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The “American Rule” Prevails: The Supreme Court denies certain fees in bankruptcy cases

The “American Rule” Prevails: The Supreme Court denies certain fees in bankruptcy cases

In 2005, ASARCO LLC, a copper mining, smelting and refining company, was in financial trouble and filed for Chapter 11 bankruptcy. Relying on §327(a) and §1107(a) of the Bankruptcy Code, ASARCO retained two law firms to provide legal representation in the bankruptcy. In 2009, at the conclusion of the bankruptcy, ASARCO emerged with $1.4 billion dollars in cash and little debt.

The law firms representing ASARCO filed fee applications for compensation under §330(a)(1), which provides that a bankruptcy court “may award… reasonable compensation for actual, necessary services rendered by” professionals hired under §327(a). ASARCO challenged the compensation sought by the firms in their fee application. Following substantial discovery and a six day trial on fees, the bankruptcy court awarded the firms approximately $120 million for their work in the bankruptcy and an additional $5 million for litigating their fee applications. ASARCO appealed various aspects of the award to the district court. As pertinent to this case, the district court held that the firms could recover fees for defending their fee application. The Court of Appeals for the Fifth Circuit reversed by reasoning that the American Rule – the rule that each side must pay its own attorney’s fees – applies absent clear statutory authority; thereby barring the recovery of fees for defending the fee application. The Supreme Court of the United States affirmed.

Under the American Rule, “[e]ach litigant pays his own attorney’s fees, win or lose, unless a statute or contract provides otherwise.” Hardt v. Reliance Standard Life Ins. Co., 560 U.S. 242 (2010). Under §327(a), professionals are retained to serve the administrator of the estate for the benefit of the estate. Compensation authorized under §330(a) allows reasonable compensation for actual, necessary services rendered. With regard to the fee application, the Supreme Court noted that “[t]he primary beneficiary of a professional fee application, of course, is the professional.”

The Supreme Court found that these provisions did not specifically or explicitly authorize the award of fees for defending an application for fees and that the defense of the fee application was not a necessary service rendered to the bankruptcy estate. “Because §330(a) does not explicitly override the American Rule with respect to fee-defense litigation, it does not permit bankruptcy courts to award compensation for such litigation.”

The “American Rule” prevails under the Supreme Court’s ruling.

Matthew A. Barley

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