ASARCO and Unsecured Trade Creditors: Boon or Bain?

On June 15, 2015, in Baker Botts L.L.P. v. ASARCO LLC,[1] the Supreme Court held that the Bankruptcy Code does not permit bankruptcy courts to award attorney fees under § 330(a) of the Bankruptcy Code to counsel or other professionals employed by the bankruptcy estate for work performed in defending a fee application, potentially giving unsecured trade creditors, and the official committees representing their interests, another avenue for extracting value and providing new retention issues for which to watch in the early stages of bankruptcy cases. At the same time, however, the decision will require official committees and their professionals to be mindful of new risks posed with respect to their fees and applications for payment under § 330(a).

In ASARCO’s chapter 11 case, ASARCO was granted authority by the bankruptcy court to employ Baker Botts L.L.P. and Jordan, Hyden, Womble, Culbreth & Holzer, P.C., pursuant to § 327(a) of the Bankruptcy Code.[2] Upon the conclusion of ASARCO’s chapter 11 case, the two firms sought compensation for services rendered under § 330(a)(1), which grants a bankruptcy court authority to “award ... reasonable compensation for actual, necessary services rendered by” professionals hired under § 327(a) of the Bankruptcy Code.[3] Once the firms’ fee applications had been filed, ASARCO challenged the compensation sought, and after extensive discovery and a trial, ASARCO’s objections were overruled and the firms were awarded compensation, including compensation for time spent in litigation arising from ASARCO’s objection to the firms’ fees.[4]

Upon appeal to the district court, the district court held that the firms could recover fees as compensation for defending their fee applications.[5] Thereafter, upon appeal to the U.S. Court of Appeals for the Fifth Circuit, the Fifth Circuit reversed the decisions of the bankruptcy court and district court, holding that the American Rule applied absent explicit statutory authority to the contrary, and that the Bankruptcy Code did not contain any statutory provision for the recovery of attorneys’ fees for defending a fee application.[6]

In analyzing the issues, the Supreme Court began with the so-called “American Rule” — that each litigant pays his own attorneys’ fees, win or lose, unless a statute or contract provides otherwise.[7] From this starting point, the Supreme Court explained it would not deviate from the American Rule “absent explicit statutory authority,” given the American Rule’s deep roots in common law.[8] Noting that the Supreme Court had recognized departures from the American Rule in the past, the Supreme Court explained that such departures had been recognized only in “‘specific and explicit provisions for the allowance of attorneys’ fees under selected statutes.’”[9]

Having provided the foregoing background, the Supreme Court announced its holding: “Congress did not expressly depart from the American Rule to permit compensation for fee-defense litigation by professionals hired to assist trustees in bankruptcy proceedings.”[10] In explaining its holding, the Supreme Court began by finding that, pursuant to § 327(a) of the Bankruptcy Code, “professionals are hired to serve the administrator of the estate for the benefit of the estate,” and in turn, § 330(a)(1) authorizes compensation of those professionals for reasonable compensation for actual, necessary services rendered to the estate.[11] This text, the Supreme Court explained, cannot displace the American Rule with respect to fee-defense litigation.

In particular, the Supreme Court explained that “the phrase ‘reasonable compensation for actual, necessary services rendered’ neither specifically nor explicitly authorizes courts to shift the costs of adversarial litigation from one side to the other ... as most statutes that displace the American Rule do.”[12] The Supreme Court specifically found the qualification “actual, necessary services rendered” significant, espousing that “[t]he word ‘services’ ordinarily refers to ‘labor performed for another.’”[13] Based on this definition, the Supreme Court noted that it had previously concluded that “reasonable compensation for services rendered” necessarily implies loyal and disinterested service in the interest of a client.[14] The Supreme Court also found it telling that while Congress had not expressly transferred the costs of litigation in § 330(a), Congress had done so in other portions of the Bankruptcy Code — section 110(i), for example — and accordingly refused “to invade the legislature’s province of redistributing litigation costs.”[15] The Supreme Court thus concluded that time spent litigating a fee application against the client could not be described fairly as loyal and disinterested service provided to the client.[16]

In reaching its conclusion, the Supreme Court also rejected three arguments: (1) that the estate benefits from the fee dispute because the estate has an interest in obtaining a just determination of the amount it should pay its professionals, and thus the fees should be compensable; and (2) that defense of the fee application is part of the underlying services; and (3) that prohibiting compensation for fee litigation would steer the best and brightest away from practicing bankruptcy law.[17] In rejecting the first argument, the Supreme Court flatly rejected any interpretation of § 330(a)(1) that would allow courts to pay professionals for arguing for fees they were found never to have been entitled to in the first place.[18] With respect to the second argument, the Supreme Court found that the theory could not be reconciled with the relevant text, explaining that defending the bill for services provided cannot naturally be considered part of the services that have been provided.[19] As to the final argument, the Supreme Court stated that the argument was flawed, explaining that no attorneys, regardless of whether they practice in bankruptcy, are entitled to receive fees for fee-defense litigation absent express statutory authorization.[20]

Based on all of the foregoing, and having rejected the arguments to the contrary, the Supreme Court affirmed the Fifth Circuit, concluding that the decision was following the general practice of the U.S. that is in opposition to forcing one side to pay the other’s attorney’s fees: “Because § 330(a)(1) does not explicitly override the American Rule with respect to fee-defense litigation, it does not permit bankruptcy courts to award compensation for such litigation.”

The Supreme Court’s holding in ASARCO potentially gives unsecured trade creditors and the committees representing their interests an increased incentive and ability to challenge fee applications in scenarios where, before ASARCO, doing so would not have been economical or beneficial. In addition, with professionals on notice of the limits imposed by the American Rule upon compensation under § 330(a), unsecured trade creditors and official committees should be watchful for revised retention applications and agreements for, and orders approving retention of, professionals representing debtors in bankruptcy cases, as the American Rule applies only where there is no statute or contract regarding the payment of fees. Finally, the ASARCO decision will also require professionals representing official committees to carefully consider all actions taken to protect the interests of creditors, given the new risks posed by the Court’s holding with respect to their fees and fee applications.