Bankruptcy Judge Mary F. Walrath in Delaware categorically barred lawyers from circumventing the Supreme Court’s opinion in Baker Botts LLP v. ASARCO LLC by refusing to approve a retention application requiring the debtor to compensate committee professionals for successfully defending their fees.
In June, the Supreme Court held 6-3 in ASARCO that debtors’ counsel in bankruptcy cases cannot be paid for successfully defending their fee requests. In Delaware, the reorganization of Boomerang Tube LLC became a test case to decide whether lawyers could sidestep ASARCO by incorporating the reimbursement of defense costs into a retention agreement approved up front by a bankruptcy judge.
In a footnote at the very end of her opinion, Judge Walrath in substance said that no form of artful drafting, even by the debtor’s lawyers, will pass muster because using estate funds to pay fee defense costs “are not reasonable terms of employment of professionals.”
Theoretically, the Boomerang decision does not bind the other Delaware bankruptcy judges. However, judges ordinarily discuss important decisions with their brothers and sisters on the bench in the same district. It would therefore be surprising if another Delaware bankruptcy judge reached a different result.
The proposed retention agreement between the Boomerang creditors’ committee and its lawyers would have required the debtor to pay the cost of a successful defense of fees. Committee counsel contended that providing for defense costs as a term of employment under Section 328(a) was permissible because ASARCO only barred reimbursement in the allowance of fees under Section 330(a). Judge Walrath did not buy that theory and knocked down every other argument proffered by committee counsel.
She barred the use of Section 328 as a vehicle for paying defense costs because it, like Section 330(a), was not a “specific and explicit statute” overriding the American Rule against fee-shifting. Judge Walrath said that while Section 328 does not prohibit defense costs, “it simply does not authorize them.”
Next, the committee contended that the engagement agreement fell under the so-called contract exception to the American Rule, allowing parties by contract to agree that the losing side pays everyone’s lawyers. The argument was flawed, she said, because the debtor was not a party to the retention agreement. Even if the contract exception applied, Judge Walrath said she could not approve because fee-defense costs would not entail any services for the committee, only benefit the lawyers themselves.
Although dicta, Judge Walrath included a footnote at the very end of the opinion announcing she would not approve fee-shifting “in a retention agreement filed by any professional under Section 328(a) — including one retained by the debtor,” because they would not be “reasonable terms of employment.”