Supreme Court Rules Against Fees For Fee Application Defense

Issuing its third bankruptcy ruling in a month, the Supreme Court held, by a 6-3 margin, that the Bankruptcy Code does not permit awarding fees to debtor's counsel, when counsel incurred those fees defending its own fee application. The Court held that services defending fee applications were not rendered to the debtor's estate, and therefore the fees did not constitute "actual, necessary services" payable under section 330(a)(1) of the Bankruptcy Code as reasonable compensation. This decision could increase leverage on parties seeking to rein in bankruptcy litigation by threatening to challenge attorney's fees. Baker Botts L.L.P. et al. v. ASARCO LLC, No. 14-103, 2015 WL 2473336 (S. Ct. June 15, 2015) (hereinafter, the "Opinion").

Background.

ASARCO, a copper mining, smelting and refining company, filed for bankruptcy relief in 2005. The Debtor retained Baker Botts and another firm as counsel under section 327(a) of the Bankruptcy Code. ASARCO emerged from bankruptcy in 2009 with over $1.4 billion in cash, little debt and resolution of its key environmental claims. Baker Botts and its co-counsel filed final fee applications requesting approximately $120 million in fees plus a $4.1 million enhancement for "exceptional performance." The bankruptcy court approved the fees and the enhancement, as well as over $5 million in fees for time spent litigating the fee applications themselves.

On appeal, the Fifth Circuit reversed and held that the "American Rule," which requires each side to pay its own attorney's fees, applies "absent explicit statutory authority" to the contrary. The Fifth Circuit cited the failure of the Bankruptcy Code to include any provision expressly permitting the recovery of fees incurred defending a fee application, holding The Court of Appeals held that section 330(a)(1) of the Bankruptcy Code permits recovery of fees only if the services are "likely to benefit a debtor's estate or are necessary to case administration." Here, because the attorneys—not the estate—benefit from the fee application, the Court of Appeals held that section 330(a)(1) does not permit recovery.

Analysis.

Justice Thomas, writing for the Supreme Court, first reviewed the American Rule, which, as noted, requires that each "litigant pays his own attorney's fees, win or lose, unless a statute or contract provides otherwise." Op. at *4. The Court held that "Congress did not expressly depart from the American Rule to permit compensation for fee-defense...