Defending Professional Fees: SCOTUS Shuts the Door, and the Delaware Bench Closes the Window

In Baker Botts L.L.P. v. ASARCO,[1] the Supreme Court held that under § 330(a)(1) of the Bankruptcy Code, estate professionals are not entitled to payment of fees and expenses incurred in connection with the defense of such professional’s fee applications. Specifically, the Supreme Court determined that Congress did not expressly depart from the “American Rule,” which requires litigants to pay their own attorneys’ fees “unless a statute or contract provides otherwise.” Because the Supreme Court’s holding was based on an analysis of § 330(a)(1) of the Code, many practitioners believed that the Court had potentially left open the ability for estate professionals to be reimbursed for such fees and expenses pursuant to another section of the Code or by contract. Recently, however, the U.S. Bankruptcy Court for the District of Delaware has rejected any attempt to distinguish the holding in ASARCO.

Three recent rulings, the first from Judge Walrath in In re Boomerang Tube Inc.,[2] followed by Judge Shannon in In re New Gulf Resources LLC[3] and Judge Sontchi in In re Samson Resources Corp.,[4] each demonstrate the Delaware Bankruptcy Court’s reluctance to allow parties to estate professionals to structure around the Supreme Court’s decision in ASARCO.

In Boomerang, the most in-depth of the three decisions, Judge Walrath analyzed whether proposed counsel for an official committee of unsecured creditors could include a provision in the order approving its retention indemnifying counsel for expenses incurred in any successful defense of its fees pursuant to § 328 of the Bankruptcy Code (rather than § 330). Siding with the U.S. Trustee[5], Judge Walrath ultimately denied the inclusion of such a provision and found that it ran afoul of § 328 of the Code, which, the Court explained, does not provide a statutory exception to the American Rule.[6]

Judge Walrath similarly analyzed whether estate professionals could contract around the American Rule through their retention applications. Although Judge Walrath agreed that retention applications were contracts (albeit ones that are subject to objection by other parties and court approval and modification), she determined that these “contracts” could not be considered to be or include contractual exceptions to the American Rule. Judge Walrath noted that a typical contractual exception to the American Rule is a bilateral agreement that provides that each party to the agreement “will be responsible for the other’s legal fees if it loses a dispute between them.”[7] In Boomerang, however, Judge Walrath explained that the retention application at issue could not be considered a contractual exception to the American Rule because it is a contract between the committee and its counsel that provides that in the event that counsel to the committee is successful in defending a challenge to its fees, the estate, a third party, would be responsible for committee counsel’s defense costs.[8]

The court in Boomerang further determined that even if the retention application at issue could serve as a contractual exception to the American Rule, it could not be considered a “reasonable term[] and condition[] of employment” under § 328 of the Bankruptcy Code.[9]

In the wake of Judge Walrath’s ruling in Boomerang, Judges Sontchi and Shannon faced similar requests from proposed counsel to chapter 11 debtors in In re Samson Resources Corp. and In re New Gulf Resources LLC. In Samson, proposed counsel to the debtors included reimbursement provisions in its retention application. In New Gulf, proposed counsel to the debtors sought a “fee premium” that would be waived if counsel did not incur material expenses in defending a fee objection. In both instances, the court issued letter rulings holding that such structures ran afoul of the holdings in ASARCO and Boomerang Tube.[10]

In light of these recent decisions from the Delaware bankruptcy bench, it appears that bankruptcy courts are adopting a restrictive application of the Supreme Court’s ruling in ASARCO and have, to date, rejected all attempts to contract around the Supreme Court’s decision. It remains to be seen whether courts in other districts will apply a similarly restrictive application of the ASARCO ruling, and whether practitioners will think of new and more creative ways of contracting around the Supreme Court’s ruling. However, given the rulings in Boomerang, Samson and New Gulf, it is unlikely that the Delaware Bankruptcy Court will agree to the inclusion of any provision in a retention order that attempts to contract around the “American Rule.”