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SCOTUS: No "Fee for Fees" in Chapter 11 Cases

June 15, 2015 | Posted in : Bankruptcy Fees / Expenses, Fee Award, Fee Dispute, Fee Doctrine / Fee Theory, Fee Entitlement / Recoverability, Fee Issues on Appeal, Fee Jurisprudence, Fee Reduction, Fee Request, Fees for Fees / Fees on Fees

Today, in a 6-3 decision (pdf), the U.S. Supreme Court ruled that bankruptcy attorneys must bear the expense of defending their fees, which could make it harder for lawyers to get paid for their Chapter 11 work.  The case, Baker Botts v. ASARCO, dashes the Texas law firm’s hope, along with those of other firms involved, of recovering nearly $7 million in costs incurred while defending the original fee application against attack by the mining company ASARCO LLC.

Bankruptcy lawyers expressed alarm that the court’s decision will open new fronts in bankruptcy litigation that could swallow up legitimate fee awards and make it less appealing for lawyers to take on such cases.  “The court’s decision makes it harder for bankruptcy attorneys to get paid,” Mayer Brown Brian Netter said.  “Under the incentive structure created by today’s opinion, reorganized companies can be expected to challenge the compensation of the law firms who made it possible for them to emerge from bankruptcy.”

Robbin Itkin, who heads Liner LLP’s business-solutions and financial restructuring group, said the decision has “far reaching ramifications.”  The ruling, she said, “does not just adversely affect the ability of the debtor’s bankruptcy lawyers to be paid, but all professionals involved in bankruptcy cases whose fees need to be approved by the bankruptcy court.”

Baker Botts partner Aaron Streett, who leads the firm’s Supreme Court and constitutional law practice, said Monday, “While we are of course disappointed in the holding that bankruptcy attorneys may not be compensated under [the Bankruptcy Code] for defending meritless objections to their fee applications, we respect the court’s conclusion.”

Jeffrey Oldham of Bracewell & Giuliani, who argued and won the Supreme Court case for ASARCO, dismissed concerns that the decision would harm bankruptcy law practices.  “All the decision does is put bankruptcy lawyers in the same place as lawyers who operate outside bankruptcy” and who are not compensated for defending their fee awards, he said.  “There is no evidence that this is the kind of issue that bankruptcy lawyers base their career decisions on.”

Justice Clarence Thomas, writing for the majority, noted that the bankruptcy court awarded the firms $120 million for their work in the bankruptcy proceeding, as well as a $4.1 million enhancement for "exceptional work," and $5 million for litigation costs of defending their fee application.

But Thomas agreed with the U.S. Court of Appeals for the Fifth Circuit that the bankruptcy court had no authority to award the $5 million for fee defense.  "Time spent litigating a fee application against the administrator of a bankruptcy estate cannot be fairly described as 'labor performed for'—let alone 'disinterested service to'—that administrator," Thomas wrote.

Thomas invoked the so-called "American Rule" of litigation, in which each side pays its own attorney fees, unless a statute or contract says otherwise.  During oral argument, Chief Justice John Roberts Jr. called the rule "patriotic," one of several signs that the court was ready to reject the law firms' pleas.

Dissenting Justice Stephen Breyer argued that the fees sought by the Texas firms were part of the "reasonable compensation" allowed by the code for bankruptcy lawyers.  "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," Breyer wrote on behalf himself and fellow dissenters Ruth Bader Ginsburg and Elena Kagan.