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Fifth Circuit Upholds 20 Percent Fee Enhancement in Historic Case

May 2, 2014 | Posted in : Bankruptcy Fees / Expenses, Expenses / Costs, Fee Award, Fee Award Factors, Fee Dispute, Fee Dispute Litigation / ADR, Fee Issues on Appeal, Fee Jurisprudence, Fee Request, Fees for Fees / Fees on Fees, Litigation Management, Lodestar

A recent Courthouse News Service story, “Massive Attorneys’ Fee Award Upheld on Appeal,” reports that attorneys who won a $7 billion judgment for bankrupt cooper-mining firm Asarco, “achieving the most successful Chapter 11” restructuring in history, are entitled to a 20 percent fee enhancement, the Fifth Circuit ruled.

Asarco declared Chapter 11 bankruptcy in 2005.  With the help from its lawyers at Baker Botts and Jordan Hyden Womble Culbreth & Holzer, Asarco emerged from bankruptcy four years later with $1.4 billion in cash, and the successful resolution of its environmental liabilities.  Despite Asarco’s financial difficulties, its parent company, Grupo Mexico, had Asarco transfer its interest in Southern Copper Co.  Asarco’s attorneys used that factor to win a judgment against Grupo Mexico valued at between $7 billion and $10 billion.  This award was the largest fraudulent-transfer judgment in Chapter 11 history.

Given their extremely successful work, Baker Botts and Jordan Hyden sought a 20 percent fee enhancement for the entire case, as well as $5 million in fees for preparing and litigating their final fee application.

After a six-day fee dispute trial, the court rejected Asarco’s objections, and awarded Baker Botts $113 million and Jordan Hyden $7 million in fees and expenses.  It approved a fee enhancement for the work performed on the Southern Copper Co. litigation, but not for the firm’s entire work for Asarco.  This enhancement amounted to an additional $4.1 million for Baker Botts and $125,000 for Jordan Hyden.

A federal judge in Dallas who affirmed noted: “There is an abundance of evidence which supports [the bankruptcy] court’s enhancement award.  … A seven billion dollar judgment, which is recoverable, which saves a company, and funds a 100 percent recovery for all concerned is a once in a lifetime result.”

The Fifth Circuit on Wednesday affirmed the fee enhancement but said the attorneys cannot recover fee awards for litigation over their fee applications.  “The [bankruptcy] court singled out the firm’s prosecution of the SCC litigation for the fee enhancement precisely because it ascribed success to their efforts alone,” Judge Edith Jones wrote for the three-judge panel in its published opinion (pdf).  Quoting the bankruptcy court’s ruling, the New Orleans-based panel noted that the attorneys’ extraordinary results brought Asarco back from the brink of financial ruin, and transformed it into a competitive company in “probably the most successful Chapter 11 of any magnitude in the history of the [bankruptcy] code.”

Baker Botts cannot, however, recover “fees on fees”.  “In the absence of explicit statutory guidance, requiring professionals to defend their fee applications as a cost of doing business is consistent with the reality of the bankruptcy process,” Jones wrote.  The perverse incentives that could arise from paying the bankruptcy professionals to engage in satellite fee litigation are easy to conceive.”  Jones acknowledged that this precedent could encourage unscrupulous firms to object to attorneys’ fee requests, which would require the attorneys to defend themselves, amounting to a fee reduction.

“This opinion should not be read as encouraging tactical or ill-supported objections to fee applications,” Jones said.  “We are confident that bankruptcy courts, practicing vigilance and sounds case management, can thwart punitive or excessively costly attacks on professional fee applications.”