Alexandria, Va. — Practitioners looking to defend their fee applications face difficult headwinds in the aftermath of the Supreme Court’s ASARCO ruling and recent bankruptcy court opinions, according to an article in the April ABI Journal. “Practitioners and courts will now need to wrestle with virtually no prospect for presumptive compensation for fee-defense fees,” write Robert J. Keach of Bernstein Shur (Portland, Maine) and Brady Williamson of Godfrey & Kahn, SC (Madison, Wis.) in “The Boomerang Effect: Is There a Contract Exception to ASARCO (and if Not, What Then)?”
The Supreme Court ruled on June 15, 2015, in the case of Baker Botts LLP v. ASARCO LLC, No. 14-103, that § 330(a)(1) of the Bankruptcy Code does not permit bankruptcy courts to award fees to § 327(a) professionals for defending fee applications. The Court reasoned that the plain text of the statute, which only permits “reasonable compensation for actual, necessary services rendered by” a professional retained by the estate, does not suffice in the context of fee-defense awards to override the “American Rule,” which states that each party bears its own attorneys’ fees unless a statute or contract provides otherwise. “Some hope arose that the effects of ASARCO could be offset by including a provision in retention agreements, and blessed by the bankruptcy courts under § 328 of the Bankruptcy Code, that allowed fees for the defense of fees, at least where the defense was successful,” Keach and Williamson write.
Keach and Williamson said that professionals have been quick to test the premise, including submitting retention application requests for courts to allow provisions allowing for fees for the defense of fees. However, the U.S. Bankruptcy Court for the District of Delaware in the Boomerang Tube chapter 11 case refused to approve a fees-for-the-defense-of-fees provision. The bankruptcy court held that § 328 does not expressly authorize the approval of fee-defense provisions. “The decision in Boomerang Tube … may not definitively answer the question, outside of Delaware, of whether the ‘contract exception’ to the American Rule survives as an option for obtaining fees for the defense of fees in bankruptcy cases,” write Keach and Williamson.
However, the Boomerang Tube holding is likely to stick and gain traction, according to Keach and Williamson, leaving professionals, especially in smaller chapter 11 cases, with little room to combat frivolous objections to their fee requests. “Professionals may be forced to capitulate rather than litigate.”
Keach, a co-chair of ABI’s Commission to Study the Reform of Chapter 11, points to recommendations within the Commission’s Final Report to help re-establish balance. The Commission “recommended that the Code be amended to allow much more flexibility in compensating estate professionals to open the door more widely to alternative and case-specific fee structures,” Keach and Williamson write. “Those amendments could also deal with the problems that are created when fee-defense fees are noncompensable, even when the applicant succeeds.”
To obtain a copy of “The Boomerang Effect: Is There a Contract Exception to ASARCO (and if Not, What Then)?,” published in the April edition of the ABI Journal, please contact ABI Public Affairs Manager John Hartgen at jhartgen@abiworld.org or 703-894-5935.
To review the recommendations of the ABI Commission to Study the Reform of Chapter 11, please click here: http://commission.abi.org/full-report
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