Boomerang Tube Inc.: the Delaware Bankruptcy Court Considers Fee-Shifting Defense Provisions and ASARCO

In its January 2016 decision in Boomerang Tube Inc.,[1] Judge Mary F. Walrath of the Delaware Bankruptcy Court considered the U.S. Trustee’s (UST’s) objection to the retention application of counsel for the unsecured creditors’ committee, which took issue with a provision indemnifying committee counsel for further fees and expenses incurred for any successful defense of their fees. The court sustained the UST’s objection, finding that the fee-defense provision was not a permissible term of employment for committee counsel.

Background

On June 9, 2015, Boomerang Tube Inc. (and its affiliates) filed for chapter 11. The UST appointed the committee, which retained counsel. Committee counsel sought approval under § 328(a) of a provision in their retention applications authorizing compensation to them from the debtors’ estates for any fees, costs or expenses arising from the successful defense of their fees. Section 328(a) provides as follows:

The trustee, or a committee appointed under section 1102 of this title, with the court’s approval, may employ or authorize the employment of professional persons under section 327 or 1103 of this title, as the case may be, on any reasonable terms and conditions of employment, including on a retainer, on an hourly basis, on a fixed or percentage fee basis, or on a contingent fee basis. Notwithstanding such terms and conditions, the court may allow compensation different from the compensation provided under such terms and conditions after the conclusion of such employment, if such terms and conditions prove to have been improvident in light of developments and not capable of being anticipated at the time of the fixing of such terms and conditions.

The UST objected to the committee’s application, contending that (1) the Supreme Court’s holding in ASARCO[2] barred such a provision; (2) § 328(a) did not create an exception to the American Rule on fee-shifting; and (3) the fees incurred in defending fees were outside the scope of counsel’s employment and thereby unreasonable.

ASARCO as Bar to Defense Fees under § 328: Not Expressly Provided for by Statute

In ASARCO, the Supreme Court affirmed the Fifth Circuit’s denial of fees to debtor’s counsel for defending its fees from objections raised by the debtor. The Supreme Court stated that “the basic point of reference when considering the award of attorney’s fees is the bedrock principle known as the American Rule: Each litigant pays his own attorney’s fees, win or lose, unless a statute or contract provides otherwise.”[3]

Following ASARCO’s reasoning in Boomerang, the Delaware bankruptcy court concluded that although § 328(a) was an exception to § 330, it also did not expressly authorize an award of defense fees or litigation costs to a prevailing party. The court was unpersuaded by the theories advanced by committee counsel, namely that (1) the ASARCO holding was limited to § 330 and, therefore, was not binding precedent where fees were sought under § 328, and (2) § 328 permitted compensation to professionals that would otherwise not be available under § 330 (e.g., fixed fees, contingent fees). In the Boomerang opinion, the court discerned that § 328 simply provided that with court approval, a professional may be employed on reasonable business terms. The court also remarked that absent from the text of § 328 was any explicit reference to an award of defense fees to a prevailing party. Without express language, no statutory exception to the general American Rule could be deemed to exist. The Boomerang opinion identified contrasting provisions in the Code where the pertinent statutes did, in fact, provide the plain language necessary to create exceptions to the American Rule.[4]

Retention Agreements Failed to Create a Contractual Exception to the American Rule

Committee counsel in Boomerang also contended that the retention agreements were contracts. Notably, committee counsel pointed to the Fifth Circuit’s reasoning in ASARCO that stated, “In disputes governed by § 328(a), the contractual arrangement is supreme, and we shall enforce the contract as written.”[5] The UST maintained that the contract exception did not apply because rights to fees were imparted by the Code itself. The court ultimately resolved that the committee’s retention agreements were, in fact, contracts; however, the contracts were unilateral and only subject to objection by other parties and court approval/modification.

In the Boomerang opinion, the court’s description of the difference between a unilateral and bilateral contract with regard to fees might be paraphrased in this way: A bilateral contract means that the parties involved have a mutual agreement that the prevailing party (whoever that may be) will receive compensation from the losing party. A unilateral contract, on the other hand, as was the case with the retention agreements at issue, meant that the bankruptcy estate is liable for committee counsel’s fees, but no similar commitment on fee-shifting to the prevailing party was made by the bankruptcy estate to the committee. In that same vein, the UST observed that the bankruptcy estate was not a party to the contract between the committee and counsel for the committee. The court agreed with the UST.

So, while the opinion issued in the Boomerang case concluded that the retention agreements were contracts, they did not and could not effectively create a contractual exception to the American Rule such as to justify payment of the defense fees of committee counsel by the bankruptcy estate.[6]

ASARCO Dicta Bars Recovery of Defense Fees Incurred as Outside the Scope of § 328

In the Boomerang case, the UST further posited that even if ASARCO did not preclude the payment of the defense fees of committee counsel, § 328 provided no authorization for their payment because the work associated with the fees did not constitute services to the committee.[7] Rather, the fees were for services performed by committee counsel only in their self-interest. Moreover, the UST noted that ASARCO (in dicta) stated the following:

In our legal system, no attorneys, regardless of whether they practice in bankruptcy, are entitled to receive fees for fee-defense litigation absent express statutory authorization. Requiring bankruptcy attorneys to pay for the defense of their fees thus will not result in any disparity between bankruptcy and nonbankruptcy lawyers.[8]

The committee counsel’s contention that fee defense (and other costs associated therewith) provisions were common in the nonbankruptcy market and, in consequence, were “reasonable” in the bankruptcy context was also deemed unpersuasive by the court in light of the Supreme Court’s more recent decision in ASARCO. The 11 or so judicial decisions provided by committee counsel to the court, which held that these provisions were permissible and ethical (and therefore evidenced “reasonableness” in the market), all pre-dated ASARCO’s express rejection of the consideration of such factors.

In summary, the court in its Boomerang opinion held that, in light of ASARCO, a fee-shifting defense provision is not a reasonable term of employment in the retention applications of committee counsel.[9]

Given the interim fee-compensation procedures for professionals typical to bankruptcy, do ASARCO and subsequent decisions bound by its precedent, like the one issued in Boomerang, encourage potentially meritless objections to final fee applications, rate increases and problems for bankruptcy estate administration?