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Supreme Court’s Restrictive Reading Of Bankruptcy Code Section 330 Leaves Bankruptcy Professionals High And Dry

Baker Botts L.L.P. v. ASARCO LLC, 576 U.S. —- (2015)

The Supreme Court made a significant ruling that will encourage leveraged fee attacks on estate professionals in bankruptcy cases.  In an Opinion delivered by Justice Thomas, and joined by five other Justices, the High Court ruled that Bankruptcy Code section 330(a)(1) does not permit a bankruptcy court to award estate professionals fees for work performed in defending a fee application.

In this case, two law firms were retained under Bankruptcy Code section 327(a) to provide legal representation for the debtor, and more specifically, to prosecute fraudulent transfer claims.  The law firms were very successful, clawing back $7 to $10 billion for the debtor’s estate, which helped the debtor reorganize and pay all creditors in full.  As required by the Bankruptcy Code, the law firms filed fee applications with the court for “reasonable compensation for actual, necessary services rendered” and the debtor, controlled post-confirmation by the fraudulent transfer target, objected.  11 U.S.C. § 330(a)(1).  After a six-day trial, the bankruptcy court overruled the debtor’s objections, awarded the law firms $124.1 million in fees and $5 million for time spent litigating in defense of their fee applications.  Here, the Supreme Court decides whether the bankruptcy court had authority to grant the law firms the additional $5 million award for defending their fee applications.

Justice Thomas starts with the default rule of attorney’s fees, the “American Rule,” which provides that each litigant pay his own attorney’s fees unless a statute or contract provides otherwise.  The Court then looks to the statute and holds that it does not “provide otherwise” because litigating a fee application is not labor performed for the estate.  Deferring to Congress and citing to section 110(i) of the Bankruptcy Code as an example of an explicit fee-shifting statute, the Court observes that had Congress wished to shift the burdens of fee-defense litigation under § 330(a)(1), “it easily could have done so”, Op. at 7, and notes that “reasonable compensation” is not explicit enough to override the American Rule.

The dissent, penned by Justice Breyer and joined by Justices Ginsburg and Kagan, makes a number of arguments seemingly brushed over by the majority.  The dissent argues that the Bankruptcy Code affords courts broad discretion in determining “reasonable compensation” under section 330 and should be permitted, where applicable, to award compensation for fee-defense work.  While the majority lumps all attorneys in the same category, the dissent points out that only bankruptcy attorneys, prior to payment entitlement, must file fee applications with a court, which are then subject to notice and a hearing.  Any party-in-interest may object to the fees thereby commencing a court-supervised mini-trial.  From a practical perspective, the dissent notes that fees spent defending fee applications, if not compensated, can turn a reasonable compensation award into an unreasonable one, with the litigation costs diluting the award.  “In order to ensure that each professional is paid reasonably for compensable services, a court must have the discretion to authorize pay reflecting fee-defense work.”  Dissenting Op. at 5-6 (emphasis in original).  The dissent also finds statutory support in section 330(a)(6), which provides for compensation “for the preparation of a fee application[.]”  11 U.S.C. § 330(a)(6).  Typically, attorneys (and other service providers) do not charge clients for the time spent preparing bills, but Congress recognized that bankruptcy courts should be afforded discretion to award compensation for this task because professionals are mandated to prepare fee applications.  While the majority agrees that preparing a fee application is a compensable “service” under section 330(a)(1), the dissent questions (and the bankruptcy professionals are left wondering) why not compensate professionals for the time spent defending that same “service”?