Under the recent landmark opinion ASARCO,[1] the Supreme Court noted that the bankruptcy court had awarded ASARCO’s bankruptcy counsel, Baker Botts, L.L.P. and Jordan, Hyden, Womable, Culbreth & Holzer, P.C., (collectively, “Counsel”), more than $5 million for legal fees incurred in defending against the parent company’s claims concerning the reasonableness of Counsels’ legal fee applications.[2] In oral arguments to the Court, Justice Samuel Alito remarked that sanctions relating to frivolous objections regarding legal fees was a better solution because the economic impact “fell on the party causing them rather than on the estate.”[3]
In my assignment to develop persuasive arguments that sanctions for frivolous objections are an insufficient solution in the recovery of disputed legal fees, I looked to what a culture icon like David Letterman would do to illustrate such arguments. I am thereby proposing the fabulous five reasons (the “Fab Five”) as to why sanctions for frivolous motions to recover legitimate legal fees fall short in providing a satisfactory resolution to such disputes.
First, sanctions are inappropriate methods in resolving valid disputes about legal bills in a bankrupt estate. ASARCO’s parent company engaged in permitted litigation to dispute legal fees paid to Counsel. Sanctions for frivolous litigation exist so that bad legal practices are not rewarded, e.g., inappropriate disclosure or spoliation.[4] A motion for sanctions for frivolous litigation is not typically used to resolve valid legal fee disputes between parties.
Second, proving sanctions adds additional burdens to practitioners seeking to recover legitimate legal fees. Sanctions are intended to deter inappropriate legal behavior, not chill litigation for legitimate recoveries in a bankrupt estate. In general, courts are hesitant to award sanctions for frivolous litigation unless persuasive evidence is introduced.[5] Gathering additional persuasive evidence that proves the merits for sanction damages (even in a Federal Rule 11 claim)[6] creates additional legal and discovery burdens[7] beyond substantiating the reasonableness of legitimate legal fees by the party seeking them.[8] These burdens translate into additional economic impact to the moving party that may not be recovered in a damage award for sanctions, thus failing to achieve the objectives that Justice Alito articulated in his comments made during oral arguments.
Third, sanctions may discourage bankruptcy practitioners from pursuing estate recoveries.[9] By encouraging claims for sanctions against the parent company of a bankrupt estate (that did return payments to the estate for alleged fraudulent transfers) to recover legitimate legal fees, courts’ historical reluctance to award damages may result in bankruptcy practitioners hesitating to vigorously pursue related party claims. These practitioners may fear retaliation by related parties in an estate with increased disputes for the recovery of reasonable legal fees. A sanctions approach to resolving legal fee disputes may also reduce needed legal innovation in the development of legitimate legal theories that can result in additional estate recoveries.[10] Courts have also cautioned that asking for sanctions can result in the imposition of sanctions on the moving party. This judicial admonition creates additional litigation risk for a movant seeking damages in situations where reasonable legal compensation has not been paid.[11]
Fourth, frivolous litigation sanctions may not compensate the aggrieved party seeking recovery for disputed legal fees. Several examples illustrate this Fab Five point. State rules regarding professional conduct and the Model Code (and Rules) of Professional Responsibility prohibit a lawyer from pursuing litigation that is “frivolous” or “inflicts needless harm.”[12] Yet these sanctions do not provide the compensation for the total legitimate legal fees that would be sought by bankruptcy counsel. Moreover, similar types of limitations are in place under § 1927 of Title 28 that generally make an individual lawyer liable for excess costs, expenses and attorneys’ fees reasonably incurred by such conduct.[13] In cases where a court considers an individual party’s wealth to determine damages, such resulting awards also may not be regarded as sufficient to compensate a law firm for its legitimate legal fees.[14]
Finally, repeated and pervasive use of a sanction process undermines the public confidence in the legal system and the community of bankruptcy lawyers that serve it. If the legal profession is channeled into increased filings for sanctions, an inappropriate and unfounded conclusion of increasing improper or illegitimate legal billing practices could be drawn. Fees awarded under a sanction case could also be viewed as reward or punishment, and not for payment of historical legal services rendered.[15] An increased number of sanction filings could also suggest that the U.S. legal system is unable to resolve disputes with integrity and efficiency,[16] thus eroding a layperson’s belief that the U.S. legal fee compensation structure is fair for the expertise and work required for legal representation in bankruptcy. Such disdain for the recovery of legal compensation will result in an erosion of experienced and innovative talent from the bankruptcy legal community that provides valuable services to troubled estates.
The Fab Five are compelling considerations for seeking valid legal or alternative dispute approaches other than sanction filings that fairly and efficiently resolve legal fee compensation disputes with bankruptcy estate counsel.
[1] Baker Botts LLP v. ASARCO LLC, __ U.S. ___, 135 S. Ct. 2158 (2015).
[2] ASARCO’s parent company had been required to pay ASARCO’s bankruptcy estate more than $XX million from fraudulent transfers, which enabled full recovery for the estate’s creditors. See Baker Botts LLP, et al. v. ASARCO LLC, 576 U.S. _____ (2015), slip op. No. 14-103, at 2 (June 15, 2015).
[3] See Mann, Ronald, “Argument recap: Justices dubious of paying fees for defending bankruptcy fee applications,” www.scotusblog.com/2014/02/argument-recap-justices-dubious-of-paying-fe… applications, at 1.
[4] As Tracy Axelberg noted, “Frivolous pleadings, motions and appeals have been a blight on the judicial process. In addition to clogging the judicial machinery, these practices place an unjustifiable burden upon other parties, impede the timely burden of meritorious claims, and undermine public confidence in the judicial process.” Axelberg, Tracy, “Sanctions Available for Attorney Misconduct: A Glimpse at the ‘Other’ Remedies,” The Scholarly Forum @ Montana Law, 1986, at 87. Note also that the judiciary has also developed contempt for frivolous litigation that delays the resolution of valid cases and has been active in the development of statutes, codes, rules and case law to impose sanctions. See Keeling, Bryan C., Toward A Balanced Approach to Frivolous Litigation: A Critical Review of Federal Rule 11 and State Sanctions Provisions, Pepperdine L. Rev., Pepperdine University School of Law, 1994, at 1.
[5] Pepe, Douglas J. “Persuading Courts to Impose Sanctions on Your Adversary,” Litigation, Volume 36, Number 2, Winter 2010, American Bar Association, at 4-5.
[6] See Axelberg at n.2, p. 97.
[7] Id. at n.2, p. 87.
[8] See Keeling at n.3, p. 2.
[9] See Kim v. Westmore Partners Inc., 201 Cal. App. 4th 267, 293 (Ct. Ap. Cal. 2011); see also Medina, Andje M. and Cloyd, Jeremy D. “Sanctions – To ask or not to ask: That is the question,” www.plaintiffmagazine.com, June 2012, at 1.
[10] See Axelberg at 3, n.3. This point has been extensively debated when statutory schemes for sanctions are limited in their reach. In cases of imposing broad objective sanctions, the opposite consequence occurs and novel litigation is discouraged. See Keeling at n.3, pp. 10, 11 and 13.
[11] See Williamson, Richard D., “The Sanctions Merry-Go-Round,” www.americanbar.org/publications/young_lawyer_2010-11/july_august_2011/…, at 2.
[12] See Axelberg at n.2, p. 88; see also Williamson at n.10, p. 1.
[13] See Pepe at n.4, p. 4.
[14] See Axelberg at n.2, pp. 94-95.
[15] See Keeling at n.3, p. 20.
[16] This defies the objective that the “courts in the United States serve the function of providing a forum in which opposing parties can resolve disputes fairly and impartially.” See Keeling at n.3, p. 13.