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On Behalf of | Jun 23, 2015 | Bankruptcy Appellate Panel

On June 15, 2015, contrary to the standing authority in the Ninth Circuit and a majority of lower courts, the United States Supreme Court in Baker Botts L.L.P. v. ASARCO LLC, 2015 U.S. LEXIS 3920 (June 15, 2015) ruled in a 6-3 decision that 11 U.S.C. §330(a) does not authorize compensation for attorney fees incurred in defending fee applications.

Respondent, an integrated copper mining, smelting, and refining company filed a voluntary bankruptcy petition under Chapter 11. Petitioner was counsel to respondent’s bankruptcy estate. Due to petitioner’s efforts, respondent’s reorganization was a success, resulting in full payment to creditors, including interest and attorney’s fees. A primary reason for the effective reorganization was petitioner’s successful prosecution of a fraudulent transfer cause of action against respondent’s parent corporation, which resulted in a judgment for respondent valued at between $7 and $10 billion. Once the reorganization took effect, respondent ceased being a debtor and the parent corporation regained control. Thereafter, respondent, under the control of the parent corporation, attacked petitioner’s fee application and all previously approved fees.

After extensive discovery and a 6-day trial on fees, the Bankruptcy Court awarded petitioner $5 million (reduced from $8 million) for the fees it incurred in successfully defending its fee application. On appeal, the District Court affirmed and the Fifth Circuit Court of Appeals later reversed. The Fifth Circuit reasoned that absent explicit statutory authority to the contrary, the “American Rule,” that each party to litigation bears its own costs, governs and the text of 11 U.S.C. §330(a) “does not authorize compensation for the costs counsel or professionals bear to defend their fee applications.” In re Asarco, L.L.C., 751 F.3d 291(5th Cir. Tex. 2014). The U.S. Supreme Court granted petitioner’s writ for certiorari and affirmed the Fifth Circuit’s holding.

In the opinion delivered by Justice Thomas, the Court’s reasoning begins with the “American Rule” as the “basic point of reference” for awards of attorney’s fees. Because the American Rule is deeply rooted in common law, the Court refused to deviate from it “absent explicit statutory authority.” According to the Court, Congress did not depart from the American Rule in 11 U.S.C. §330(a)(1) because §330(a)(1) only authorizes “reasonable compensation for actual, necessary services rendered.” The word “services,” the Court reasoned, ordinarily refers to “labor performed for another,” and thus, the phrase “reasonable compensation for services rendered” necessarily implies loyal and disinterested service in the interest of a client; therefore, time spent litigating a fee application against the bankruptcy estate’s administrator cannot be fairly described as “labor performed for”-let alone “disinterested service to”-that administrator. Moreover, the Court found the policy arguments that §330(a)(1) should override the American Rule in a fee-defense context, unpersuasive. The Court explained that fee-defense litigation could not be considered a part of §330(a)(1)’s “reasonable compensation” or “services rendered” language. The Court explained that considering fee-defense litigation a part of §330(a)(1)’s “services rendered,” suffers from an unnatural interpretation of the term “services rendered” (as explained above) and would permit attorneys to be awarded fees for unsuccessfully defending fee applications when most fee-shifting provisions permit awards only to a “prevailing party.” In addition, the Court rejected the argument that fee-defense litigation must be understood as a component of §330(a)(1)’s “reasonable compensation” to ensure that compensation for the “actual . . . services rendered” will not be diluted by unpaid time spent litigating fees and that competent counsel will not be deterred from taking bankruptcy work-ultimately finding that this interpretation cannot be reconciled with §330(a)(1)’s text and that bearing the cost of fee litigation provides no disincentive to bankruptcy counsel.