in the negative.  The law firm chosen in that case to represent the official committee of unsecured creditors, in its application to the bankruptcy court, asked for the approval order to include a provision that would entitle it to be compensated from Boomerang Tube’s bankruptcy estate for fees incurred in defending its fees against any challenges.  The firm pointed to Section 328 of the Bankruptcy Code, which allows for the retention of estate professionals “on any reasonable terms and conditions.”  It argued that the Supreme Court in Baker Botts had noted that parties could and regularly did contract around the American Rule.

Judge Walrath denied the request. She first held that Section 328 does not create a statutory exception to the American Rule, as it makes no mention of awarding fees or costs in the context of an adversarial proceeding. She observed in contrast that several discrete Bankruptcy Code provisions do contain express language providing for payment of fees to a prevailing party.  She next rejected the law firm’s argument that Section 328 permitted a contractual agreement for the payment of defense fees.  The retention agreement was between the law firm and the official creditors’ committee, but it would be Boomerang Tube’s bankruptcy estate, a non-party to such agreement, that would bear the costs.  Finally, she determined that the proposed fee shifting provisions were simply not “reasonable” terms of employment of professionals with the meaning of Section 328.

In view of the extent to which challenges to estate professionals’ fees (or at least the threat of doing so) are ingrained in chapter 11 practice, it was unlikely that Boomerang Tube would be the last word on this issue.  Recent decisions in two cases, Nortel Networks and Hungry Horse, have distinguished Boomerang Tube.

Judge Kevin Gross, a Delaware colleague of Judge Walrath, ruled in Nortel Networks that Baker Botts and Boomerang Tube did not apply to a fee dispute between an indenture trustee and certain bondholders, and permitted the trustee to recover its attorneys’ fees for defending against the challenge.  Although this case is not directly on point as it did not involve an estate professional, and Judge Gross was not opining on whether Section 328 would permit such an agreement, he held that the bond indenture qualified as a contractual exception to the American Rule, noting that, unlike the retention agreement in Boomerang Tube, it was an agreement directly between the debtor and the trustee.

In Hungry Horse New Mexico Bankruptcy Judge David Thuma looked to Nortel Networks for support in holding that a retention agreement in a chapter 11 case between proposed debtor’s counsel and the debtor could pass muster under Section 328, thereby permitting a contractual work-around to Baker Botts.  Judge Thuma first determined that nothing in Baker Botts prevented a bankruptcy court from finding a fee defense provision in a retention agreement to be “reasonable” within the meaning of Section 328.  In his reading of Baker Botts, the Court simply limited the compensation an estate professional could receive under Section 330 to fees for services to the client, rather than on its own behalf, and noted that Section 328 had no applicability to that issue.

He then considered various other provisions typical of retention agreements, and observed that several were “reasonable” under Section 328 even if they were intended to favor the professional, rather than the client. He pointed to provisions, among other things, setting out retainer requirements, permitting an attorney to withdraw under certain conditions, and granting a lien on certain recoveries.  “A typical employment agreement between a lawyer and a client has many terms; some benefit the client, while others benefit the lawyer.  Considered together, they may be reasonable.”  The overall effect, he noted, is that “the client obtains the services of needed, able professionals.”

Judge Thuma concluded that Section 328 therefore can permit contractual exceptions to the American Rule, and outlined the terms of a fee defense provision in a retention agreement that he believed was “reasonable” and “violat[ed] neither the letter nor spirit of [Baker Botts].”  He stated that, among other things, it needed to be agreed to by the bankruptcy estate, in order to avoid the issue highlighted by Judge Walrath in Boomerang Tube, and provided also that it extended to the creditors’ committee’s professionals, in order to “level the playing field.”  He suggested sample language that he believed could be acceptable under Section 328:

The Client agrees to pay all reasonable legal fees and expenses incurred by the Firm, and also by any counsel retained by the unsecured creditors’ committee (if one is formed in the Client’s bankruptcy case) for successfully defending their respective fee applications. The bankruptcy court must approve all of such fees as reasonable. The Client will have no obligation to pay for any fees or expenses the Firm incurs defending fees that are not allowed.

Disputes over payment of estate professionals’ fees will invariably remain part of the bankruptcy landscape. Estate professionals in chapter 11 cases are likely to ask bankruptcy judges in other jurisdictions to follow the pragmatic approach of Judge Thuma in Hungry Horse in order to blunt the detrimental impact of Baker Botts.

Benjamin Feder is Special Counsel at Kelley Drye & Warren LLP in New York.

NALFA Analysis: Partner Bankruptcy Rates

October 27, 2017

NALFA conducted a survey of partner hourly rates in bankruptcy cases.  NALFA examined dozens of court filings in bankruptcy cases over the past couple years.  The following results of our survey are the average of partner hourly rate ranges in major legal markets:

2017: $1005-$878
2016: $921-$807
2015: $886-$783

Key findings:  Not only have partner rates increased every year, but the variance (i.e. the range of rates) has increased as well.

Law Firm Resolves Fee Dispute in Sungevity Chapter 11 Bankruptcy

October 9, 2017

A recent Law 360 story by Matt Chiappardi, “MoFo Resolves Fee Dispute in Sungevity Ch. 11” reports that Morrison & Foerster LLP resolved its fee dispute with bankrupt rooftop solar firm Sungevity Inc.’s buyer and post-petition lender, agreeing to reduce its bid by $25,000 and clearing the way for its total request of about $2.5 million for the roughly six-month-long case.

During a hearing in Wilmington, U.S. Bankruptcy Judge Kevin Gross agreed to approve the fee requests from both Morrison & Foerster and restructuring adviser AlixPartners LLP, both of which worked on Sungevity’s case, after hearing that a dispute with Solar Spectrum Holdings LLC was resolved after giving the parties some time to hammer out a deal.  “There are no longer any objections to the fee applications,” Sungevity attorney M. Blake Cleary of Young Conaway Stargatt & Taylor LLP told Judge Gross after returning from a recess called so the sides could negotiate.

Under the deal both Morrison & Foerster and AlixPartners would reduce their fee bids by $25,000 apiece and neither would bill for having to defend their applications.  The parties are expected to file their final proposed orders for fees, which Judge Gross agreed to sign.

The fees became a disputed issue in the case last week, when Solar Spectrum asked the court to cut about $304,000 from a $1.6 million Morrison & Foerster bill and nearly $183,000 from a $1.1 million AlixPartners bill, arguing that the money was for duplicative and unnecessary work.

The case is In re: Sunco Liquidation Inc. et al., case number 1:17-bk-10561, in the U.S. Bankruptcy Court for the District of Delaware.

$925M in Fees in Madoff-Related Matter

September 10, 2017

A recent American Lawyer story by Roy Strom, “Madoff-Related Fees Grow to $925M for Baker & Hostetler,” reports that last month, a federal judge approved a nearly $36 million payment for four months of work by the firm, bringing Baker & Hostetler’s total fees for the matter to just shy of $925 million.

This week, Picard also reached the largest settlement related to the dissolution of Bernard L. Madoff Investment Securities LLC (BLMIS) since 2011—a $687 million payout from an Irish investment firm that will bring the total recovery for Madoff victims to about $12.7 billion, or about 72 percent of the $17.5 billion that Picard states that Madoff’s investors lost.

The settlement this week with Thema International Fund PLC amounts to 100 percent of the money the Dublin-based fund received from BLMIS for six years prior to the New York fraudster’s collapse, Picard said in a court filing.  It will raise the fund for victims by 5.7 percent.

Meanwhile, the Madoff matter has managed to bolster Baker & Hostetler’s finances for years.  The firm’s gross revenue has grown 15 percent since fiscal 2008, the year before the start of its Madoff work.  Profits per partner at the Cleveland-based Am Law 100 firm rose to $965,000 last year, up 42 percent from 2008.  And revenue per lawyer, at $700,000 last year, is up 22 percent since 2008.

Compared to its Am Law 100 peers, Baker & Hostetler has risen to No. 78 from No. 98 in revenue per lawyer for fiscal 2008.  The firm’s profits per partner ranking last year was No. 76, up from No. 96 almost a decade ago.  Baker & Hostetler’s partner profit numbers are somewhat difficult to compare over that timeframe, however.

Last year the firm restructured its partnership to provide some equity to all partners, which resulted in a slight uptick in the profits per partner metric by lowering the number of “equity partners” under The American Lawyer’s definition.  An equity partner is someone who receives 100 percent of compensation from shares in a law firm.

The latest payment to Baker & Hostetler in the BLMIS matter is for 68,341.3 hours worked by its lawyers, including 24,539.7 by partners and of counsel and 43,801.6 by associates.  The team bills at a blended rate of $515.81, with the highest hourly rates being the $998 earned by Picard and partners David Sheehan and David Rivkin.  Those rates, along with all others, are then discounted 10 percent.

Picard and Baker & Hostetler are not paid from the Madoff victims’ fund, but rather from the Securities Investor Protection Corp. In June, Picard’s team reached two other settlements totaling about $370 million, bringing the total recovery for victims in the past four months to over $1 billion.

“The Thema International settlement is the latest in a series of highly successful negotiations and mediations,” said a statement by Baker & Hostetler partner Oren Warshavsky, who along with Sheehan joined the firm’s New York office in 2008 from Troutman Sanders.

Sheehan’s hire, as previously noted by The American Lawyer, proved to be a critical factor in Baker & Hostetler getting the call for its Madoff work.  Sheehan had previously worked with Picard at another firm, and when Picard was appointed liquidation trustee for BLMIS in late 2008, he called on Sheehan to advise.  Baker & Hostetler hired Picard from New Jersey’s Gibbons shortly thereafter.

$32M More in Fees in Madoff Bankruptcy

September 4, 2017

A recent Law 360 story by Ryan Boysen, “Baker Hostetler Gets $32M More in Fees in Madoff Bankruptcy,” reports that BakerHostetler will receive $32 million for four months of work managing the liquidation of Bernie Madoff’s defunct investment firm after a New York bankruptcy court approved the fee request, bringing the firm’s total payout for its work on the Madoff case past the $900 million mark.  The latest fee request covers nearly 82,000 hours of work performed between the beginning of December and the end of March and was approved by U.S. Bankruptcy Judge Stuart M. Bernstein.

BakerHostetler partner Irving H. Picard serves as the liquidating trustee for Bernard L. Madoff Investment Securities LLC and his firm has received about $908 million all told since the case began in 2008, while recovering roughly $12 billion for victims of the $65 billion Ponzi scheme.

The legal costs in the case are paid by the Securities Investor Protection Corp., a member-funded organization that keeps a warchest stocked with roughly $2.5 billion at any given time to shell out for instances like the Madoff fraud.  SIPC covers investor losses directly in many types of financial frauds, and also works with law firms to recover funds for victims in bigger, more complex cases.

In addition to bearing the costs and fees to Picard, the organization has also paid about $555 million in legal expenses to special counsel, consultants and administrators that have worked on the case, according to the trustee.  The latest $32 million payout for BakerHostetler amounts to roughly 90 percent of the $35.7 million the firm was technically awarded for its work.  BakerHostetler and SIPC agreed to the discount early on in the case, and the firm typically receives about $435 an hour for its work, according to court documents.

"The reasonable value of the services for which the trustee and BH seek an allowance has been reduced significantly, based on consultation and review by SIPC, from the standard rates the trustee and BH charge," SIPC's general counsel wrote in a brief recommending the court approve the fee request.

The case is Securities Investor Protection Corp. v. Bernard L. Madoff Investment Securities LLC et al., case number 1:08-ap-01789, in the U.S. Bankruptcy Court for the Southern District of New York.