The Supreme Court has not handled its recent major bankruptcy decisions well. The jurisdictional confusion engendered by its 2011 decision in Stern v. Marshall was only partially clarified by this term’s opinion in Wellness International Network v. Sharif. The Court’s ruling this week in Baker Botts v. Asarco, while narrower, stands as another example of obtuse judicial reasoning that will create unnecessary problems for practitioners and bankruptcy court judges.
The law firm of Baker Botts was retained to represent Asarco in its chapter 11 bankruptcy case. During the case, Baker Botts sued Asarco’s parent company to recover improperly transferred assets, and won a huge recovery for the benefit of Asarco’s creditors. At the end of the chapter 11 case Baker Botts, as the Bankruptcy Code requires for all professional firms that represent debtors or official committees, applied to the bankruptcy court for final approval of $120 million in fees and expenses, plus a performance bonus of $4.1 million. Asarco, which wound up back under the control of its parent company after all of its creditors were paid in full, objected to Baker Botts’ fee application. Following a multi-day trial, the bankruptcy court approved Baker Botts’ requested fees and also awarded it over $5 million to cover the costs incurred in defense of those fees. The Fifth Circuit reversed the award of fees for defending fees, and the Supreme Court upheld that reversal.
The Court’s analysis was straight-forward: under American jurisprudence, each side in a litigated dispute bears its own attorneys’ fees, unless there is an applicable statute or agreement that provides otherwise. Section 330(a)(1) of the Bankruptcy Code states, “After notice to the parties in interest and . . . a hearing . . . the court may award to . . . a professional person . . . reasonable compensation for actual, necessary services . . . .” In the Court’s view, the plain text of the statute does not support a deviation from the “American Rule” regarding attorneys’ fees. Citing to Webster’s New International Dictionary, the Court’s majority stated, “The word ‘services’ ordinarily refers to ‘labor performed for another.’” Since Baker Botts was litigating to defend its own fees, the Court reasoned, it was not providing an “actual, necessary service” to the bankruptcy estate and therefore was not entitle to compensation for such time.
The problem with this analysis is that the statutory language of Section 330(a) of the Bankruptcy Code is nowhere near as unambiguous as the majority read it. Unsurprisingly, the dissent offered an equally plausible alternative reading, focusing on the words “reasonable compensation.” Although the work undertaken by a law firm defending its fees may not be a “service,” in the dissent’s view, “[t]he statute permits compensation for fee-defense work as a part of compensation for the underlying services in a bankruptcy proceeding” – not for the “service” of defending the fee application. The dissent noted that Section 330(a)(6) expressly contemplates that compensation should be awarded for preparing a fee application. It reasoned that if compensation should be awarded for the preparation of a fee application, then time spent in defending the application should also be compensable.
While this may all seem to be an academic debate, the implications in chapter 11 cases could be substantial. The requirement of bankruptcy court approval for all fees paid by the bankruptcy estate to professionals employed by a debtor, a trustee or an official committee helps to maintain the fairness and integrity of the bankruptcy process, and is accepted as an inconvenient but necessary requirement by law firms and other professional firms that undertake such work. That fees may only be allowed after a “hearing” necessarily implicates a contested process, and challenges from other parties have always been a recognized hazard for such firms. Indeed, threats to contest professionals’ fees are an ingrained part of the hard-nosed negotiating process that is the hallmark of corporate restructuring practice. The common view, reflected in the vast proportion of lower court decisions, has long been that “reasonable compensation” should be provided for responding to such challenges. In other words, the dissent’s reading of Section 330(a) is more consistent with both the understanding of most bankruptcy practitioners and basic fairness.
The majority opinion needlessly ignores the realities of large corporate bankruptcy cases and long-standing commercial practice. By determining that compensation cannot be given for defending fee applications, the Court’s ruling in Baker Botts v. Asarco will invariably encourage more litigation challenges to the allowance of professional fees, and increase the costs and time necessary to wind down chapter 11 bankruptcy estates.