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Pay to Play: §327(a) Professionals Pay their Own Defense Costs in Litigation Challenging Fee Applications

Pay to Play: §327(a) Professionals Pay their Own Defense Costs in Litigation Challenging Fee Applications

On June 15, 2015, the Supreme Court of the United States made clear that attorneys and other professionals hired under §327(a) of the Bankruptcy Code are not entitled to fees for their time spent litigating a §330(a)(1) fee application challenge. Baker Botts LLP, et al. v. ASARCO LLC, No. 14-103, 2015 U.S. LEXIS 3920 (U.S. June 15, 2015). In Baker Botts, the respondent, ASARCO LLC (“ASARCO”), hired Baker Botts LLP and other law firms (collectively the “Law Firms”) to assist it in its duties as a Chapter 11 debtor in possession pursuant to 11 U.S.C. §327(a). At the conclusion of the bankruptcy case, the Law Firms filed fee applications requesting fees under 11 U.S.C. §330(a)(1) in the amount of approximately $120 million. Section §330(a)(1) allows bankruptcy courts to award “reasonable compensation for actual, necessary services rendered by” §327(a) professionals.

ASARCO did not believe that the Law Firms’ fees were reasonable and challenged them. The bankruptcy court not only rejected ASARCO’s challenge, but also awarded the Law Firms over $5 million for their fees incurred in defending the applications. The district court affirmed the bankruptcy court. The Fifth Circuit Court of Appeals, however, reversed and held that §330(a)(1) did not authorize fee awards for time spent defending fee applications. The Supreme Court of the United States affirmed the Fifth Circuit.

In holding that §330(a)(1) did not authorize fee awards for defending fee applications, the Supreme Court relied upon the American Rule – that “each litigant pays his own attorney’s fees, win or lose, unless a statute or contract provides otherwise” – and the plain language of §330(a)(1), which only authorizes compensation for “actual, necessary services rendered.” Baker Botts LLP, et al., 2015 U.S. LEXIS 3920 at *8, 10 (emphasis added). Justice Thomas, delivering the opinion for the 6-3 majority, reasoned in part that “services” ordinarily means “labor performed for another,” and “[t]ime spent litigating a fee application…cannot be fairly described as ‘labor performed for [another].’” Therefore, [b]ecause §330(a)(1) does not explicitly override the American Rule…it does not permit bankruptcy courts to award compensation” for litigation challenging a fee application.

In light of the Supreme Court’s opinion in Baker Botts LLP, §327(a) professionals should expect challenges to their fee applications when a reasonable basis for such a challenge exists. Baker Botts LLP not only removed an objecting party’s deterrent, i.e., the threat of a further award of attorney’s fees, but also incentivized an objecting party, such as a creditors’ committee, to challenge fee applications. Unlike the fee applicant, the creditors’ committee’s attorney is arguably rendering services for the benefit of the committee when it seeks to reduce administrative costs by challenging a fee application. Therefore, the creditors’ committee attorney is entitled to compensation under §330(a)(1). Ultimately, §327(a) professionals should do their best to document the reasonableness of their fees to minimize protracted fee application litigation and/or better position themselves to calculate whether to defend their fee application in satellite litigation or accept a reduction to avoid litigation.

C.E. Hunter Brush