Tuesday, October 28, 2014

Supreme Court to Hear Dispute Over Fees for Defending Fee Application

The Supreme Court doesn't take many cases on bankruptcy issues.  It has only ruled on attorney's fees in bankruptcy once since the Code was adopted and that ruling was on the narrow issue of whether a chapter 7 debtor's attorney could recover fees from the estate.    As a result, it was big news when the Court granted cert in  No. 14-103, Baker Botts, LLP v. ASARCO, LLC on October 2, 2014.    The issue in ASARCO is whether an attorney can recover fees for defending his fee application or whether those expenses are merely "a cost of doing business" as held by the Fifth Circuit.   The issue matters in the particular case because Baker Botts spent $5 million in time defending its $113 million application.   

What Happened

I have previously written about the ASARCO case at length here.   This was a case where the Debtor's law firms obtained a judgment against the Debtor's parent company for somewhere between $7 and $10 billion which was "the largest fraudulent transfer judgment in Chapter 11 history."    As a result of the adverse judgment, the Debtor's parent company decided to fund a plan which paid the creditors in full and left the Debtor with $1.4 billion in cash.   

Given this incredible result, the Debtor's law firms should have had an easy time recovering their fees.  After all, when you are measuring results in the billions, what's a hundred million in fees?   However, under the Plan, ASARCO's parent regained control of the Debtor.   They were apparently not happy about paying Baker Botts and Jordan Hyden for having sued them.   
The Debtor submitted a discovery request to Baker Botts which required it to produce every document it had prepared in 52 months of bankruptcy.    This amounted to 2,350 boxes of hard copy documents and 189 GB of electronic data.   In case you were wondering, 1 GB of data translates into between 65,000 to 165,000 pages of documents depending upon whether the documents were Microsoft Word documents, Excel spreadsheets or emails.   Assuming 100,000 pages per GB of electronic data, that means that Baker Botts produced about 18.9 million pages of electronic documents.   (Imagine being the associate who had to review all that!)  

Notwithstanding ASARCO's efforts to contest its firms' fees, the Bankruptcy Court awarded Baker Botts $113 million in fees, an enhancement of $4.1 million and $5 million for defending its application and awarded Jordan Hyden $7 million in core fees, an enhancement of $125,000 and $15,000 for prosecuting the application.

On appeal, the Fifth Circuit upheld the fee enhancements but struck down the cost of defense fees.   ASARCO, LLP v. Jordan Hyden Womble Culbreth & Holzer, P.C. (In re Asarco, LLC), 751 F.3d 291 (5th Cir. 2014), cert. granted, 2014 U.S. LEXIS 4913 (10/2/14).   

Having been mostly successful, Baker Botts decided to go to the Supreme Court for the last $5 million which was withheld.    In filing their petition, Baker Botts was supported by the State Bar of Texas Bankruptcy Law Section and the Business Law Section of the Florida Bar.  

Why It Matters

In its opinion, the Fifth Circuit made a brief though cogent examination of section 330(a) in denying the cost of defense fees.  In particular, it ruled that section 330(a)(3) and (4) require that services be likely to benefit the estate or necessary to the administration of the estate in order to be compensated.  
Nevertheless, Section 330 states twice, in both positive and negative terms paraphrased above, that professional services are compensable only if they are likely to benefit a debtor’s estate or are necessary to case administration. Matter of Pro-Snax Distributors, Inc., 157 F.3d 414, 418 n.7 (5th Cir. 1998). The primary beneficiary of a professional fee application, of course, is the professional.
Opinion, p. 13.   The Court also concluded that because section 330(a)(6) allows fees for preparing a fee application but not for litigating one, that cost of defense fees must be denied.   

This case has both the statutory interpretation questions mentioned above and the policy question of whether one party can impose litigation costs upon another party with impunity.   Here, there is a strong hint that ASARCO's parent, now in control of the Debtor, sought to get payback against Baker Botts by running up the cost of getting compensated.   It seems curious that the Debtor would have needed to request every piece of paper created by the firm in order to judge whether their fee request was reasonable.    While the Fifth Circuit raised the prospect that fees could be awarded for vexatious fee objections, it also suggested that fees were not litigated often enough, stating:
“Too frequently, court-appointed counsel for debtor[’s] and the official creditor committees’ interests in a case, sharing the mutual goal of securing approval for their fees, enter into a conspiracy of silence with regard to contesting each other’s fee applications.”
Opinion, p. 18.

The result in this case is likely to be important beyond the narrow issue presented for the following reasons:
  • Supreme Court watchers have noted that the Court's bankruptcy decisions tend to swing between strict textual analysis and a functional approach.   If the Court goes with the textual approach, it will be likely (though not guaranteed) to uphold the Fifth Circuit, while a functional approach would support Baker Botts.
  • The Court will be required to address the meaning of likely to benefit the estate and necessary to case administration.    Because these terms are critical to interpretation of section 330, the court's opinion will provide valuable guidance on awarding fees.   While the Fifth Circuit's view that defending a fee application was for the benefit of counsel is plausible, I believe that the better answer is that it is part of the process of administering the estate.
  • The Fifth Circuit's opinion relied on one of the multiple rationales of the Pro-Snax case.  While the Court's interpretation of Pro-Snax in ASARCO was consistent with the statute, the mere fact that the case is before the Supreme Court may encourage the Fifth Circuit to walk back Pro-Snax's most aggressive holding that only actual results may be compensated.   In its amicus brief in support of the petition for cert, the State Bar of Texas Bankruptcy Law Section raised the Pro-Snax "results only" holding and mentioned my firm's case of Matter of Woerner, 758 F.3d 693 (5th Cir. 2014), which is currently the subject of a pending request for rehearing en banc.    
The importance of the case is also underscored by the fact that representatives from two state bars weighed in on the dispute.   In my experience, it is highly unusual for a section of the Texas State Bar to file an amicus brief.  I am not aware of any other case in which it has been done.   While I am speculating here, I have to believe that the Bankruptcy Section must have convinced the State Bar that this was an issue of importance to lawyers in general.    Otherwise, they would just have been taking sides in a dispute between different groups of lawyers.    This will be an interesting case to watch.

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