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Fee Defense Provisions Held Impermissible for Estate Professionals Under Section 328; Argument for Contract Based Exception to ASARCO Rejected

In re Boomerang Tube, Inc.,Case No. 15-11247 (MFW), 2016 WL 385933 (Bankr. D. Del. Jan. 29, 2016)

In this case, the Delaware Bankruptcy Court addressed a question remaining in the wake of the Supreme Court’s ASARCO opinion:  Although fees incurred by debtors’ attorneys in defending challenges to their fees are generally not permitted under section 330 of the Bankruptcy Code, may such fees be approved if they are provided in the attorneys’ retention application under section 328(a)?  See Baker Botts LLP v. ASARCO LLC, 135 S.Ct. 2158 (2015).  In a succinct Opinion, Judge Mary F. Walrath ruled that they may not.  After ASARCO, Her Honor held no “contract exception” remains for fee defense provisions under section 328 even if such provisions would have previously been permitted under Third Circuit precedent.

Under ASARCO, the Supreme Court held that only “specific and explicit” statutory language is sufficient to overcome the “American Rule,” under which litigants are presumed to be responsible for their own attorneys’ fees.  The Supreme Court found such specific language lacking in section 330 of the Bankruptcy Code, and as a result, affirmed a lower court’s ruling denying attorneys’ fees incurred in defending their own fees.

Under the facts of this case, counsel for the official committee of unsecured creditors (the “Committee”) included provisions in their retention applications under section 328(a) of the Bankruptcy Code that would indemnify them for successful defense to challenges of their fees.  The United States Trustee (the “UST”) objected, arguing that fee defense provisions are not only precluded by the Supreme Court’s holding in ASARCO, but they are also unreasonable under section 328 because they are outside the scope of the attorneys’ employment and provide no benefit to the estate.  To rule otherwise, the UST argued, would place the statutes at odds, potentially entitling attorneys to “reasonable” reimbursement for fee defense under section 328 while the same fees would be deemed unreasonable under section 330.

In response, the Committee argued that the fee defense provisions in its retention agreements were permissible under section 328 pursuant to a “contract exception” to the American Rule recognized by the Supreme Court in ASARCO.  Moreover, the Committee argued that its position dovetailed with precedent in the Third Circuit and other circuits that upholds indemnification provisions for estate professionals under section 328(a) as long as the provisions are consistent with “market-driven” practice.  See In re United Artists Theatre Co., 315 F.3d 217 (3d Cir. 2003).

Judge Walrath sided with the UST.  Similar to section 330, the Court found that section 328 lacks the specific language required to provide a statutory exception to the American Rule.  Moreover, Judge Walrath disagreed that retention agreements could qualify for a contractual exception because the parties (i.e., the Committee and counsel) were not attempting to bind one another, but the estate, which was a not a party.  Additionally, the Court noted “retention agreements in bankruptcy are not simply contractual matters” but are subject to approval by the Court, objections by parties-in-interest and other restrictions that limit freedom of contract.  Op. at *12.

Even if the parties had the power to opt out of the American Rule and provide indemnification to the Committee’s counsel for time and expenses incurred in fee disputes, Judge Walrath held the provisions would still not be reasonable terms for employment under section 328(a) “because they do not involve any services for the Committee.  Rather, they are for services performed by Committee Counsel only for their own interests.”  Id. at *13.  Judge Walrath found that cases such as United Artists that permitted market-driven fee defense provisions are no longer good law, noting the cases pre-dated ASARCO and that ASARCO “expressly rejected the consideration of such factors.”  Id. at *19.

The Court further noted that its Opinion is not limited in its applicability to Committee counsel.  Rather, the “Court would reach the same conclusion if the fee defense provisions were in a retention agreement filed by any professional under section 328(a) – including one retained by the debtor.  Such provisions are not statutory or contractual exceptions to the American Rule and are not reasonable terms of employment of professionals.”  Id. at *22 n.6.