Reconciling Baker Botts v. ASARCO and the Bankruptcy Code

[1]Fee applications are an inescapable aspect of bankruptcy practice. As “estate professionals,”[2] attorneys and other professionals employed by debtors in possession, must file fee applications and obtain court approval of their fees.[3]

These tome-like submissions pass through the hands of practitioners of varying levels — from law clerk to senior partner — ensuring not only that the fee application satisfies the amorphous “reasonable compensation for actual, necessary services” standard under § 330(a)(1) of the Bankruptcy Code but also the tedious requirements in courts’ local bankruptcy rules.[4] Much to the chagrin of practitioners, there are gatekeepers standing in the way of compensation, such as the U.S. Trustee, the court (which typically includes the watchful eye of the judge’s law clerk(s)) and any interested party.[5] The unique posture of estate professionals having to petition the court for payment begs the following question: What happens when a party challenges a fee application? More specifically, what happens when a party prevails over a fee application challenge?

The U.S. Supreme Court decided to address the question in Baker Botts L.L.P. v. ASARCO LLC.[6] The issue presented was whether § 330(a)(1) permits bankruptcy courts to award attorneys’ fees after successfully defending a fee application.[7] In tackling the issue, and affirming the Fifth Circuit, Justice Thomas leaned on the “bedrock principle” of the ‘American Rule,’ wherein “[e]ach litigant pays his own attorney’s fees, win or lose, unless a statute or contract provides otherwise.”[8] The Court recognized instances warranting “departures” from the American Rule, but noted that such departures arise only in the face of “explicit statutory authority.”[9] The Court held that, with respect to fee-defense litigation, the plain text of § 330(a)(1) did not provide the type of explicit language often found in exceptions to the American Rule.[10] Integral to the Court’s decision was § 330(a)(1)’s qualifying language, specifically that “reasonable compensation” can only be awarded for “actual, necessary services rendered.”[11] The Court surveyed the definition of ‘services’ and found that the term “ordinarily refers to ‘labor performed for another.’”[12] Unable to reconcile Baker Botts’ efforts to defend its fees as an “actual, necessary service” to the bankruptcy estate, the Court deemed it improper to award Baker Botts compensation for such services.[13]

Although ASARCO appears to have stymied statutory attempts for compensation in fee-defense litigation, recent decisions have analyzed the propriety of carving out compensation through contract law. In In re Boomerang Tube, 546 B.R. 69 (Bankr. D. Del. 2016), Judge Mary Walrath denied approval of a retention order indemnifying lawyers for the committee of unsecured creditors for expenses incurred in successful defense of their fees.[14] The committee’s lawyers focused on § 328, emphasizing that the indemnification term constituted a “reasonable ter[m] and conditio[n] of employment.”[15] Judge Walrath engaged in an ASARCO-like analysis and held that, despite § 328 being an exception to § 330,[16] it, too, was not a statute explicitly authorizing an exception to the American Rule.[17] The court further recognized that retention agreements, although clearly contracts, also did not constitute an exception to the American Rule.[18] The court highlighted that the retention agreement was not a bilateral agreement, as it was “not a contract between two parties providing that each will be responsible for the other’s legal fees if it loses a dispute between them.”[19] Unpersuaded by the use of pre-ASARCO case law, the court closed by stating that indemnification provisions, pursuant to § 328, are “[un]reasonable terms . . . because they do not involve any services for the Committee. Rather, they are for services performed by Committee Counsel only for their own interests.”[20]

The most recent, and perhaps in-depth, analysis of ASARCO is In re Hungry Horse LLC, 574 B.R. 740, 743–46 (Bankr. D. N.M. 2017), wherein Judge David T. Thuma ultimately held “that the contract exception to the American Rule remains viable in bankruptcy cases[, and] . . . a properly drafted fee defense provision could[, while abiding by ASARCO,] be a ‘reasonable term’ under § 328(a). . . .”[21] The court was careful in parsing ASARCO’s holding, taking a narrower approach than Judge Walrath in Boomerang Tube.[22] Judge Thuma explained that ASARCO did not address compensation in terms of a § 328 analysis and that the Supreme Court solely limited compensation of estate professionals under § 330 “for services rendered to its client” — not for one’s own behalf.[23] Accompanied by four criteria for “reasonable” fee-defense provisions, the court closed by providing a template for a fee-defense paragraph capable of withstanding a challenge under § 328(a).[24]

While it is too early to tell what effect ASARCO and, particularly, the more recent decisions will continue to have on fee-litigation disputes, it is evident that lawyers must familiarize themselves with the case law in this ever-evolving area. Thus, with no panacea on the horizon, lawyers must — early on — begin to grapple with the nuances of fee-litigation disputes in bankruptcy.