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U.S. Supreme Court to Hear Historic Fee Enhancement Case

October 2, 2014 | Posted in : Bankruptcy Fees / Expenses, Defense Fees / Costs, Expenses / Costs, Fee Award, Fee Dispute, Fee Dispute Litigation / ADR, Fee Entitlement / Recoverability, Fee Issues on Appeal, Fee Jurisprudence, Fee Request, Fees for Fees / Fees on Fees, Lodestar

The U.S. Supreme Court will review a bankruptcy case that was one of the biggest and most bitterly contested Chapter 11 cases in U.S. history.  Attorneys for Asarco, Baker Botts and Jordan Hyden Womble Culbreth & Holtzer were awarded about $120 million and a 20 percent fee enhancement after “achieving the most successful Chapter 11” restructuring in history.  Baker Botts incurred over $5 million in fees and costs preparing and litigating their final fee application.  The Supreme Court will consider whether bankruptcy judges can award lawyers compensation for defending a fee application.

Asarco, a copper-mining and smelting company declared Chapter 11 bankruptcy in 2005, facing cash flow and tax problems, as well as environmental liabilities.  When it emerged from bankruptcy four years later, it had a $1.4 billion in cash, and its environmental liabilities were resolved.  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.

In May, the U.S. Circuit Court of Appeals for the Fifth Circuit upheld the fee award and the fee enhancements but ultimately held that the Bankruptcy Code did not authorize the firms to recover the $5 million they spent defending their fee request against Asarco’s opposition.  “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,” Judge Edith Jones wrote for the Fifth Circuit.

In its original petition for certiorari, Baker Botts argued that Section 330(a) of the U.S. Bankruptcy Code, which covers fees to all professionals, authorizes judges to award “reasonable compensation” for “necessary services.”  The firm argued a resolution was needed to resolve differences among appellate courts, noting that the Ninth Circuit has held that the cost of defending a fee application is compensable so long as the defense is successful.

“It’s an important principal for bankruptcy lawyers who do excellent work on a case and then have to defend their fee application, but then bear the costs of defending their fee application,” said Aaron Streett, a Baker Botts partner.  If defense fee awards are not allowed, “the fees of bankruptcy lawyers will be diluted,” Streett added.

The case is Baker Botts LLP et al. v. Asarco LLC, case number 14-103, in the Supreme Court of the United States.  NALFA also reported on this case in “Fifth Circuit Upholds 20 Percent Fee Enhancement in Historic Case” and “Baker Botts Earns Historic Fees in Bankruptcy Case”