Creative Lawyers Thwarted in ASARCO Workaround Attempts

One of the panels at the recent Fifth Circuit Bench-Bar Conference featured Judge Craig Gargotta and Stephen Rosenblatt discussing fee issues raised by Barron & Newburger, P.C. v. Texas Skyline, Ltd. and Baker Botts v. ASARCO.  While I was personally interested in hearing the discussion about my own case, the really interesting part involved what creative lawyers are doing to try to work around the ASARCO decision.    

In the ASARCO case, the reorganized debtor caused Baker Botts to spend about $5 million in attorney time defending its fee application.  Both the Fifth Circuit and the Supreme Court ruled that these services were not compensable because the American Rule provides that parties must bear their own fees absent a statute or contract and 11 U.S.C. Sec. 330 did not allow fees for defending a fee application.    Thus, Baker Botts had to eat the cost of establishing its entitlement to fees in one of the most extraordinarily successful cases of all time.

This has left some creative lawyers wondering how they can protect themselves from the expense of a costly fee battle.    However, two recent decisions from the Bankruptcy Court for the District of Delaware have thrown cold water on these attempts.

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.     

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.

Meet Judge Davis (Expanded Version)

From 1989 to 2007, Judges Larry Kelly and Frank Monroe occupied the bankruptcy bench in Austin, providing a period of judicial continuity rivaled only by their colleagues in San Antonio (Judges Leif Clark and Ronald King served at the same time from 1988 to 2012).   On April 1, 2013, the Austin bar welcomed its third new judge in six years as Judge Craig Gargotta moved to San Antonio and Judge Tony Davis assumed the bench.   Here is an introduction to the newest jurist to oversee Austin insolvency proceedings.    (Note:  This is an expanded version of an article that I previously published).

Background

Judge Tony Davis spent his time as a student and a young practitioner in three very different locales.    He received a B.A. in economics and mathematics from the University of Minnesota at Morris in 1980, was awarded a J.D. from the University of Virginia School of Law in 1983 and then was admitted to the Oklahoma bar.   He spent his early years as an associate with Conner & Winters in Tulsa before making his move to Baker Botts, LLP.    Immediately prior to taking the bench, Judge Davis was a partner in the Houston office of Baker Botts.  

 One of the most challenging cases that he worked on was the Asarco case, which involved nearly $6.5 billion (with a B) in environmental claims.    According to the Judge on that case:

Debtors' counsel, lead  by Tony Davis with Baker Botts, initiated and ultimately set in place a procedure for pre-trial, discovery, mediation and trial schedule for the estimation of the environmental claims that would have resulted in Court orders or settlements in months instead of years even if all such claims had to be estimated to a final judgment. This incredible process required Debtors' counsel to prepare for multiple-tracked sites teams of environmental and bankruptcy lawyers toward mediation, trial or settlement of each site, yet coordinated such that overlapping legal issues, overlapping facts and experts, could be efficiently implemented.

In re ASARCO, LLC, 2011 Bankr. LEXIS 2880 at *26-27 (Bankr. S. D. Tex. 2011).

Some of his other noteworthy cases include representing Ralph S. Janvey, the court appointed receiver in the Stanford International Bank, Ltd. case and representing the Russian Federation in the short-lived bankruptcy of Yukos Oil Company.  (The Yukos case involved a Russian company which moved its offices to the home of its CFO in Houston and paid a retainer to Fulbright & Jaworski to qualify for bankruptcy in the United States.   The case was dismissed after about three months).    Thus, he has experience chasing fraudsters and oligarchs and cleaning up the financial fallout from environmental claims.

   

What Others Say About Judge Davis

Bill Stutts, who worked with Judge Davis at Baker Botts, described his former colleague as “measured and thoughtful,” stating:

He started practice in bankruptcy in Oklahoma during the oil-patch bankruptcies of the 1980's.   He is known to be measured and thoughtful, and rarely (if ever) rash.  Responsibility and an expectation that others will be responsible can be hallmarks of his approach to the practice.  He is pretty well organized (I don't want to over-sell his work habits too soon), having even found some time during practice to write published law review articles.  I believe that he really and honestly views his upcoming service on the bench to be just that-- service. 

Mr. Stutts also characterized Judge Davis as a voracious learner and said that by the time he handles his first chapter 13 hearing, he will have studied until he knows as much as or more than anyone else in the room.

Judge Brenda Rhoades was hired as an associate at Baker Botts by Judge Davis.   She described him as a most patient and kind supervising attorney.  She said that he asked very intelligent but tough questions and taught her about how to work with junior attorneys and how to teach them.  

At his investiture ceremony, Judge Davis was described as having a “teutonic work ethic.”    Apparently this term comes from the German phrase “hochste Leistung bringen” which loosely translated means “to bring about the highest output or performance” or “to work very intensively.”   The concept arises in the teachings of Martin Luther  and was referred to by the German sociologist Max Weber as the Protestant work ethic.   According to a recent article in Slate, the teutonic work ethic is actually a myth since Greeks work many more hours than Germans.    No doubt the term was applied to Judge Davis to refer to his prodigious work output as opposed to the current slothfulness of the German worker.

Judge Davis’s new colleague Chris Mott described him as someone who read the encyclopedia and the dictionary for fun, who was equally interested in tennis and golf and Churchill and chess and who forced his family to listen to Shakespeare on CD on family trips.

Judge Davis In His Own Words

At his investiture, Judge Davis described his feelings at being selected for the position of U.S. Bankruptcy Judge as pride, humility and a sense of responsibility.    He said that his goal would be to demonstrate a good judicial demeanor, to be prepared and to rule promptly.    He urged practitioners to be prepared to “teach me.”     He affirmed that “truth and justice are best revealed in the crucible of the adversary system.”    He touted the value of an independent judiciary as opposed to a society subject to “the whim of an ayatollah.”        

Practitioners in Judge Davis’s courtroom should be punctual.    He has stated that as a practitioner, he was deathly afraid to be late for a hearing and made it a point never to do so.    However, on one occasion when he appeared on the bench after the time set for a hearing, he apologized to the bar and stated that he should have allowed himself more than fifteen minutes for lunch.

Judge Davis stated that he has learned from each of the Texas judges that he has appeared before and considered them all role models, but that “if I had to name one, I would name my chief, Judge King, for his exemplary demeanor and the sound judgment that is reflected in his decisions.     He said that his biggest challenge would be “quickly developing proficiency in consumer bankruptcy law and practice.”     When asked how he would Keep Austin Weird, he said that, “Occasionally I will wear a pink or salmon-colored tie to court.”

In a 2009 interview, Judge Davis stated that the Bankruptcy Code had already seen “excessive reform.”   He said:

If anything, bankruptcy law has seen excessive reform. The Bankruptcy Code, as originally enacted in 1978, has been and continues to be such a remarkably flexible and efficient way to conduct a financial restructuring under court supervision that it is the envy of the commercial world.  

Since it was enacted, however, a number of special interest groups have succeeded in carving out special interest legislation to address or protect unique issues that apply to specific industries. These numerous amendments have somewhat increased the complexity of the Bankruptcy Code but, fortunately, have not materially impaired the Bankruptcy Code’s overall effectiveness.

Law 360, Q &  A with Baker Botts’ Tony Davis, which can be found here.

            When asked what advice he would give a young lawyer, he said:

 Seek and take on responsibility — responsibility for understanding the facts and issues involved in the case, responsibility for advising clients, and responsibility for preparing for and conducting in-court hearings and out-of-court negotiations. Accepting and discharging responsibility is the surest way to develop the professional growth you need to be an accomplished and successful lawyer.

This is good advice for lawyers of any age.

Bidders Reimbursed For Auction Which Never Occurred: The Fifth Circuit's ASARCO Opinion

The Fifth Circuit has ruled that, under the facts of the specific case, that bidders could recover their costs without a showing of direct benefit to the estate. Matter of ASARCO LLC, No. 10-40930 (5th Cir. 8/16/11). The specific holding was that reimbursement of costs incurred in submitting a bid were governed by the business judgment standard under 11 U.S.C. Sec. 363(b) rather than the benefit to the estate standard under 11 U.S.C. Sec. 503(b). You can find the opinion here.

A Billion Dollar Judgment And An Auction That Wasn't

This was a case about a big judgment and a unique procedure to auction off that judgment. In 1999, Grupo Mexico S.A.B. de C.V. (Grupo Mexico) purchased ASARCO. ASARCO owned 260 million shares of Southern Peru Copper Company (SCC). Through a series of transfers, the SCC shares were transferred from ASARCO to a subsidiary of Grupo Mexico. After ASARCO filed for chapter 11 relief in 2005, it sued the transferee, which was a subsidiary of Grupo Mexico. ASARCO won big. It obtained a judgment for actual fraudulent transfer, aiding and abetting a breach of fiduciary duty and conspiracy. ASARCO LLC v. Americas Mining Corp., 396 B.R. 278 (S.D. Tex. 2008). Not only did it get the shares back, but it also recovered a judgment for $1.4 billion. ASARCO LLC v. Americas Mining Corp., 404 B.R. 150 (S.D. Tex. 2009). (I have included the citations here because they are informative opinions for fraudulent transfer litigation).

Having a valuable asset in hand, ASARCO proposed a plan of reorganization. Its plan was to be funded in part by selling the SCC Judgment. It proposed a two-stage bid solicitation process. In the first stage, its financial adviser identified potential bidders for the judgment. In a variant on the typical auction process, ASARCO invited a select group of bidders to proceed to the second phase of the process. In order to entice the bidders to perform the expensive legal due diligence necessary to evaluate the asset, ASARCO sought and obtained an order from the Bankruptcy Court authorizing it to reimburse qualified bidders for their due diligence expenses. The Bankruptcy Court granted the motion finding that ASARCO had demonstrated a "compelling and sound business justification" for the order.

Grupo Mexico appealed the reimbursement order which was stayed. Meanwhile Grupo Mexico confirmed a plan of reorganization which paid all creditors in full, released the judgment and gave it control of ASARCO. Since Grupo Mexico now controlled ASARCO, ASARCO was not interested in defending the appeal. However, two of the bidders were granted leave to intervene and defend the order.



The Appeal

On appeal, the Appellants argued that because the sale was never concluded, there was not a benefit to the estate and the bidders expenses could not be reimbursed under Sec. 503(b). The bidders argued that the Bankruptcy Court could authorize the payment under the business judgment standard of Sec. 363(b). The business judgment test was a lower bar since it looked at whether the order was reasonable at the time it was sought; on the other hand, the benefit to the estate standard would have analyzed the benefit in hindsight.

The Fifth Circuit distinguished two Third Circuit cases which had disallowed break-up fees. While the Third Circuit had rejected break-up fees on the ground that they chilled the bidding, here the Fifth Circuit found that the reimbursement order sought to increase competition and was offered to all bidders invited to the second round. The Fifth Circuit also distinguished the break-up fee cases on the basis that the auction involved a "very unique and very valuable but possibly worthless asset."

The Ruling

In upholding the order, the Fifth Circuit wrote:

On this record, we conclude that the business judgment standard is the better fit for assessing ASARCO’s reimbursement motion. Section 363 addresses the debtor’s use of the estate property, and in its motion ASARCO sought authorization to make discretionary use of the estate’s funds. Section 503, in contrast, generally applies to third parties that have already incurred expenses in connection to the debtor’s estate. The unsuccessful bidders in O’Brien and Reliant Energy sought payment for expenses incurred without the court’s preapproval for reimbursement, and thus section 503 was the proper channel for requesting payment. In ASARCO’s case, however, the bankruptcy court issued the Reimbursement Order before any potential qualified bidders, including the Intervenors, had incurred due diligence and work fees. In this context, application of the business judgment standard is appropriate.

Opinion, pp. 11-12. Having concluded that the business judgment standard applied, the court had no difficulty finding that the standard had been satisfied.

In a final footnote, the Court hinted that it would have upheld the award under the benefit to the estate standard as well, noting that the District Court had found that the auction process "was perhaps the final impetus needed to encourage the Parent to file its plan which pays creditors in full."

Why It Matters

This case is important for two reasons. One is that large bankruptcy cases are increasingly being resolved by Sec. 363 sales. There are not many circuit level opinions on 363 sales, since most appeals are rendered moot by the sale closing. As a result, any opinion which explains the Sec. 363 process is useful.

Second, this particular opinion, while very fact specific, provides some useful pointers. First, reimbursement orders should be obtained before any due diligence expenses are incurred. Second, the complexity of the asset will influence the advisability of reimbursing due diligence costs. There is a big difference between a tract of raw land and a billion dollar judgment. Finally, and perhaps most importantly, reimbursement orders are justifiable when they will increase competition. In the typical case, a stalking horse bidder is granted reimbursement if it is outbid. This encourages the stalking horse to invest in the due diligence necessary to submit a bid. Conversely, it can be used to tilt the auction procedures in favor of the stalking horse. Here, the unique aspect of the process was that all bidders invited to the second round were granted a right of reimbursement. Thus, the process was even-handed and fostered competition rather than inhibiting it.