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Category: Fees for Fees

Approval of Attorney Fee Defense Provisions Post-Asarco

February 19, 2018

A recent Legal Intelligencer article by Rudolph J. DiMassa Jr. and Jarret P. Hitchings, “Approval of Fee Defense Provisions in Retention Agreements Post-ASARCO,” on recent approval of fee defense provision in retention agreements post-Asarco.  The article reads:

The Bankruptcy Code authorizes a debtor (or its bankruptcy trustee) to retain and compensate attorneys and other professionals during the course of the debtor’s bankruptcy case. Specifically, Section 327 allows a debtor, with bankruptcy court approval, to employ attorneys, accountants or other professionals to represent or assist the debtor in connection with its bankruptcy case. Section 328, in turn (and again subject to court approval), allows the debtor to retain such professionals “on any reasonable terms and conditions of employment, including on a retainer, on an hourly basis, on a fixed or percentage fee basis or on a contingent fee basis.” Finally, Section 330 permits a court to award to a professional retained under Section 327 “reasonable compensation for actual, necessary services” and “reimbursement for actual, necessary expenses.” Given this framework, the retention and compensation of professionals in a bankruptcy case is often a routine affair. The debtor will seek, and usually receive, authority to retain its professionals on specified terms. Thereafter, professionals may periodically file applications seeking payment of fees and expenses incurred during the course of the bankruptcy case. If the court concludes that the requested compensation is reasonable, it will award payment by the debtor’s estate. However, if any party objects to a professional’s fee application, this process can take an unwelcome turn.

Contested fee application litigation can result in additional professional fees and expenses. Vexingly for the professional, these “fee defense” costs may not be payable from the debtor’s bankruptcy estate: In Baker Botts v. ASARCO (135 S. Ct. 2158 (2015)), the U.S. Supreme Court held that fees and costs incurred by a professional on account of fee-defense litigation are not compensable under Section 330. To mitigate this risk, bankruptcy professionals have begun to include fee-defense provisions in their retention agreements. While these types of provisions have been met with objection, the U.S. Bankruptcy Court for the District of New Mexico in In re Hungry Horse, Case No. 16-11222 (Bank. D.N.M. Sept. 20, 2017) recently approved a retention agreement between a debtor and its counsel that entitled counsel to payment of all reasonable fees incurred in defending its fee applications. Importantly, the bankruptcy court determined that such a provision was not barred by the Supreme Court’s holding in ASARCO.

In ASARCO, the Supreme Court began its analysis by recognizing the “bedrock principle known as the American Rule” which requires each litigant to pay its own attorney fees—win or lose—unless a statute or contract provides otherwise. Because none of the parties in ASARCO relied on the contract exception to the American Rule, the Supreme Court considered whether Section 330 of the Bankruptcy Code provides a statutory exception to the American Rule in the context of fee defense litigation. On this point, the Supreme Court concluded that nothing in Section 330 warranted an exception to the American Rule. Indeed, the Supreme Court recognized that Section 330(a)(1) authorizes compensation only for “actual, necessary services rendered” by the professional. The Supreme Court therefore concluded that because “litigation in defense of a fee application is not a ‘service’ [to the debtor’s estate] within the meaning of Section 330(a)(1),” fees and expenses incurred in connection therewith are not allowable as compensation under Section 330.

In response to ASARCO, bankruptcy professionals have incorporated fee defense provisions into their retention agreements. By including such provisions, the professionals hope to come within the contract exception to the American Rule. Unfortunately, this approach was analyzed—and rejected—by the Delaware Bankruptcy Court in In re Boomerang Tube, 548 B.R. 69 (Bankr. D. Del. 2016).

In Boomerang Tube, proposed counsel for the unsecured creditors’ committee included a term in its retention agreement that provided for payment of expenses incurred defending counsel’s fee applications. The U.S. trustee objected to the inclusion of this fee defense provision as contrary to Section 328 and ASARCO. The court sustained the trustee’s objection on several grounds. First, relying on ASARCO, the court concluded that Section 328 does not contain a statutory exception to the American Rule because it lacks any specific and explicit language awarding litigation fees or costs to a prevailing party. Second, the court determined that the retention agreement between the unsecured creditors’ committee and its counsel was insufficient to trigger the contract exception to the American Rule. The court noted that the retention agreement was “not a contract between two parties providing that each will be responsible for the other’s legal fees if it loses a dispute between them.” Rather, the court found, the retention agreement provided that a third party (i.e., the debtor’s estate) would pay counsel’s defenses, even if the estate were not the objecting party. Because the retention agreement could not bind the debtor’s estate, it failed to establish a contract exception to the American Rule. Finally, the court determined that fee defense provisions could not be approved under 328 because such a provision could never be deemed reasonable. According to the court, fee defense provisions are de facto unreasonable since they inure to the benefit of the professional and not the professional’s client.

The bankruptcy court in Hungry Horse considered a similar issue but reached a different conclusion. There, the debtor sought court authorization to retain bankruptcy counsel. The parties’ retention agreement expressly provided that the debtor agreed “to pay all reasonable legal fees incurred in obtaining court approval of all employment and fee applications including dealing with any objections to any of the applications.” The debtor’s unsecured creditors’ committee objected to the approval of this fee defense provision as contrary to ASARCO.

The Hungry Horse court overruled the objection and approved the fee defense provision. In doing so, the court concluded that nothing in ASARCO prevents approval of a fee defense provision in a retention agreement as a “reasonable term and condition” under Section 328(a). As the bankruptcy court pointed out, the Supreme Court in ASARCO construed Section 330 as limiting an attorney to compensation for services rendered to the client. However, the ASARCO court did not consider any contractual fee defense provision or consider whether such a provision could be approved under Section 328. The court also rejected the Boomerang Tube holding that a fee provision can never be a reasonable term under Section 328, since nothing in the Bankruptcy Code requires that all the terms of a professional’s employment directly benefit the estate.

The court distinguished Sections 328 and 330, noting that “if employment terms and conditions are approved by a bankruptcy court under Section 328(a), then the professional’s compensation is governed by those terms and conditions, rather than the general ‘reasonable compensation for services rendered’ language of Section 330(a)(1)(A).” The court specifically relied on the fact that the authority of the bankruptcy court to award compensation under Section 330 is expressly subject to the provisions of Section 328. As a result, the court held that Section 330 does not preclude payment of fee defense costs if the terms and conditions of a professional’s compensation include a fee defense provision approved under Section 328.

The court also considered practical realities to reach its conclusion. It recognized that in smaller bankruptcy cases with smaller fees, fee defense costs can become a sizeable percentage of the total amount of fees billed in a case. Consequently, “if estate counsel were forced to successfully defend its fees ‘on its own dime,’ the net compensation in a bankruptcy case could be substantially reduced,” minimizing the incentive for counsel to undertake a debtor representation. Moreover, allowing a professional to recover fee defense costs from the estate limits objections to fee applications to bona fide disputes.

In conclusion, the court in Hungry Horse offered an example of a fee defense paragraph that might be approved as reasonable under Section 328(a): “Fee Defense. 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.”

Whether such language will be approved by other courts remains to be seen. In the meantime, in order to reduce the risk that they bear the expense of their own fee defense, bankruptcy professionals should consider specifically providing for the payment of such costs in their retention agreements.

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.

Ninth Circuit Backs Attorney Fees in ERISA Appellate Work

November 28, 2017

A recent Law 360 story by Adam Lidgett, “9th Circ. Backs Appellate Attys’ Fees for Benefit Plan,reports that a Ninth Circuit panel reversed a lower court’s denial of appellate attorneys' fees for an employee benefit plan in its dispute with Sun Life Assurance Co. of Canada Inc., saying the district court failed to take into account the whole course of litigation in analyzing the fee request. 

The panel reversed and remanded the denial of the fee request from the Group Disability Benefits Plan for California-based Gynecologic Oncology Associates Partners LLC.  The plan sought attorneys' fees and costs it incurred defending an earlier award of attorneys' fees in an Employee Retirement Income Security Act (ERISA) case filed against the plan and Sun Life.

The Ninth Circuit said the district court has to take into account the entire course of litigation and that it was clear the plan is entitled to the appellate attorneys' fees after weighing five factors outlined in the case Hummell v. S.E. Rykoff & Co. in light of Sun Life’s conduct.  Those factors included Sun Life's denial of a claim for disability benefits from a cancer surgeon with Gynecologic Oncology Associates Partners, the move that kicked off the initial lawsuit.

The appellate judges said the plan was forced into litigation after Sun Life wrongfully denied Dr. John Paul Micha’s claims and that Sun Life doesn’t dispute it can pay the fee award.  The panel remanded the issue to the district court to calculate reasonable fees.

“A party like Sun Life should not be able to appeal from a litigation fee award, even on an issue justifying appellate review, and thereby impose significant costs on the appellee in defending the fee award, while taking comfort in the knowledge that any potential appellate fee award against it will be judged solely on the basis of its appellate arguments on the fee issue,” the published decision said.

The case dates back to 2009 when Micha filed the suit after he was denied disability benefits by Sun Life.  The benefits of the plan were insured under a policy purchased from Sun Life, the plan has said.  After Sun Life settled Micha’s suit, the plan said it moved for attorneys' fees, and the district court agreed, awarding more than $38,000.  Sun Life appealed that award to the Ninth Circuit, but the appellate court affirmed the plan's win, prompting Sun Life to file a petition for a writ of certiorari in the U.S. Supreme Court, court papers show.

The Supreme Court denied the petition, however, and the plan sought an award for attorneys' fees and costs it incurred on appeal, according to court documents.  However, it first filed with the Ninth Circuit to transfer consideration of appellate attorneys' fees to the district court, the plan has said.  But when the issue went back to the lower court, the court denied the plan’s request for attorneys' fees incurred in defending the earlier award, the plan said.

The case is John Micha v. Sun Life Assurance of Canada et al., case number 16-55053, in the U.S. Court of Appeals for the Ninth Circuit.

4 Reasons to Get Help on a Fee Requests

November 24, 2017

A recent CEBblog article by Julie Brook, “4 Reasons to Get Help on a Fee Motion,” reports on attorney fee requests.  This article was posted with permission.  The article reads:

Just because you successfully handled the merits of a case doesn’t mean that you should take on a large or complex fee motion that arises from it.  It may be time to bring in someone with fee motion expertise.

Here are four reasons to bring in outside counsel for a fee motion:

  1. The expertise required for fee motions may make it more efficient or effective to hire an experienced fee litigator.
  2. Trial counsel’s credibility or skill is often a major issue, and an outside attorney adds objectivity to the presentation.
  3. Fee applications can become very time-consuming, and trial counsel’s efforts might be better spent on matters more within his or her areas of expertise.
  4. The cost to trial counsel (“fees on fees”) can be claimed from the opponent  (see Serrano v Unruh (Serrano IV) (1982) 32 C3d 621 (prevailing party is entitled to fees for time spent preparing and litigating fee application)).

On the other hand, there might be reasons for handling fee motions “in-house” in some cases, particularly if the law firm or program seeking the fees has an attorney with sufficient expertise.  Keep in mind that, just because outside counsel potentially can recover his or her fees (“fees on fees”) from the opponent doesn’t mean it will happen—there’s a risk that the court will deny the motion for fees or refuse to award all of the fees sought, leaving your firm on the hook.

Regardless of whether you decide to use outside counsel, make sure that your law firm designates one of its attorneys to be primarily responsible for maximizing attorney fee recoveries.  Otherwise, the firm is likely to miss deadlines or make mistakes early in the case that even the best outside counsel will be unable to remedy.  This is particularly critical if you represent low-income clients in certain civil rights, employment, or public interest cases and statutory attorney fees are your only source of payment if you win.

CA Court: No Fee Multiplier for “Fees for Fees” in Private Attorney General Action

November 8, 2017

A recent Met News story, “Enhancement Based on ‘Risk’ Inapplicable in Seeking ‘Fees on Fees’ Award—C.A.” reports that an attorney fee award in connection with work done in securing fees in a private attorney general action would logically not be enhanced based on “risk,” the Court of Appeal for this district held.  The decision came in a case in which trial court ordered the state to pay $836,211.25 in attorney fees to lawyers for work they did in defending previous attorney fee awards in the case, a case which stretches back to the filing of a complaint on June 20, 1978, and includes a decision by the California Supreme Court.  It was alleged in the class action that the state unconstitutionally collected higher vehicle license fees and use taxes on vehicles purchased out of state.

The state appealed the latest fee awards, divided among three firms and one sole practitioner, now located in Houston; the sole practitioner and plaintiff, Patrick G. Woosley, cross appealed.  Broken down, the awards were: $14,332.50 to Jones, Bell, Abbott, Fleming & Fitzgerald L.L.P, $80,010 to the Gansinger Firm, $15,600 to the Law Offices of John F. Busetti, and $70,000 to Woosley.

Writing for Div. Five, Justice Lamar Baker said Los Angeles Superior Court Judge Stephanie M. Bowick did not abuse her discretion in making the awards.  With respect to the enhancements Woolsey sought in connection with the risk a lawyer in a private attorney general action takes that no fees will be ordered, should there be a lack of success, and based on a delay in payment, Baker wrote:

“[W]e conclude the trial court’s decision not to enhance Woosley’s fee award for risk and delay was not error.  By the time Plaintiffs’ Counsel applied for the attorney fees at issue here, their entitlement to an award of some amount was all but inevitable (notwithstanding the State’s arguments to the contrary) based on their success in the underlying litigation and their earlier fee award…. Thus, the trial court did not abuse its discretion in failing to enhance Woosley’s award for risk.”

He went on to say that while a small enhancement based on delay in payment is permissible, being akin to interest, the award is discretionary.  Woosley contested deductions Bowick made from the amount he requested, but Baker declared:  “The court’s method and results were both sound.”

Bowick rebuffed the state’s contention that the attorneys were entitled to no further fees.  She cited the California Supreme Court’s 1982 decision in Serrano v. Unruh (Serrano IV) for the proposition if a party has received attorney fees in a private attorney general action, pursuant to Code of Civil Procedure §1021.5, entitlement to fees in connection with gaining fees follows.

In that decision, the high court said: “We conclude that, absent circumstances rendering an award unjust, the fee should ordinarily include compensation for all hours reasonably spent, including those relating solely to the fee.”

Woosley initially scored a victory in the trial court.  Then-Los Angeles Superior Court Judge Lester M. Olson awarded $13.7 million to class counsel and $1 million in fees to Woosley “for services rendered as class representative.”  The state appealed from a judgment in favor of the two classes Olson certified, and Woosley appealed from the denial of fees for his legal services.  The Court of Appeal affirmed the judgment for the classes and reversed the denial of fees for Woosley’s legal work.

The California Supreme Court in 1992 affirmed and reversed the Court of Appeal.  Then-Chief Justice Ronald George (now retired) wrote: “[W]e hold the state violated the commerce clause of the United States Constitution by imposing vehicle license fees and use taxes on vehicles originally sold outside California that were higher than the fees and taxes charged on similar vehicles first sold within the state….

“[W]e hold the class claim filed in this case was not authorized by statute. That claim is valid only as to Woosley in his individual capacity.  Although our ruling does not automatically preclude continuation of this suit as a class action, the class may include only persons who timely filed valid claims for refunds.”  George noted that under the judgment as it stood, refunds, according to the state’s reckoning, would amount to more than $1 billion.  He also noted that the state had ceased its discriminatory practice on 1976.

The chief justice added: “Because our opinion will result in a substantial reduction in the amount of the judgment, the trial court shall reconsider the amount of its award of attorney fees to counsel for the class and the amount of its award to Woosley ‘as fees for services rendered as class representative.’”

On remand, there came a $23 million attorney fee award, with costs, which the Court of Appeal in 2010 reversed because consideration had not given “any consideration to the lack of success.” In 2014, the trial court pared the award to $2.8 million, and the lawyers appealed.

The case is Woosley v. State of California, B275402.