Supreme Court Says Lawyers Don't Get Paid for Defending Their Fees

A Texas law firm did a great job and beat back a punitive attack on their fees.   However, the Supreme Court has ruled that they may not receive compensation for defending their work.   Baker Botts, LLP v. ASARCO, LLC, No. 14-103 (6/15/15).

Introduction

I have previously talked about the case here.   As a result, I will just give the Cliff's Notes version of the facts.  Baker Botts delivered remarkable results in their representation of ASARCO, LLC.   However, when the party they had sued gained control of the Debtor, they faced a withering attack on their fees.   In response to discovery requests, they produced 2,350 boxes of documents and 189 GB of electronic data.    The trial on their fees took six days.   All of this defense did not come cheap.   The firm spent $5 million of time litigating their fees.     

The Bankruptcy Court awarded Baker Botts $120 million in fees, an enhancement of $4.1 million and $5 million for the fee litigation.   The Fifth Circuit upheld the fees and the enhancement, but not the defense award.   Matter of ASARCO, LLC, 751 F.3d 291 (5th Cir. 2014).   

The Supreme Court granted cert to review whether 11 U.S.C. Sec. 330 allows fees for litigating a fee award.   Baker Botts was supported by the United States, the State Bar of Texas Bankruptcy Law Section, the Business Law Section of the Florida Bar, the National Association of Bankruptcy Trustees, the Committee on Bankruptcy and Corporate Reorganization of the Association of the Bar of the City of New York, the National Association of Consumer Bankruptcy Attorneys, the National Association of Chapter 13 Trustees, nine eminent law professors and two former Bankruptcy Judges.    No one filed an amicus in support of ASARCO's position (although four fee examiners filed a brief in support of neither party).   Many of the most prominent professors and practitioners in the country supported Baker Botts.    

Despite the impressive array of legal firepower arrayed in support of the Petitioners, they were done in by a combination of the American Rule and plain meaning.   In a 6-3 decision authored by Justice Thomas, the highest court of the land said firms must bear the freight for litigating their own fees.

How They Decided

The Court started with the "bedrock principle known as the American Rule" which says that each party pays its own attorney's fees "unless a statute or contract provides otherwise."   Opinion, p. 3.   The Court concluded that the Bankruptcy Code does not explicitly allow fees for defending fees.   They did this by treading the following statutory path:

• Under 11 U.S.C. Sec. 327, professionals may be hired "to serve the administrator of the estate for the benefit of the estate."
• 11 U.S.C. Sec. 330 allows "reasonable compensation for actual, necessary services rendered."
• According to Webster's International Dictionary, the word "services" ordinarily refers to "labor performed for another."
• Fees expended to defend a fee application "cannot be fairly described as 'labor performed for'--let alone 'disinterested service to'--(the) administrator (of the estate)

It is only a slight exaggeration to say that according to Justice Thomas, the Dictionary says it, therefore it is the law.

Of the amici who argued so eloquently, only one was mentioned in the opinion.   The Court unceremoniously rejected the policy arguments of the United States and critiqued the government for taking a contrary position below.    The government argued that defending the fee application was simply an extension of performing the underlying services and that a judicial exception was necessary for the proper functioning of the system.    The Court refused to decouple "reasonable compensation" from "actual, necessary services rendered."    Because the dictionary said that "services" must be performed for another, "reasonable compensation" could not encompass work done for the firm's own benefit.   Further, because section 330(a)(6) allows fees for preparing a fee application but not for defending it, such fees are necessarily disallowed.    

The Court referred to the government's request for a judicial exception as "a flawed and irrelevant policy argument."    Because no attorney in any field may be paid for litigating their own fees absent a contract or express statutory authorization, denying such fees in bankruptcy does not place bankruptcy lawyers at a disadvantage relevant to non-bankruptcy lawyers.    This is a bit disingenuous because most lawyers don't have to get a court order to get paid.   

The court referred to arguments that their opinion would lead to vexatious objections as "unsupported predictions of how the statutory scheme will operate in practice."    The Court offered a judicial zinger by pointing out that the USA had taken the opposite position below.   Justice Thomas wrote:

The speed with which the Government has changed its tune offers a good argument against substituting policy-oriented predictions for statutory text.

Opinion, p. 12.    Justice Sotomayor concurred in the judgment and in all of the opinion except for the section dismembering the government's policy arguments.

The dissent authored by Justice Breyer looked at broader language, such as "all relevant factors" and "reasonable compensation."    He also suggested that once Congress adopted section 330, it displaced the American Rule so that the presumption against fee-shifting should not apply.    

What Does It Mean?

This does not add a lot to our knowledge of section 330.    There are two types of disputes with regard to allowance of fees.   There are cases such as this one and United States v. Lamie,  540 U.S. 526 (2004) which say that a type of fees are categorically allowed or disallowed.   However, most disputes involve the application of discretionary factors to determine the amount of fees that should be allowed.   By cordoning off one small category of fees as not allowable, the Court does not affect the vast majority of fees disputes.

The impact of the case may be minimized by the fact that this was truly an unusual case.   In the typical case, the fee application hearing won't involve discovery and may involve an hour or so of court time.   In these instances, having to bear the cost of defending the application is an inconvenience but not a hardship.   Additionally, in most cases, the objector succeeds in obtaining some reduction in the fee request.   If the applying firm does not exercise good billing judgment and its fees are reduced, it can hardly insist that it be compensated for defending the portion of the fees that were disallowed.

However, there is not a good mechanism in place for protecting the small minority of cases where the decision will have a real impact.   For example, what of the truly vindictive objection, the objection filed by a disgruntled party solely for the purpose of imposing cost on a law firm which prevailed against it?    The majority suggests that Rule 9011 is an antidote for such conduct.   Unfortunately, Rule 9011 requires that the party seeking sanctions serve a proposed motion for sanctions on the offending party 21 days before filing.   By the time the firm seeking fees drafts and serves the motion, there may not be 21 days until the hearing.  As a result, this remedy may be less than helpful.

Some commentators have suggested that attorneys can build fees for defense into their fee contract with the estate.    If such provisions are approved as part of the employment application, they might be defensible under section 328.   However, including a provision in a fee contract which the Supreme Court has found to be outside the statute would probably be subject to objection.   As a result, it would only work if the U.S. Trustee was not particularly active and the vindictive party was asleep at the switch or had not yet entered the fray.

The unfortunate fact is that a few attorneys will have to pay for fee litigation with little opportunity to recoup the cost.   In order to compensate for this cost, rational attorneys could be expected to raise their rates slightly above what they charge for non-fee app clients.  

The obvious fix is to amend section 330(a)(6) to include not only the cost of preparing a fee application but the cost of litigating an application as well.    This would close the legislative loophole left open by ASARCO.    If Congress takes up the ABI Commission Report, this issue should be added to the agenda.