From The Top In Brief - July/August 2015

Fees on Fees

On June 15, 2015, the U.S. Supreme Court handed down its ruling in Baker Botts LLP et al. v. ASARCO LLC, No. 14-103, 2015 BL 187887 (June 15, 2015), in which it considered whether a bankruptcy court has the power to award fees to a law firm for defending its fee application for services performed on behalf of a chapter 11 debtor. The dispute concerned a $124 million base fee award for a law firm's work on mining giant ASARCO LLC's bankruptcy. The firm also received a $4 million merit enhancement for "rare and extraordinary" work. The Fifth Circuit upheld the enhancement bonuses but reversed the $5.2 million in fees awarded for defending the "core" fee, ruling that the Bankruptcy Code "does not authorize compensation for the costs counsel or professionals bear to defend their fee applications." See ASARCO LLC v. Jordan Hyden Womble Culbreth & Holzer, P.C. (In re ASARCO LLC), 751 F.3d 291 (5th Cir. 2014), cert. granted sub nom. Baker Botts LLP v. ASARCO LLC, 135 S. Ct. 44 (2014). The Eleventh Circuit and a handful of lower courts have also disallowed "fees on fees," whereas the Ninth Circuit and a number of lower courts have permitted recovery of such professional fees. See In re Smith, 317 F.3d 918 (9th Cir. 2002); Grant v. George Schumann Tire & Batt. Co., 908 F.2d 874 (11th Cir. 1990); see generally Collier on Bankruptcy ¶ 330.03[16][a][ii] (16th ed. 2016). The Supreme Court affirmed the Fifth Circuit's ruling in a 6-3 decision. Writing for the majority, Justice Clarence Thomas explained that, in accordance with the "American Rule," each litigant pays its own attorneys' fees, win or lose, unless a statute or contract provides otherwise. Justice Thomas further explained that section 327(a) of the Bankruptcy Code authorizes the employment of professionals by a bankruptcy trustee or chapter 11 debtor-in-possession ("DIP"), and section 330(a)(1), in turn, authorizes payment to such professionals of "reasonable compensation for actual, necessary services rendered" to the trustee or DIP. According to Justice Thomas, the text of section 330(a)(1) "cannot displace the American Rule with respect to fee-defense litigation." The phrase "reasonable compensation for actual, necessary services rendered," he wrote, "neither specifically nor explicitly authorizes courts to shift the costs of adversarial litigation from one side to the otherin this case, from the attorneys seeking fees to the administrator of the estate." Justice Thomas...