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Judge Rejects Fee Proposal in New Gulf Bankruptcy

March 23, 2016 | Posted in : Bankruptcy Fees / Expenses, Fee Agreement, Fee Dispute, Fee Jurisprudence, Fee Request, Fees for Fees / Fees on Fees

A recent American Lawyer story, “Judge Rejects Baker Botts Fee Proposal in New Gulf Bankruptcy,” reports that, following a defeat at the U.S. Supreme Court last summer, Baker Botts proposed a change in the way it charges for bankruptcy work, hoping to cover its financial bases if a Chapter 11 client later sues the firm after emerging from bankruptcy.

After weighing the firm's bid, a bankruptcy judge has now offered his take: Nice try, but no dice.

In an order on Monday, U.S. Bankruptcy Judge Brendan Shannon in Delaware shot down a modified fee structure in Baker Botts’ application to serve as lead debtors’ counsel for New Gulf Resources LLC, an Oklahoma-based energy company that filed for Chapter 11 protection on Dec. 17.  The order follows a letter ruling from the judge late last week rejecting the firm’s fee proposal.

In its application to represent New Gulf in the bankruptcy, Baker Botts sought to build in a layer of financial protection while also respecting the Supreme Court’s June 15 ruling in Baker Botts v. Asarco, which restricted the firm’s ability to recover bankruptcy litigation costs.

Shannon previously approved most of Baker Botts’ December application, but the judge had reserved judgment on the firm’s fee proposal.  At issue was a conditional fee premium that could have been triggered later, if a reorganized, post-bankruptcy New Gulf decided to challenge Baker Botts’ baseline fees.

In Asarco, the Supreme Court overruled a bankruptcy court decision that allowed restructuring lawyers at Baker Botts and Jordan, Hyden, Womble, Culbreth & Holzer to recoup litigation costs they incurred toward the end of mining company Asarco LLC’s bankruptcy.  Those expenses stemmed from a fee dispute that Asarco’s new owners lodged after the company emerged from bankruptcy in late 2009.  At the time the Supreme Court ruled, Baker Botts’ litigation costs in the Asarco fee dispute had reached about $7 million.

In its application in the New Gulf bankruptcy, Baker Botts explicitly nodded to Asarco while also seeking to protect itself financially from any future fee objections from whatever entity might take New Gulf out of bankruptcy.

The firm’s proposal, however, faced opposition from the U.S. Trustee’s office in Wilmington, Delaware, which argued that Baker Botts was trying to circumvent the Supreme Court’s decision.  In a Jan. 12 court filing, the trustee’s office described the proposed fee premium as a “windfall” for Baker Botts that undercut “the rights of parties to litigate fees in good faith.”

In his letter ruling, Shannon sided with the government over Baker Botts—though the bankruptcy judge did credit the firm’s attempt to work around the “Asarco issue.”

“The structure proposed by Baker Botts runs afoul of the holdings in Asarco,” the judge wrote.  “While I acknowledge the creative approach to the issue, I do not find that there is a meaningful distinction between the fee premium proposed here and the matters considered and ruled upon in [prior cases].”