Effects of the ASARCO Decision in Cases with a Fee Examiner

On June 15, 2015, in Baker Botts LLP v. ASARCO LLC , the U.S. Supreme Court ruled in a 6-3 decision that § 330(a)(1) of the Bankruptcy Code does not permit bankruptcy courts to award attorneys’ fees to § 327(a) professionals for defending fee applications.[1] Justice Thomas, writing for the majority and using a narrow statutory interpretation, held that the statutory provisions of §§ 330 and 327 failed to provide a basis for recovery of fees for fees.[2] Rather, the Court held that the longstanding principle known as the American Rule, which provides, “Each litigant pays his own attorney’s fees, win or lose, unless a statute or contract provides otherwise,” applied,[3] and that Congress did not intend to depart from the American Rule in § 330(a)(1).[4]

The ASARCO decision clearly prohibits a § 327 professional from collecting fees for defending his or her fee application. Yet § 330(a)(6) specifically allows for compensation for preparing a fee application.[5] Thus, there is some middle ground for professionals to try and sidestep the potential breadth of the ASARCO ruling. This piece will discuss the decision’s effect in those chapter 11 cases where fee examiners are appointed.

How the Fee Examiner Order Can Help

Whether initiated by the U.S. Trustee Guidelines, a local rule or a bankruptcy judge’s request, when a fee examiner is appointed in a chapter 11 case, a fee examiner order is entered that should set forth in detail all of the procedures regarding the fee examination process. Now more than ever, with the ASARCO ruling and no relevant statutory reform on the horizon, fee examiners and case professionals need to be much more cognizant of the content of fee examiner orders, because the language included or left out will have a direct impact on what fees and expenses a professional is entitled to recover throughout the fee-examination process.

As the Supreme Court noted, the Bankruptcy Code prohibits compensation for professional services that were not reasonably likely to benefit the debtor’s estate or necessary to the administration of the case.[6] However, for a retained professional, the fee examiner order makes the entire fee-examination process a necessary service. The order sets forth the requirements that a retained professional must follow, and failure to comply with the order could adversely affect a professional’s right to compensation, delay its compensation, or even result in contempt. It is the appointment of the fee examiner and the preparation and entry of a properly detailed fee examination order that can actually safeguard certain compensation that the ASARCO decision put into question.

When Does a Professional’s Work Stop Being a Necessary and Compensable Service?

We know that a professional can be compensated for preparing a fee application, and further, that a fee examiner’s appointment and the associated fee examination order makes the fee-examination process necessary for the administration of a case. Keep in mind, though, that the ASARCO ruling clearly concluded that there is a point at which a professional will not be paid for certain work regarding his or her fee application.

So the question becomes: When does a professional’s work stop being necessary? Arguably, it becomes unnecessary at the point that a professional’s work or focus regarding its fee application becomes adversarial, litigious or self-interested. This position is a narrow interpretation of the ASARCO ruling: The service is not necessary when the retained professional is truly defending or litigating its fee application.[7] However, the more detailed the fee examiner order is, the less likely there will problems or questions as to when the line is crossed.[8]

For instance, each professional should be compensated for responding to a fee examiner’s initial/preliminary report (i.e., either verbally or in writing). A professional should also be compensated for any negotiations with the fee examiner regarding issues raised in the fee examiner’s preliminary report. Additionally, a professional should be compensated for attending a fee hearing. But as the Supreme Court noted, if the professional has to defend its fee application at the hearing, it cannot be paid for the attendance or preparation, etc. These are just a few examples of how a well-drafted fee examination order could lessen or even eliminate unnecessarily broad interpretations of the ASARCO decision.

Conclusion

With the Supreme Court’s narrow interpretation of §§ 330(a)(1) and 327(a), the line where a professional will not be compensated has unquestionably been drawn in the sand. The true breadth of the ASARCO ruling has yet to be determined. In the meantime, the grey area that exists between defending a fee application, and preparing a fee application and working with a fee examiner through the fee-examination process, can accurately be controlled and made compensable. The solution lies in properly addressing all relevant issues when preparing and presenting the fee examination order.